The Hidden Legal Risks of Employee Furloughs

An employee furlough -- or unpaid leave of absence -- may seem like a good alternative to layoffs and downsizing. But before asking employees to take off a few days or weeks without pay, beware of legal pitfalls.

Generally, the issue of the legality of mandated furloughs boils down to a distinction of the two following employee categories under the Fair Labor Standards Act:

1. Non-exempt employees, who earn an hourly wage and are not exempt from overtime compensation.

Employers can usually furlough non-exempt workers without risking legal exposure. An employer may send them home without pay if there is not enough work to keep them profitably occupied or to save payroll costs for other reasons.

Companies with union contracts will have to comply with the terms of the contacts and may have to bargain before mandating furloughs if the issue isn't already covered.‍

2. Exempt employees, who meet two tests concerning:

• Duties: The job responsibilities are executive, administrative or professional.‍
• Salary: Compensation is a specified sum for each pay period, regardless of hours worked or the quantity or quality of the work.

It's the second category where employers can run into problems with furloughs.

Federal labor law says exempt employees must be paid their full salary for any workweek in which they are "ready, willing and able to work." If an exempt staff member who normally works a five-day week is told to work three days and pay is reduced accordingly, the employee no longer has exempt status and becomes entitled to compensation for overtime (However, employees can be docked if they request personal time off or their absences exceed the term allowed by a sick leave policy).

The law does let employers furlough exempt employees in limited circumstances without losing the overtime exemption. An organization does not have to pay exempt employees in any workweek in which no services are performed. So a company may shut down for one or more workweeks, or require employees to stagger their time off in one-week increments over a certain period (A workweek is the seven consecutive 24-hour days used to compute overtime for non-exempt employees).

If you need to institute furloughs at your company, keep in mind:

• Furloughs should be scheduled in full workweek increments to protect an employee's exempt status.
• Make it clear that employees cannot perform any work for the company while on furlough. It is not permissible to take work home or drop by the office to finish a few tasks. Even checking e-mail and voice mail is prohibited.
• Decide whether the savings is worth the damage to employee morale. Consider alternative cost-cutting methods. Most companies find that furloughed employees complain, but they generally realize it could be worse -- they could lose their jobs permanently or be forced to take pay cuts without time off.
• There may be different state labor laws affecting furloughs.
• Furloughs can subject your company to significant liability, so carefully analyze both federal and state wage and hour requirements before mandating them or taking other measures to cut costs. Consult with your attorney to ensure compliance with applicable laws.

Alternatives to Furloughs

• Freeze hiring and wages.
• Postpone wage increases.
• Reduce fringe benefits.
• Assess expected job attrition.
• Transfer employees to other vacant positions.
• Start job sharing programs.
• Fire employees with major performance problems.
• Terminate new hires within introductory periods.
• Eliminate part-time employees and redistributing their work.

How One Firm Worked it Out

One major distributor was facing financial problems and laid off some of its workforce.

Hoping to avoid another 10 percent job reduction, and determining that remaining employees were worth keeping, the company required three-fourths of its employees to take off three unpaid weeks staggered over six months. In addition, some executives took salary cuts.

Voluntary Furloughs

Some companies institute cost-cutting voluntary furlough programs that allow employees to take unpaid breaks for such reasons as traveling or taking care of a sick relative.

For example, one university allows staff members to request a furlough of up to 90 days. If a supervisor approves the request, the furloughed employee is placed on leave without pay status. However, the employee continues to accrue annual and sick leave. Benefits continue, as long as the employee makes required contributions.