Episode 224 - Furloughs, Layoffs, Reducing Work Hours During Economic Uncertainty

Welcome to the Workplace, a podcast by Cal Chamber. I'm Matthew Roberts, associate General Counsel with the California Chamber of Commerce. Hello listeners. Due to current economic uncertainty, employers are starting to take a look at managing their workforces in a way that helps address this uncertainty while still preserving their ability to continue conducting business. As a result, we have started to see a significant number of questions around temporary solutions like furloughs, temporary or seasonal layoffs, and reduction in work hours for employees. Now, all of these potential actions require some very careful thought, and we have the perfect two guests for such a discussion. First, we say hello to Erica Barbara, Cal Chambers, senior employment law counsel. Thank you for being here, Erica.

Hi, Matt. Thank you for having me.

Next, I am happy to be joined by Vanessa Green, Cal Chambers, employment law subject matter expert. Thanks for joining me today, Vanessa.

Thanks, Matt. Happy to be here.

All righty. Well, this topic and the questions that we are starting to receive are actually eerily reminiscent of the early days of the COVID 19 pandemic, when employers were not sure how businesses would operate during the initial stay at home orders. And one of the first common reactions to the sudden economic uncertainty was just to reduce work hours for. So, Erica, first, can employers simply reduce an employee's work hours without any notice to those employees?

Yeah. So let me tackle this one in two parts. So first we have this question of can employers just reduce an employee's work hours? And California is an at will employment state. And so unless there's an employment agreement in place that guarantees that the employee is going to get a certain number of hours, which is uncommon, then employers generally can reduce work hours for their employees. But the second part of your question is really, okay, well what, what kind of notice do we need to provide to our employees if we're doing this Now? There's not a statewide requirement that employers have to provide a certain amount of notice. And although California doesn't have what's commonly called a predictive scheduling requirement, there are some local requirements for certain industries, so employers need to be aware of those. For example, there's the Emeryville Fair Workweek ordinance, which imposes some requirements on certain retail and fast food employers. So unless you fall under one of those local ordinances, there isn't a requirement on the amount of notice you have to provide. So your next step is going to be to figure out, well, how much notice do we give to our employees? And when you're making that determination, you know, be sensitive to the effect that the reduction in hours is going to have on your employees. Right. For your Non exempt employees, they're getting paid based on the hours that they work. So if you reduce their hours, they're getting a reduction in their wages. So that's obviously going to impact them and give as much notice as you can under the circumstances. Something else to consider when you're doing a reduction in hours is what kind of effect it may have on other things such as health benefits or other benefits that you offer to employees. So if you, for instance, take somebody from a full time position to a part time position, are they still going to be eligible for vacation? Is this going to impact their health benefits? So, something else to think about. And then lastly, just to throw it out there, when we do a reduction in hours, it's possible for employees to then file an unemployment insurance claim or a partial claim if the reduction is temporary. So one other thing to have on your radar.

Yeah. And I noticed in your answer that you focus really in on those non exempt employees and the fact they get paid for the hours that they worked. And so when you reduce their hours, it reduces their pay outright. Now, some of the questions that we get commonly are around exempt employees and reducing their hours because a lot of our exempt employees, for example, are supervisory. And if the employees they're supervising no longer have hours to be supervised, then we don't need these exempt supervisors around as much either. Or if there's just less production for our administrative or professional exempt employees to do, we want to reduce their hours here. So ultimately, Erica, if we have a reduced need for an exempt employee during this kind of temporary reduction in hours, with the economic uncertainty, can we prorate their salary based on that percentage reduction? For example, if we don't need them to come into work one day a week, can we we reduce their salary by that 20% that they're no longer working for us?

Yeah. So this can get tricky, as is often the case when we're talking about pay salary for our exempt employees. So let's start with the general rule that our exempt employees are being paid a salary which is a predetermined amount regardless of the number of hours that they work. And so we can't deduct from an exempt employee's salary because there's a variation in the number of hours that they're working or because there's an unavailability of work on the part of the employer, if the exempt employee works anytime in the workweek, they're paid their full salary. So for example, if an employer just has a partial week shutdown when hourly employees don't work and aren't paid, the exempt employees generally would still be paid their full salary if they work the rest of the week. Now, we could have a different result if the employer is proposing to make a bona fide reduction in salary that corresponds with a reduction in their normal work week. So, for example, there's a period of economic downturn. The employer says, we're now going to operate only four days a week and all exempt employees salaries will be reduced by 20%. As long as the exempt employees are still being paid at or above the salary threshold and the reduction to their pay is not being designed to circumvent the salary basis requirement, then that may be compliant. So, for example, the current salary threshold for 2025 is $68,640 a year for the white collar exemptions. So if you have an employee who's making $100,000 a year and you reduce their pay by 20%, they'd be at 80,000 for the year. They're above the threshold. But if an employee is making 70,000 a year and you reduce by 20% now, they're going to be at 56,000, they're below the threshold and they would lose their exemption. So we've got to be careful if we're doing any reductions. Now. All that being said, the Department of Labor Standards Enforcement, the Labor Commissioner has taken some conflicting positions in opinion letters about whether it is permissible reduce salary and reduce the work schedule for exempt employees. The federal Department of Labor says it's okay if you're considering doing this. We recommend working with legal counsel to make sure that you are compliant, given that there have been some different positions taken by the Labor Commissioner.

