Labor Board Approves Reduction In Managers’ Hours & Compensation

For years the California Labor Commisioner had strict guidelines regarding managers’ compensation and any reduction in their wages. In an about-face the California Division of Labor Standards Enforcement issued an opinion that concluded that an employer facing economic difficulties will not violate California law by reducing the work schedules (and compensation) of managers, supervisors, and other employees who are exempt from overtime.

Previously, you may recall, the Division of Labor Standards Enforcement (DLSE) had concluded that reducing an exempt employee’s salary following a corresponding reduction in hours violated the “salary basis test,” which required that exempt employees be paid for the entire week if they worked any part of it. Now, according to the DLSE, employers who are facing economic difficulties are free to reduce exempt employees’ work schedules and salaries as a cost-savings measure. As an example, an employer may instruct some or all of its exempt employees not to come to work on Fridays and reduce their salaries by a corresponding 20 percent.

There are some “caveats” that clients need to be aware of. The DLSE also made it clear that the employer better be able to show:

1. That the employer is experiencing “significant economic difficulties”;

2. that once business conditions permit, the employer intends to restore the prior workweek and salary levels; and

3. the affected employees will still be earning a monthly salary of at least twice the state minimum wage for full-time employment.

As a final note, the opinion letter does not involve non-exempt (hourly) employees. An employer is always free to reduce their hours.