On March 16, the City and County of San Francisco issued the nation’s first “shelter in place” order to mitigate the spread of the unrelenting novel coronavirus. Although this drastic move was needed to deal with the negative effects of a global pandemic quickly making its way to the Bay Area, the local economy has come to a halt, affecting numerous industries and leaving many companies with no other option than to consider cutting employees’ hours, furloughing others for weeks at a time, and, in some situations, ending their employment through layoffs or reductions in force.
With COVID-19 outbreaks growing in Silicon Valley and other parts of the Bay Area, other neighboring counties and the state itself also imposed similar “shelter-in-place” orders. Today, many other states and localities have implemented similar measures to curtail the spread of the virus.
As one might expect, there are likely to be unsuspecting employers who run afoul of many federal and state laws that could affect a large segment of their work populations and lead to class and collective actions. The following is a discussion of the issues that are most likely to result in costly class and collective action litigation matters, and some possible solutions.
Reductions in force
Many employers have been forced to make the difficult decision to lay off employees through reductions in force. Before conducting a reduction in force, employers should consider whether mass layoffs will affect their eligibility for new federal benefits under the Coronavirus Aid, Relief and Economic Security Act, also known as the CARES Act. Employers with 500 or fewer employees may be eligible for the Paycheck Protection Program loans to cover payroll and other business expenses so long as they maintain specified levels of full-time equivalent employees.
Despite the CARES Act, employers may find that a reduction in force is the only viable option. In such cases, employers should take steps to consider whether compliance with federal and state notice requirements is required under their circumstances.
The WARN Act and state “Mini-WARN” acts
The federal Worker Adjustment and Retraining Notification Act requires covered employers to provide 60 days’ notice of plant closings or mass layoffs. Many states have their own “mini-WARN” acts that require notice in similar situations. Notice must be provided to affected employees, union representatives, and various state and local entities. The financial penalties associated with WARN Act violations are significant. Employers who fail to provide required notice face strict fines and must pay affected employees back pay and benefits up to a maximum of 60 work days. In California, employers also may face steep penalties under the Private Attorneys’ General Act.
The federal WARN Act allows for reduced notice where a plant closing or mass layoff was caused by unforeseen business circumstances. In the past, this exception has been applied narrowly to “sudden, dramatic and unexpected” circumstances outside of an employer’s control, such as a natural disaster. Although courts are likely to extend this exception to the COVID-19 pandemic, employers still must provide as much advance notice as possible and comply with the Act’s other requirements.
Employers considering a reduction in force should consult with counsel because some states have temporarily amended their mini-WARN acts or provided pandemic-related guidance for employers. In California, Gov. Gavin Newsom (D) issued an executive order temporarily suspending the 60-day notice period for mass layoffs, relocations, or terminations directly caused by COVID-19-related business circumstances that were not reasonably foreseeable. However, California employers still must provide notice as soon as practicable. Similarly, the Vermont Department of Labor has said that it does not intend to enforce state notice requirements against employers who are forced to lay off employees due to the effects of the pandemic. Again, Vermont employers are still encouraged to provide advance notice when possible.
What Should Employers Do?
Not all reductions in force will trigger notice under the federal WARN Act or state law. Consult with counsel on how to structure mass layoffs and plant closings to avoid notice requirements where possible.
Document the specific ways in which the COVID-19 pandemic has affected your business. In the event of litigation, employers would have to prove that the reduction in force was directly caused by the pandemic to take advantage of notice exceptions.
The U.S. Department of Labor and states are likely to continue to provide additional guidance as the pandemic progresses. Seek the advice of counsel before conducting a reduction in force to stay on top of notice requirements as the law rapidly changes.
Older Workers Benefit Protection Act
Employers may mitigate the risk of class actions arising from reductions in force, including potential claims under the WARN Act, through release agreements. However, to obtain a valid waiver of federal age discrimination claims, employers must ensure that release agreements comply with the Older Workers Benefit Protection Act, an amendment to the federal Age Discrimination in Employment Act.
