We know it is a time of great anxiety for our clients trying to manage federal and state directives to combat the spread of the 2019 novel coronavirus (COVID-19) while continuing to run a business. With the economic impact of the COVID-19 pandemic being largely unknown, employers should consider these options to help manage their business and employees during this unprecedented time:

Temporary reduction in pay or work hours

What is it?

A temporary decrease in the amount of pay and/or hours of work for some or all members of your workforce, with the goal of reducing overall payroll costs in the short-term.

Why does it work?

Employees stay working and paid, even if at a reduced level.

How does it work?

• For nonexempt employees: For nonexempt employees (i.e. employees who are entitled to overtime), employers may implement prospective (but not retrospective) reductions in wages and work hours, as long as those reductions keep employees’ wages above the applicable minimum wage requirements. However, employers should be mindful that unless these reductions are made acrossthe-board, or are driven by clear, legitimate business goals (e.g. a certain division has temporarily shut down), there is potential for disparate impact discrimination claims if the burden falls disproportionately on a protected class of employees. Additionally, certain state and local predictive scheduling laws may require an advance notice period before a wage or hours reduction can go into effect.
   
• For exempt employees: For exempt employees (i.e. employees who are not subject to federal and state overtime requirements), reductions to the weekly salary are generally not permissible. The exemptions require that these employees be paid the same minimum weekly salary for any workweek in which they perform work, regardless of the number of hours worked. This means that, generally, employers may not force exempt employees to take one or two unpaid days of leave in a workweek and prorate their salaries accordingly.

However, there is a limited exception where employers can prospectively reduce an exempt employee’s future salary and working hours because of a bona fide reduction in the amount of work as long as it is not designed to circumvent the salary basis requirement. To qualify, this practice must be occasional (not recurrent), and be related to long-term business needs or an economic slowdown, not merely on an ad hoc basis. While there is no bright line rule defining what amount of time constitutes “long-term,” in the past we have recommended at least two months or more of consistent reduced workweeks (not fluctuating).

Be mindful of unintended consequences. Reductions may not go below the minimum salary for exempt status (now $684 per week), and even if the employee works only part of a given workweek, the employee must be paid for the full week (see furloughs, below).

As an additional complication, if you have employees that are subject to an employment contract that guarantees a certain level of pay, these provisions may legally bind you to maintaining certain levels of pay unless and until they are renegotiated. Check the personnel files of all employees impacted by pay reductions for these kinds of employment clauses. employee personnel files of impacted employees must be checked to ensure that the employee is not, as such provisions may legally bind you to maintaining certain pay levels unless and until they are renegotiated.

Long-term reductions in pay, where an employee is allowed to take leave in exchange for accepting a reduced salary, are sometimes referred to as a sabbatical. Employees typically lose their eligibility for employer benefits during a sabbatical. A sabbatical may be an effective way to reduce costs with respect to highly-compensated employees. These arrangements take careful negotiation and should be memorialized in writing.

Mandatory use of vacation/PTO

What is it?

A requirement that employees must take time off from work and use their existing vacation/PTO time.

Why does it work?

When employees are using their vacation/PTO, they are paid at their full rate of pay. However, if an employer plans to shut down all or some operations for a period of time, requiring the use of vacation/PTO now prevents employees from saving up vacation/PTO for use later in the year.

How does it work?

• For nonexempt employees: Except as limited by federal, state or local laws, or by the terms of an employer’s policy, nonexempt employees may be forced to use vacation/PTO until it is exhausted. Likewise, employers who maintain vacation/PTO policies where employees accrue vacation/PTO over time may prospectively freeze employees’ ability to accrue additional vacation/PTO time during periods of economic difficulty. It is important to note, however, that requiring an employee to exhaust his/her employerprovided vacation/PTO will not affect his or her rights to receive paid sick leave and/or Family Medical Leave Act (FMLA) leave under pre-existing state laws or the new Families First Coronavirus Response Act (FFCRA).
   
• For exempt employees: Exempt employees can likewise be forced to use vacation/PTO except as prohibited by law, or as restricted by an employer’s policy and/or any employment contract between the parties. However, unlike nonexempt employees, exempt employees are entitled to their full salary for any workweek in which they work. Thus, if an exempt employee exhausts his/her vacation/PTO balance in the middle of a given week, he or she must be paid a full salary for that week unless the requirements of a furlough are met.

Voluntary unpaid leave

What is it?

An effort to convince employees to volunteer to take unpaid time off in an effort to maintain the viability of the company.

Why does it work?

Employees who are concerned that their employer may not be able to survive a period of financial difficulty may volunteer to go on unpaid leave to keep their company afloat. Employers are not required to pay employees through the use of vacation/PTO.

How does it work?

• For nonexempt employees: You are free to encourage nonexempt employees to voluntarily take unpaid leave, when not otherwise protected by law (for example FMLA). You may even temporarily modify your company policy to allow for shorter or longer required increments of time off to meet your business needs, as long as the policy and modifications are uniformly applied to your workforce to avoid discrimination claims. There are exceptions driven by business needs, and those limitations should be based on objective business reasons that cannot only be articulated, but proven if there was ever an issue. For example, it will be difficult to approve everyone in a single critical department to participate in voluntary unpaid leave. You should maintain documentation that shows your analysis and how you reached your decision and why.
   
• For exempt employees: You can give exempt employees the same option, but the critical difference is the manner in which the employee takes the leave. To preserve the exempt status of the employee, the employee must take the voluntary unpaid leave in fullday increments and it must truly be voluntary. For these reasons, we suggest the exempt employee sign a simple document that acknowledges this fact.

Furloughs

What is it?

