By Stella Skaljac
There is no doubt that businesses have been upended practically overnight due to the COVID-19 pandemic. Because of the economic uncertainty, this has forced many employers to weigh options that they have not considered in a long time, if ever. The calls and emails continue to pour in as to which route makes the most sense from a business viability standpoint and which option is the safest from a legal liability perspective – layoff, furlough, or a reduction of hours and wages?
Also, in the midst of weighing these options, employers must now consider additional emergency legislation that was recently passed into law that will require some employers to pay employees who are absent due to coronavirus-related reasons and another unprecedented law that provides small business loans (among many other relief provisions) to help keep people employed. Both these new laws apply to companies with fewer than 500 employees and will be discussed below and in more detail in other COVID-19 articles.
With respect to layoffs, furloughs and other decisions to reduce hours and wages, there are no easy answers. Whether you choose to layoff a group of employees or furlough them for a finite period of time, there are important considerations with practice and legal significance. Reducing pay and hours can be done fairly easily and generally without notice. However, it’s important to note that some states (like New York and Illinois) require notification of such changes.
To be clear, a layoff can be temporary or permanent in nature and is generally for an indefinite period of time. A layoff is essentially a termination that triggers an employer’s requirement to issue continuation of health coverage (COBRA) notice and also may entitle employees to unemployment benefits. Employees may or may not be eligible for rehire and this will ultimately be at the discretion of the employer. Employers with union employees may need to refer to their collective bargaining agreement to determine whether a layoff is a termination and other obligations when implementing layoffs of union employees.
A layoff becomes legally significant if the layoff is large enough and long enough to trigger the Worker Adjustment and Retraining Notification (WARN) Act’s notification requirements. This law mandates employers of a certain size to provide 60 days’ advance written notice of a layoff that will be on-going for at least 6 months. In addition, employers may have other notification obligations due to what is referred to as “mini-WARN” laws effective at the state level. Fortunately, in circumstances where businesses have had to face abrupt productivity and revenue drops, the WARN Act (and state law equivalents) provide for exceptions in the event of unforeseen business circumstances or a physical calamity.
For private sector employers, furloughing employees is less legally risky than in union or government employer situations. In practice, a furlough is reducing days or weeks an employee would be scheduled to work. Furloughs are typically of a limited duration with the understanding that the employee is still actively employed. Furloughs can be paid or unpaid, and an employer can generally implement furloughs without giving employees notice.
It’s important to note that furloughing non-exempt employees is typically not a problem in terms of legal risks. Non-exempt employees do not have to get paid for any time not working. However, for exempt employees, this may be more problematic as exempt employees must receive their full week’s pay if the employee worked any part of that workweek. The only way it would be legally appropriate for an employer not to compensate an exempt employee for the entire workweek is if in fact the employee did not work the entire workweek. A particular challenge is for industries that have completely shut down, like restaurants, but still have some exempt employees working. An employer should be cautious in these types of situations and review the below analysis to determine the right approach.
As mentioned, reducing wages can lead to a direct violation of the Fair Labor Standards Act (FLSA) if employers start fluctuating exempt employee wages. The law is clear that exempt employees who work less than an entire workweek because of a furlough or reduction of work still must be paid a guaranteed salary. However, an employer can require that the exempt employee use PTO or paid vacation on days when the employee does not work. Another option is to “reclassify” an exempt employee to nonexempt and pay the employee by the hour. It’s important to remember, however, that the employer would be responsible for overtime and would also need to maintain an accurate record of all hours worked. A final option would be to reduce the employee’s salary – for instance, have the exempt employee take a percentage pay cut. A word of caution with this approach is to ensure that the pay cut is not tied to hours worked and that such pay reductions are not so frequent that they may be viewed as an attempt to evade the salary requirements per the FLSA.
Along with considering wage and hour issues during these types of absences and reductions, an employer must also consider the possibility of employees losing coverage and becoming ineligible for healthcare benefits. However, if an employee is taking leave under the expanded FMLA paid leave law (available to employees unable to work or telework due to having to take time off to care for a child whose school or daycare is closed), the employer will be required to continue healthcare benefits (similar to their obligation under normal FMLA-qualifying events).
If a leave of absence is non-FMLA or the FMLA period has ended, the employer should evaluate the employee’s situation to determine whether healthcare benefits are still available since employees are generally eligible if they maintain certain hours worked in a month. If an employee loses coverage, an employee should be offered COBRA. This also applies to layoffs and furloughs when hours worked have been reduced or eliminated, making employees ineligible for benefit coverage. Of course, employers should review their individual plans as there may already be provisions allowing for extended coverage during a leave of absence, furlough or temporary layoff.
Please be aware that there is a nuance for employers who use a “look back” measurement for purposes of the Affordable Care Act (ACA) and the mandate rules. Under such rules, eligibility and coverage may need to be maintained until the end of the then-current “stability period.” In most cases, COBRA would apply following the end of the stability period if the employee is on a continued leave. Also, it’s important to note that the employer can continue to collect employee premiums during these absences as a requirement to continue coverage. They can do this by collecting premiums in three ways – pre-pay, pay-as-you-go and catch-up. Employers will want to speak with an employment or benefits attorney or their broker to determine the correct method of obtaining premium pay from employees.
During this COVID-19 time, employers may want to amend their respective health plans and policies to extend coverages offered during an absence, furlough or layoff. It would be important for employers wishing to do so to speak with their insurance carrier or stop-loss provider before implementing such plans.
Lastly, with the new Families First Coronavirus Response (FFCR) Act going into effect on April 1st, employers should know they will be responsible to pay for certain sick days/family leave under the two provisions – the Emergency Paid Sick Leave (EPSL) and the Expanded Family and Medical Leave (EFML). These laws define certain qualifying events that will entitle employees to paid leave for anywhere from two to twelve weeks, depending on the need for leave. Although the government plans to reimburse employers through tax credits, many employers are contemplating layoffs due to the expected financial burden they anticipate this law will cause for their particular business. In addition, the Coronavirus Aid, Relief, and Economic Security (CARES) Act recently signed into law will offer financial support to employers by providing emergency loans for payroll, employee salaries, and other expenses. This Act may create more of an incentive to keep workers employed and help businesses avoid potential layoffs and furloughs.
As you can clearly see, there is much to consider when deciding whether to layoff, furlough or reduce hours and wages of your workforce. From business evaluations to legal analyses, we can help be a sounding board to companies contemplating the immediate effects of maintaining or reducing resources. Contact one of our employment attorneys today to help guide you through the process.