To lower costs and avoid layoffs during difficult times, employers may consider reducing employees' regular work hours. Among other things, a reduction in hours can affect wage and hour law compliance, eligibility for unemployment and benefits, loan forgiveness under the Paycheck Protection Program (PPP), and employee morale. For those reasons, it's important to carefully consider a number of factors before reducing employees' hours.
Wage & Hour Law Considerations:
Under the Fair Labor Standards Act (FLSA), employers must pay non-exempt employees at least the minimum wage for each hour worked and overtime when they work more than 40 hours in a workweek. Some states require overtime pay in additional circumstances. Employers may reduce non-exempt employees' hours provided the employee is paid at least the minimum wage per hour and overtime when due.
Employees who meet certain salary and duties requirements may be classified as exempt from the FLSA's minimum wage and overtime requirements. Generally, exempt employees must receive a pre-determined, guaranteed salary of at least $684 per week under federal law (some states require a higher salary). With a few limited exceptions, exempt employees must be paid their full salary each week they perform any work, regardless of the number of hours or days worked. Depending on the exemption and circumstances, a reduction in pay could result in a loss of the employee's exempt status.
Under the FLSA, employers are prohibited from reducing an exempt employee's salary based on short-term, day-to-day, or week-to-week operating requirements. However, employers may change exempt employees' salaries prospectively to reflect long-term business needs, provided such adjustments are not related to the quantity or quality of work performed and the employee still receives at least $684 per week on a salary basis. For instance, an employer could reduce all exempt employees' salaries by five percent for the upcoming fiscal year because of budgetary constraints (provided the reduced salary still meets minimum requirements). By contrast, an employer could jeopardize an employee's exempt status by making a short-term deduction for reductions in scheduled work.
Nondiscrimination laws prohibit discrimination on the basis of age, race, color, sex, national origin, religion, genetic information, disability, and other protected characteristics. All pay practices and pay decisions must be job-related and applied fairly and consistently. It's a best practice to document the reasons for a reduction in pay and/or hours.
Employees who have their hours reduced may be eligible for partial unemployment benefits. Keep in mind that employees who quit as a result of a significant reduction in hours/pay may also be eligible for unemployment benefits. Check your state law for details.
The Affordable Care Act (ACA) requires employers with 50 or more full-time and full-time equivalent (FTE) employees to offer health coverage to full-time employees (those who work on average 30 or more hours per week) and their dependents. The ACA also prohibits employers from discriminating and retaliating against employees for receiving a health insurance premium subsidy. A reduction in hours in response to an employee claiming a subsidy under the ACA could be considered retaliation.
Paid Time Off:
If an employee accrues paid time off as a full-time employee but subsequently changes to part-time, you may be required to either pay the employee for any unused vacation or allow the employee to use the accrued vacation as a part-time employee. Additionally, federal and many state and local laws require employers to provide paid leave to employees. In many cases, both full-time and part-time employees are eligible for such leave and part-time employees may be entitled to use any leave they accrued while a full-time employee. Check the leave laws for details.
PPP Loan Forgiveness:
If you obtained a loan under the Paycheck Protection Program, the amount of loan forgiveness may be reduced if the reduction in hours results in fewer full-time equivalent (FTE) employees or any employee's pay being reduced by more than 25 percent. A reduction in pay and/or hours may also make it more difficult for you to spend at least 60 percent of the loan on payroll costs, another criterion for loan forgiveness.
A reduction in hours and/or pay can have a significant impact on employees. Some states and local laws have specific rules for how much notice an employer must provide before reducing an employee's hours or pay. Be sure to follow applicable timelines and provide as much advance notice as possible. Employers may also have certain notice obligations under the federal Worker Adjustment and Retraining Notification Act (WARN) or similar state laws (Mini-WARN). Make sure you comply with applicable rules.
Communicating with Employees:
When business slowdowns necessitate a reduction in hours, communicate with employees about the change as early as possible and acknowledge the impact the cuts will have on employees. Be straightforward about the reasons for the reduction and what the changes mean for each employee. If your state requires, provide affected employees with information about unemployment insurance and an updated notice about their hours and pay.
When reducing hours, be sure to handle the situation carefully and equitably and comply with applicable federal, state, and local laws.