The terms furlough and layoff are often used interchangeably today, although they stem from a time when unionized workforces were more prevalent. Generally speaking, a ‘furlough’ refers to a voluntary or involuntary short-term program where employees are forced to take unpaid leave to reduce payroll costs, but remain employed and maintain benefit eligibility. A ‘layoff’ is an actual employment termination with possible re-hire at some point in the future.

Why does it work?

Employers save money on payroll costs during times of reduced business activity, while employees keep their jobs and (typically) remain eligible under the terms of employer benefit plans.

How does it work?

• For nonexempt employees: Nonexempt employees can be furloughed for hours, days or weeks without violating wage and hours laws. For example, a furlough program could mandate one day off per week for six weeks for nonexempt hourly employees. Weekly pay and overtime (if earned) would continue to be calculated based on actual work performed during those furlough weeks.

If the intent of implementing a furlough is to preserve employee benefits, however, employers must take care to review the details of their qualified benefit plans and fringe benefits to determine whether the length of furlough in question will jeopardize employee eligibility. Likewise, employers must be mindful of federal, state and local laws governing notice in the event of plant closings and mass layoffs.

For Wisconsin employers, we advise that you notify employees, in writing, of the temporary nature and parameters of the furlough (i.e. not to exceed six months in time). Such notice should tell employees that they are not allowed to perform any work (e.g. checking e-mail, corresponding with management) during their furlough time, as any such work would need to be compensated. Finally, when some but not all employees are selected for furlough, the potential for disparate impact on a protected class must be considered.

• For exempt employees: There are special considerations for furloughing exempt employees. Generally speaking, the same rules apply as with a reduced workweek (i.e. an exempt employee must be furloughed for an entire work week with no work responsibilities) before an employer can legally withhold such person’s salary. Weeklong furloughs (or furloughs consisting of multiple weeks) do not jeopardize the exempt status of the employee if they span the employer’s entire work week (and do not start middle of the week).

If an essential employee needs to be pulled off furlough due to unforeseen circumstances, that is permissible. However, the employee must be paid his or her full salary for that week. The same written notice referenced above should be provided to exempt employees.

Layoffs and reductions-in-force

What is it?

As noted above, the term ‘layoff’ is most often used to describe an actual employment termination (or extended period of unpaid leave, with no benefits), with possible re-hire at some point in the future. In contrast to a layoff, a reduction-in-force is a group termination where the employer does not convey the implication that employees will be returned to work at some point in the future.

Why does it work?

Employers reduce both payroll and benefit costs until such time as they are able to sustain a larger workforce. Employees who are laid off or terminated as part of a reduction-in-force are typically eligible for unemployment benefits.

How does it work?

A layoff or reduction-in-force can be more complicated than a typical termination. As an initial matter, any group layoff or reduction-in-force should be evaluated to ensure that it does not give rise to a disparate impact claim. Any proposed layoff or reduction-in-force must analyze whether the federal Worker Adjustment and Retraining Notification Act (WARN) or state advance notice requirements are triggered.

Employees who are terminated by their employer, whether via a layoff or reduction-in-force, typically lose eligibility under company benefit plans, potentially triggering Consolidated Omnibus Budget Reconciliation Act (COBRA) and/or state law requirements. Moreover, layoffs and reductions-in-force affecting a certain percentage of employees can trigger vesting requirements for qualified defined contribution retirement plans.

Employers also need to be mindful of severance obligations that may be present in preexisting employee agreements. Employers that intend to create a new severance program in connection with a layoff or reduction-in-force should consult with legal counsel to ensure that severance agreements are structured to be compliant with the Older Workers Benefit Protection Act (OWBPA), which imposes certain requirements applicable to employees 40 years and older.

Special considerations and things to remember

• WARN and state advance notice requirements: Under WARN, covered employers must provide at least 60 days’ notice to employees and certain government officials in advance of a “plant closing” or “mass layoff.” Similar laws exist in certain states, including Wisconsin.

The WARN Act defines a “mass layoff” as affecting a minimum of 50 employees at a single site of employment in a 90-day period; Wisconsin law starts at 25 employees. Under both laws, furloughs and layoffs that last for a period greater than six months are considered an “employment loss” such that they count toward the number of “affected employees” for purposes of determining whether a covered event has occurred.

Because employees who are furloughed for periods that extend longer than six months are counted for purposes of the WARN Act on the date on which they were furloughed, careful planning is required to ensure that either the advance notice requirements are not being triggered or that the proper notices are being given at the right time.

• Disparate impact analysis: When an employer’s course of action impacts all employees in the entire company, it should not raise any issues of illegal discrimination. If the chosen path impacts only a subset of employees, and it disproportionately affects members of a certain protected class (e.g. females, workers over 40, racial minorities), then there is exposure to state and federal claims that the action in question has a statistical disparate impact on a protected group, which can constitute unlawful discrimination even if the disparate impact is unintentional. Legal counsel can help analyze whether a course of action is highrisk for disparate impact claims.
   
• Unionized workforce: If you have a unionized workforce, you are generally bound to the terms of your bargaining agreement. All available options should be carefully examined to determine what, if any, changes need to be bargained for with the union and what exceptions may apply.
   
• Contractual obligations to employees: As noted in various places above, employees who have employment or other contractual agreements with an employer may be entitled to certain protections, such as guaranteed pay, vacation, etc. In many cases, implementing acrossthe-board steps may violate those contracts, leaving employers exposed to liability for damages and/or severance obligations. Employers and employees are always free to renegotiate contractual terms. However, such negotiations must be handled carefully to ensure that any amended terms are supported by adequate consideration and enforceable.
   
• State law differences: State law considerations must always be taken into account. For example, while Wisconsin’s business closing law exempts layoffs lasting less than six months, similar exemptions may not exist in other states. Likewise, certain states have predictive scheduling laws that may not allow for hours reductions without sufficient advance notice.