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Tread CarefullyFurloughs Useful for Cost Saving but Are Not Without Risks

November 19, 2009
Related Topics: Employee Leave, Scheduling, Featured Article
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The complex legal landscape of employee furloughs has driven new work to law firms helping companies avoid violations of the Fair Labor Standards Act and other laws.

Workplace furloughs and temporary shutdowns have become an alternative for local companies seeking to shore up labor costs without laying off more staff—but they are not without pitfalls.

Partner attorneys at major firms such as Detroit-based Butzel Long, Dykema Gossett, and Miller, Canfield, Paddock and Stone all reported an uptick in furlough business. Each handled furlough matters for about a dozen companies each in their firms’ employment practices over the past 12 months. That compares with virtually none the preceding year.

The lion’s share of that work went into compliance with the federal Fair Labor Standards Act provisions for “exempt” employees—those who draw a salary rather than collect hourly pay and have executive, administrative, professional or some types of IT/computer jobs.

“That’s probably the biggest mine in the minefield of issues,” said Scott Patterson, shareholder at Butzel Long’s Bloomfield Hills, Michigan, office, who specializes in furloughs in the firm’s labor and employment practice group.

“The private sector faces some greater exposure to it than the public sector because there’s an allowance for salaried government workers to have their pay reduced during furloughs.”

A federal report on judicial business of the U.S. courts notes that lawsuits under the labor standards act for misclassification, off-the-clock work and other violations jumped to 7,310 cases in 2007, compared with 4,207 the previous year, and more than four times the 1,580 filings in 1995. But local attorneys said almost none of their FLSA work involved furloughs until the closing weeks of 2008.

Furloughing exempt employees, cutting their salaries accordingly, and then reinstating them to a full work schedule and full pay could leave an employer liable for lost pay, overtime, attorney fees and damages if employees sue or challenge the practice before the U.S. Department of Labor.

“The more often it happens, as you change the work and the pay schedule, the more it starts to look like you’re trying to treat the exempt employees like they’re really hourly employees,” said Chris Trebilcock, principal at Miller Canfield’s labor and employment practice.

“Generally speaking, if you attach it to a complete pay period or institute change over a period like six months or a quarter, that works better, and it’s how companies already tend to look at their own accounting.”

Other legal issues that arise from furloughs include hourly employees taking time “off the clock” to work from home while on furlough, worker eligibility to collect unemployment during a furlough and occasionally the loss of exemption status when pay cuts become too steep.

Patterson said he has counseled more than a dozen clients in the past year on furloughs.

Private-sector employer queries have come from automotive suppliers trying to weather bankruptcy restructuring and related shutdowns over the summer for General Motors Co. and Chrysler Group, he said, while public-sector queries came mainly from municipal governments.

Automotive suppliers explored furloughs in 2009 as a way to shave payroll costs without losing a workforce that would keep them competitive.

Dearborn, Michigan-based International Automotive Components Group North America had at least one furlough in May, Auburn Hills, Michigan-based BorgWarner Inc. announced temporary shutdowns starting last December to coincide with OEM shutdowns, and Van Buren Township, Michigan-based Visteon Corp. shortened its workweek during January and had intermittent furloughs for salaried workers later in the year.

James Fisher, director of corporate communications at Visteon, said the maker of automotive interiors, electronic components and lighting systems initiated the temporary layoff policy earlier in the year, before the company filed for bankruptcy protection in May.

Since then it has implemented the policy intermittently and used it more frequently around the times of various OEM shutdowns. Fisher said he is unaware of any litigation or regulatory issues arising from the policy.

“We were fully aware of the regulations and laws when we implemented the policy,” he said. “And we have adhered to [the laws] fully.”

Visteon has more than 2,500 U.S. employees, including about 1,500 exempt or salaried workers.

Nonprofits also have used furloughs to manage expenses.

William Jones, CEO of Focus: HOPE in Detroit, said the organization already had made staff reductions before imposing two weeklong furloughs on nonconsecutive weeks during August. Focus: HOPE has about 220 employees.

“We faced a situation where we were already operating pretty close to the bone and wouldn’t be able to reduce further without having to eliminate some important services,” he said. “Unfortunately, we still needed to tighten our budget and looked at other approaches.”

The organization also imposed a four-day workweek in June, July and August except in programs that require daily service, such as food for senior citizens, along with a 10 percent pay cut. The full workweek has been restored, but the pay cut remains in effect, Jones said.

So far, no legal issues have emerged from the changes. Jones said the organization has not scheduled another furlough—but he couldn’t rule one out in the coming year, depending on future budgets.

Trebilcock said he counseled eight to 10 companies on furloughs in the past year, and the practice group worked with a dozen or more companies, compared with little or no furlough business in 2008.

None of those matters has resulted in litigation, he said, but some companies that had considered furloughs later chose layoffs, pay cuts or negotiated labor concessions on benefits after hearing of the legal issues.

Occasionally, some employers may cut pay so deeply that their employees fall below the minimum $455 per week or $23,700 per year to be exempt under the FLSA, but Trebilcock said that is rare.

“There’s no bright line, in terms of a point where the Department or Labor does or does not see a possible violation” on exemption issues, said James Hermon, member-shareholder at Dykema in Detroit. “But generally, the less often you change your workforce hours and pay, the better off you’ll be.”

Patricia Nemeth, founder and managing partner of Nemeth Burwell in Detroit, estimates her firm has counseled 50 to 75 clients in the last 12 to 18 months on wage-and-hour issues, and it is likely the most active area of practice for the firm.

High interest in furloughs is one reason for the increased business, she said, as well as local employers trying to contain overtime and other labor costs by attempting to classify some employees as salaried workers.

Patterson said most companies that consult with an attorney and check the law have no trouble making a furlough plan that can work—but most litigation and regulation enforcement from the Department of Labor seems to fall on employers who forged plans on their own without considering the law.

“It’s one of these things where once the genie’s out of the bottle, it’s almost impossible to fix,” he said.

The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion. Also remember that state laws may differ from the federal law.

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