All right, Erica, that was excellent, because that is really common question for our exempt employees and understanding the tricky nature with how we maintain that salary basis for them and the exemption. Vanessa, let's switch over to you, because sometimes operations just need to cease altogether, right? There's just no business coming in due to the economic conditions. But the employer doesn't want to let the employees go because they feel like, well, these conditions will pass and we're going to be back to business and we need them here. So if they don't want to let the employees go, what does that look like? And how is that concerning for employers if they take that tactic of essentially just reducing everybody's hours to zero temporarily?

So sometimes these situations, we hear employers using the term furlough for situations like you just mentioned, Matt, where they don't want to let people go, but we need to stop or slow operations. We actually, everybody probably remembers back at the beginning of the pandemic, had a lot of questions coming in around, can we furlough employees? And the interesting thing about the term furlough is that it isn't actually a legal term. So it doesn't have a specific definition under California law. It's more of business term. And so what's usually meant by furlough is that an employee is going to stay on payroll and remain an employee, and they're not going to be working for a period of time. And so employers might be thinking, well, that seems easy, right? If an employee is on furlough and they're not working, we really don't need to worry about anything. Nope, not the case because it's California. So we always have to worry about stuff. So a few things that we want to keep in mind in these situations where we have folks on furlough but they're still on payroll, so to speak, still considered an employee, their time that they're working for us, even though they're not technically working at the moment, that still counts towards times of service for things like cfra. So that's California Family Rights act leave eligibility, which is based on how long someone has worked for you. So things like that can factor in even if an employee is on furlough. But then, speaking of cfra, here's where it gets even trickier, because there's another requirement for somebody to qualify for CFRA where they have to have worked 1250 hours over the past 12 months to be eligible. And so hours worked is a little different than length of service because they're not actually working any hours for you while they're on furlough. So you see how these things can get a little muddy and complicated, and employers really need to kind of understand the nuances that can go into different types of leave eligibility and other things when folks are out on furlough. And so another thing that employers would want to keep in mind with regard to furlough is the difference between paying non exempt and exempt employees. And Erica kind of just touched on this, right? We know our exempt employees, their pay is a little bit different than non exempt. For non exempt, it's really straightforward and easy. They're paid for the hours they work. So if they're out on a furlough, they're not working, they're not getting paid. For exempt employees, not quite as straightforward. If exempt employees perform any work in a work week, they're typically entitled to their full salary for that week. So we need to be thinking about, like, how are we structuring an exempt employee's furlough? What does that time off look like? Are we triggering any wage obligations? So there's definitely stuff employers need to think about that they sometimes miss or don't even realize.

All right. And following up on that, Vanessa, we know layoffs do actually have a lot of specific rules around them. Is there any time limit for furloughs before the law just considers them to have been laid off? Can we do other policy related things, as you kind of mentioned, with how we treat the furloughs? Like can we require them to use their vacation banks while they're on the furlough, for example?

That's a great question. There can in California be a time limit for when a furlough becomes a layoff? So we do have some guidance that's been issued in a couple of opinion letters from the California Labor Commissioner. I'm going to summarize at a high level that these state if an employer reduces an employee's scheduled work hours to zero, so if you put them on furlough and they're not working and you don't reschedule that employee within the same pay period, you've effectively laid off the employee, according to the California Labor Commissioner, which they say at that point is going to trigger the final pay requirements under the labor code section 201. So yes, there is a time limit for when a furlough can become a layoff. It's going to be triggered around the pay period and whether or not you're rescheduling that employee within the same pay period or if it's going longer. So it's really important to plan carefully for these types of things. If a closure that you have or furlough is going to last more than a full pay period, I would recommend talking to legal counsel about whether or not final pay obligations might be triggered in that situation. And then the second part of your question, Matt, on vacation usage and requiring. So employers can generally require employees to use their accrued vacation during a workplace closure. But a couple things need to kind of happen for this to be okay. You really need to have a vacation policy that specifies this and employees need to be given reasonable advance notice that this is going to happen, which is why we highly recommend having a written policy that states this explicitly. So just remember that you can't typically require employees to use vacation like retroactively, for example. So there's some situations where it may not be okay. And then again, when we're Thinking about our exempt employees, like I just talked about earlier, we have rules that still apply to them if they perform work during the closure. So when we're thinking about how much vacation time we're going to be deducting from their bank of time if they're working, if they're not working, we want to keep all of those things in mind.

All right, great. So, Erica, let's go back to you then. If it does become a layoff situation where we just we're going to cut ties and we don't know when we're going to restart business or we just need to reduce a significant percentage of our force, are there any special rules around layoffs that employers need to be aware of before they go down that path?