Under the OWBPA, employers seeking a release in a “group termination” (the “group” can be as small as two or more employees) must provide detailed information about the reduction in force to the affected employees who are age 40 or older. Among other information, the employer must disclose (1) the unit, class, or group of individuals covered by the exit program and eligibility factors, (2) the job titles and ages of individuals selected for the program, and (3) the ages of employees in the same unit, class, or group who were not selected for the program. Employees 40 and older must be given 45 days to consider the agreement, and seven full days to revoke their agreement after they have signed. Release agreements that do not meet the OWBPA’s strict disclosure requirements will not release the employer from claims of age discrimination under the ADEA.
What Should Employers Do?
Before conducting a reduction in force, employers should analyze, through statistical studies, whether it will have a disparate impact on employees in any legally protected class, including employees age 40 and older.
Employers should develop a clear plan for communicating with employees about the basis for the reduction in force and eligibility for any exit programs.
Employers should consult with legal counsel before offering release agreements to ensure compliance with the OWBPA.
Furloughs and wage reductions
As an alternative to reductions in force, many employers are considering other cost-saving measures, including wage reductions and furloughs. These actions also come with significant wage and hour risks, which could result in class, collective or representative actions in the future.
Salary reductions for exempt employees
Reducing the salaries of exempt employees could jeopardize their exempt status, making them eligible for overtime. The federal Fair Labor Standards Act and many state laws recognize several “white-collar exemptions,” the most common of which are the administrative, professional, and executive exemptions. To qualify for any one of these exemptions, three tests must be satisfied: (1) the “duties test”; (2) the “salary level test”; and (3) the “salary basis test.” This article focuses on the salary level and salary basis tests.
The Salary Level Test – Under the FLSA, as of January 1, 2020, an employee exempt under the administrative, professional, or executive exemptions must be paid at least $684 per week ($35,568 per year). (Limited exceptions to the salary basis and salary level tests apply to doctors, lawyers, and teachers.) Some states have higher salary level requirements. For example, in California, employees must earn a salary that is at least two times the state’s minimum wage. For California employers with 25 or fewer employees, exempt employees must make at least $960 per week ($49,920 per year). For California employers with 26 or more employees, exempt employees must be paid at least $1,040 per week ($54,080 per year). Under situations where federal law differs from state law, employers must apply the standard most favorable to the employee.
The Salary Basis Test – In addition to earning a minimum salary, exempt employees must also be paid on a “salary basis.” Exempt employees must regularly receive a predetermined amount of compensation that cannot be reduced because of variations in the quantity or quality of the employee’s work. Subject to certain exceptions, exempt employees must receive their full salary for any week in which the employee performs any work, regardless of the number of days or hours worked. Guidance from the U.S. Department of Labor states, “If the employee is ready, willing and able to work, deductions may not be made for time when work is not available.”
In general, an impermissible deduction to an exempt employee’s predetermined salary will result in a loss of the exemption, requiring the employee to be paid at least minimum wage and overtime. This rule applies to employees whose salaries actually had deductions and in the weeks in which the actual deductions were made. However, it can also apply in some instances in other weeks and to other employees who would have been subject to the impermissible deductions.
An employer generally has the flexibility to set its employees’ salaries (subject to the $684 weekly minimum) and, with some exceptions, can make prospective changes to those salaries. Relevant to COVID-19, according to the U.S. Department of Labor, employers may reduce the predetermined salary of exempt employees on a prospective basis “during a business or economic slowdown,” so long as the reduction is part of a bona fide plan and the reduction is not being made to evade the salary basis requirements. A salary reduction put into place to reflect long-term business needs is considered to be a “bona fide” change. However, salary reductions that are based on “day-to-day” or “week-to-week” determinations of business needs are not considered to be “bona fide” reductions and will result in a loss of the exemption.
Employers considering salary reductions for their exempt employees should proceed with caution.
Moreover, under many state wage and hour laws, an employer is required to provide advance written notice to employees -- exempt and non-exempt -- of a change in pay that adversely affects the employee. Accordingly, employers should consult with employment counsel to ensure compliance with all applicable notice requirements before it either reduces pay levels or reduces hours with the effect of reducing pay.
