To lower costs and avoid layoffs, some employers choose to reduce employees' regular work hours. A reduction in hours can affect wage and hour law compliance, unemployment insurance costs, benefit eligibility, and morale. Here are some factors to consider before reducing employees' hours.
Wage and hour law compliance:
Non-exempt employees:
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. Note: Some states require daily overtime and/or 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.
Exempt employees:
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 $455 per week. 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, 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, are not made to avoid salary basis requirements, and the employee still receives at least $455 per week on a salary basis.
Nondiscrimination considerations:
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 is a best practice to document the reasons for a reduction in pay and/or hours.
Benefits:
Unemployment benefits:
Employees who have their hours reduced may be eligible for partial unemployment benefits, typically a portion of the pay that they would have received if they were fully unemployed. 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.
Health benefits:
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.
Additionally, the Employee Retirement Income Security Act (ERISA) prohibits, among other things, interfering with a plan participant's attainment of any right provided by a benefit plan. While it's still an issue being challenged in court, reducing employees' hours below full-time status to avoid the ACA's requirements may violate ERISA. Before implementing a reduction in hours, covered employers should consider consulting legal counsel to discuss potential risks and ensure compliance with the ACA and ERISA.
Communicating with employees:
A reduction in hours and/or pay can have a significant impact on employees. Be sure to give employees as much advance notice as possible. Note: Some states have specific rules for how much advance notice an employer must give, so make sure you comply with applicable rules.
Here are some best practice communication tips:
- Meet with each affected employee individually in a private location.
- Be straightforward about the reasons for the reduction and what the changes mean for the employee.
- Make sure the person delivering the information has the skills, knowledge, and training on how to present the information.
- If your state requires, provide affected employees with information about unemployment insurance and an updated notice about their hours and pay. Check your state law for more information.
Conclusion:
In many cases, a reduction in hours has an impact on an employee's pay and benefits eligibility. Be sure to handle the situation carefully and equitably and comply with applicable federal and state laws.