Yeah, that's a good question, Matt, and definitely something for employers to think about. So if we're talking about a layoff, that's essentially the same as a termination. And so in California, we have an at will state. You can terminate for any reason as long as it's not unlawful reason. So just like with any other termination, we want to make sure that we have legitimate business reasons for the layoff and that the reasons for the layoffs are well documented. So we want to make sure we're using objective criteria to select employees for layoff and that we're documenting that. We want to take a look at that criteria and make sure that it doesn't have a disparate impact on any protected classes. So, for example, if a disproportionate number of older workers are selected for layoff, let's take a closer look at that and figure out why that is. And we want to make sure that there's a legitimate reason for that. We want to exercise caution if any employees that have been selected for layoff have a red flag around their employment. So that that could be maybe somebody who's just recently engaged in a protected activity or been on protected leave, it doesn't mean they still can't be included in the layoff. But we should take a closer look at that. And ultimately you want to make sure that you can justify the process that you used to select employees for layoff and show that the layoff was carried out in an objective manner. Now, that applies to layoffs. But if you're conducting a mass layoff, so a significant number of employees being laid off or you're closing an entire facility, then there may be additional concerns that you need to be aware of. There may be additional requirements under the federal WARN act and the California WARN act that would be triggered, including providing notice to all of the affected employees and certain government agencies before the layoffs. And if you don't follow those specific requirements, you're at risk for penalties and owing back pay to employees. That is a very complicated area of the law, much more than we can get into on our podcast today. So if you are looking at a potential mass layoff or you're closing a facility or a plant, you want to work with legal counsel to confirm, number one, whether the layoff is going to or the closure is going to trigger, Warn or CAL warn, and then if so, making sure that you follow all the steps that you need to take and know that at least under CAL Warn, under the California law, even a temporary mass layoff can trigger these requirements. So again, very complicated area. You want to make sure that you're compliant. So this is a great time to partner with legal counsel to help guide you through that.

Alrighty. And Vanessa, you know, we know that the economy will stabilize in some form or fashion and employers will at least be able to plan their operations with more consistency. And that may require hiring new employees. Now, for those that they may have let go under these layoff conditions that Erica just talked about, are there rehiring rights for the employees laid off previously? And what other things in addition to those rehire rights should we consider about rehiring employees that we previously let go?

So in terms of legal obligations, California doesn't have like a general rehire law that gives laid off employees some kind of automatic right to return outside of very limited situations like maybe a union collective bargaining agreement or for public sector employees, there can be memorandums of understanding or things like that, but otherwise we don't have this general rehire rule in California. Now, during COVID we did see some industry specific rehire requirements, particularly in the hospitality industry, but those were temporary. So for most employers, you're not going to be legally obligated to rehire these individuals that you've laid off. Although there might be practical reasons why you want to rehire folks if your business slowed down because of the economy and things are picking back up. So if you do this, if you do rehire folks who are laid off, what you want to think about is treating them like a new hire from a compliance standpoint. So you want to make sure you're doing things like reverifying their i9. You want to reissue any required new hire pamphlets, checking to see whether or not you need to reinstate any unused paid sick leave balance that they had if they're returning to you within 12 months. That's a requirement under the paid sick leave law in California. So there are things you want to think about if you are rehiring, folks.

All right, great. And I think it'd be good to close with both of you actually, because I know each of you have previous experiences in your careers kind of navigating similar conditions like what we're seeing these days. And I think it'd be great to conclude with final thoughts on what else employers should think about with whatever action they decide to take, if any, during these times.

Yeah. So navigating economic downturns can definitely be challenging for employers. This is not easy. It's important to be thoughtful and measured when you're evaluating and implementing different actions to make sure that you don't inadvertently create some compliance issues for your organization. So, for example, making sure that you continue to comply with all wage and hour obligations. So if you're reducing pay for your employees, making sure that you stay at or above the minimum wage requirements and the exempt employee salary threshold, if you're conducting furloughs like Vanessa mentioned, determining whether the length of that furlough is going to actually turn it into a termination. And ultimately, if you have to lay off or terminate employees, making sure that you're meeting all of California's final pay requirements.

I completely agree with you, Erica. Those are great things to keep in mind. I'm going to add just one more thing. When we're thinking about these things, think about how we're communicating changes to our team. Because just as important as what we're deciding to do is how we're doing it, how we're rolling out these decisions. And I think when we try to keep empathy in mind, when we try to be honest with folks about what's happening and why. Right. Giving as much advance notice as we can, all of those things can really impact the morale. It can impact the trust for folks that are employed by us. And employees are going to remember, they're going to remember how they were treated. And so whatever path you choose, whether it's furloughs, hour reductions, layoffs, anything that you're looking at, make sure that you're not just thinking about legal compliance, but you're also thinking about the long term impact on your culture and your retention to your employees.

Well, Erica, Vanessa, thank you so much for joining me today to discuss employer options and obligations during these unpredictable times.

Thanks for having us, Matt.

Happy to be here, Matt.

And thank you listeners for joining this discussion on the workplace. Please share and subscribe to Cal Chamber's podcast by visiting calchamber.com.