Wage reductions for non-exempt employees
Employers have more flexibility regarding the pay rates and schedules for their non-exempt employees. In general, the FLSA and most state wage and hour laws allow an employer to prospectively modify either a non-exempt employee’s hourly rate (to no less than the applicable minimum wage) or work schedule at any time, subject to the above comments about state law notification requirements. In some jurisdictions, predictive scheduling requirements may also apply.
Employers may be considering furloughs, which generally are mandatory time off without pay, to save costs during times of economic downturn. In general, there are two kinds of furloughs. A “full-week furlough” involves requiring employees to take the entire week off from work without pay. By contrast, a “partial-week furlough” occurs when the employer reduces the employee’s normal workweek -- for example, moving from five days a week to four days a week, with a corresponding reduction in pay.
Implementing full-week or partial-week furloughs can affect an employee’s exempt status under the FLSA and, possibly, state wage and hour laws. Although a full-week furlough will not affect an employee’s exempt status if the furlough corresponds precisely with the employer’s seven-day workweek, employers must ensure that exempt employees are not performing any work during their furlough workweeks. If an exempt employee does perform any work during that week, such as checking email from home, the employee should be paid for the full week.
There is conflicting legal authority and guidance regarding the permissibility of partial-week furloughs under the FLSA for exempt employees. The general rule is that deductions cannot be made to the salary of an exempt employee for partial-week absences caused by the employer. Through the years, however, the U.S. Department of Labor and some courts have allowed for prospective reductions in salary levels (versus deductions from salaries) to avoid layoffs that have some corresponding reduction in work schedule. Although the employer’s safest course is to prospectively reduce an exempt employee’s salary, employers may have some flexibility regarding a reduction in work expectations in connection with the reduced salary. Where possible, the salary reduction should occur in advance of any schedule reduction, so as to avoid creating the appearance that the salary reduction is an “illegal deduction” based on the lack of availability of work. As stated above, the salary reduction should align with the long-term business needs of the company, should not be based on “day-to-day” or “week-to-week” fluctuations in business operations, and should be implemented on a go-forward basis. Employers should also keep in mind that some states, like New York, disfavor partial-week furloughs.
As with hourly rate reductions, employers have more flexibility regarding furloughs for their non-exempt employees. In general, the FLSA and most state wage and hour laws allow an employer to prospectively reduce or eliminate a non-exempt employee’s scheduled work hours, either partially or completely, unless a predictive scheduling law applies.
Although furloughed employees may not be eligible for paid sick leave or paid family and medical leave under the Families First Coronavirus Response Act (which applies to private sector employers with fewer than 500 employees, among others), covered employers should ensure that they are compliant with the leave provisions of this new law. The FFCRA provides that violations of its paid sick leave provisions constitute a failure to pay minimum wages in violation of the FLSA. Thus, we expect to see FLSA collective actions arise from this new legislation.
Finally, if an employer does decide to move forward with a furlough for a considerable period of time, the employer will need to keep in mind the requirements of the federal WARN Act and state mini-WARN acts. The notice requirements of the federal WARN Act are not triggered if the anticipated duration of the furlough is less than six months, but some mini-WARN acts may apply to shorter furloughs. Moreover, if a furlough is converted into something more than six months or results in a traditional layoff, an employer would need to revisit these issues under the federal WARN Act as well as applicable state mini-WARN acts.
What Should Employers Do?
For exempt employees, make any salary reductions prospective and for the foreseeable future, not on a “day-to-day” or “week-to-week” basis based on the immediate needs of the company’s operations. Salary reductions should align with the long-term business realities in light of an unexpected downturn in business.
If salary reductions are made, ensure that exempt employees receive at least the minimum salary level necessary to maintain the exemption. As these minimum salary levels vary by state, it is important to consult with competent counsel.
Reductions of salaries and wages, whether the employees are exempt or non-exempt, may not take the employees below the applicable minimum wage.
With any reduction of salaries or wages, comply with any state or local notice requirements.
For both exempt and non-exempt employees, ensure that no work is performed during any furlough.
Consult with counsel to ensure compliance with the FFCRA paid leave requirements and any differing state laws regarding furloughs.
Avoiding discrimination claims
Given the dramatic rise in unemployment, employers should assume that all furloughs, reductions in force, pay reductions, and termination decisions will be scrutinized by administrative agencies and the courts. Employment actions should always be based on non-discriminatory (and preferably objective) criteria. Employers should analyze whether these decisions will have an unintended adverse impact on any legally protected group of employees.
Policy changes also may have an unintended adverse impact on legally protected groups of employees and give rise to class-wide discrimination claims under Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, the Age Discrimination in Employment Act, or similar state laws. For instance, many employers are modifying their telecommuting, paid sick leave, vacation/PTO and other leave policies in response to the pandemic. Employers should carefully consider whether such changes could adversely affect disabled employees or those in other legally protected groups.
What Should Employers Do?
All reductions in force should be based on non-discriminatory – and, where possible, objective – criteria.
Consult with counsel before modifying company policies to consider whether changes could have an adverse impact on legally protected groups of employees.
In an effort to keep the economy afloat during “shelter in place” orders, government officials are encouraging employees to work from home wherever possible. Employees who may have never worked from home in the past are now conducting conference calls from the dining room table and other improvised work spaces. There are many wage and hour risks associated with telecommuting, all of which could give rise to future litigation.
Working off the clock
The FLSA and state law in many jurisdictions require employers to pay non-exempt employees for all hours worked. The U.S. Department of Labor states that “hours worked” means “all time an employee must be on duty, or on the employer's premises or at any other prescribed place of work,” and includes “any additional time the employee is allowed (i.e., suffered or permitted) to work.” California, for example, follows a similar definition of the term “hours worked.” Although the de minimis doctrine, which precludes recovery for otherwise compensable time that is small or trivial, can apply to FLSA claims, employers should not rely on that doctrine and, additionally, cannot with regard to claims brought under California’s wage and hour laws. Non-exempt employees who are working from home must be instructed to record all of the time they work, regardless of the time of day and regardless of the length of time.
Off-clock work claims can be costly. In California, employers can be liable for minimum wage violations, waiting time penalties, and additional penalties under the PAGA. Under the FLSA, employers can be liable for unpaid overtime and minimum wage violations, and an equal amount in liquidated damages. Under some state laws, those liquidated damages are twice the amount of unpaid minimum wage and overtime.
Work-from-home policies increase the risk that non-exempt employees will conduct work outside of their normal working hours. Employers allowing their non-exempt employees to work from home should consider establishing some limits to prevent off-clock work.
What Should Employers Do?
Consider a work-from-home policy that encourages or requires non-exempt employees to conduct work only during normal working hours. However, non-exempt employees must be paid for all hours worked, regardless of when the work is performed. If it is not possible for the employees to work during their regular hours (for example, because they are having to care for children during the day), and if the job permits, work with the employee to establish some other relatively “fixed” work-at-home schedule. (For example, 9 a.m. to 1 p.m., and 7 to 11 p.m.)
Instruct non-exempt employees to accurately record all of their time worked, and pay them for the time that they record. Do not allow employees to work without recording their time, and avoid contacting them during their non-working hours. (If you need to contact employees during non-working hours, remind them to record the “unscheduled” time that they actually worked.)
Require non-exempt employees to review their time records and confirm they are accurate.
Consider restricting after-hours access to email, voicemail, and mobile devices for non-exempt employees to deter off-clock work claims.
Telecommuting also poses unique challenges for companies in states that require employers to provide all necessary equipment and reimburse employees for reasonable business expenses, which may include everything from printer paper to cell phone data or home internet plans. California, for example, has already seen representative action cases for expense reimbursement under the PAGA.
To avoid a wave of class or collective actions arising from the failure to reimburse expenses, employers should adopt clear policies regarding reimbursable expenses and the process for submitting reimbursement requests. Although it may be difficult during the pandemic, employers should continue to pay employees for reasonable expenses in a timely manner.
What Should Employers Do?
Adopt a comprehensive telework policy that includes policies and procedures for expense reimbursement and how to submit expenses.
Develop a process for documenting expense reimbursement requests and retaining records related to expense reimbursement.
Consult with counsel on state-specific laws regarding the reimbursement of cell phones, internet or other household items now being used for business-related purposes.
The COVID-19 pandemic has presented new and unique legal challenges for employers. Our highly experienced attorneys are here to assist employers in navigating these uncharted waters.
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