Managing in Hard Times: Furloughs & Salary Reductions

Personnel costs — salaries, benefits, etc. — are often the biggest piece of the expense side of the financial equation for many nonprofits. While many organizations have always been creative in finding ways to cut personnel costs, today’s economic reality is stressing many groups to the extreme and managers need to be careful not to run afoul of the law and keep employee morale from crashing.

Short of laying off employees, nonprofit executives have a couple of options available including reassignment, salary reductions, furloughs, and New York’s Shared Work Program.

A salary reduction needs careful consideration. For example, an across-the-board wage cut could seriously impact low-paid workers, and you need to be sure that it doesn’t cause an employee to fall below New York State’s minimum wage of $7.25 per hour. Other consequences to be mindful of include that a salary reduction to an exempt employee could trigger a change in his exempt status to non-exempt should his salary fall below New York State’s threshold of $543.75 per week, thereby requiring the employee to be reclassified and to be eligible for overtime.

A furlough is an unpaid leave of absence, either voluntary or mandatory. For non-exempt employees a furlough allows for a great deal of flexibility in that it can be for whatever length you decide, i.e., one full week, two days every other week, one day per month, etc. While there are virtually no laws directly regulating furloughs, there are legal ramifications to consider. For example, if a furlough is not across-the-board, you need to be make sure there is a sound business reason for choosing to furlough only some employees; if a furlough is voluntary, be careful that a manager doesn’t pressure employees into participating, thus possibly opening up the organization to a discrimination claim.

For exempt employees, furloughs are a more complicated situation because under FLSA (Fair Labor Standards Act), an exempt, salaried employee must receive the same amount of compensation regardless of the number of hours worked during the workweek. However, the U.S. Department of Labor has informally indicated that an exempt employee may be furloughed for part of a week, and his or her salary reduced proportionately, as long as the furlough is scheduled in advance and is a temporary response to economic conditions. Exempt employees can be furloughed in a full-week increment, provided that no work is done by the employee during that week. Remember that both exempt and non-exempt employees who do any work during the furlough, including checking email or returning phone calls, must be paid. Policies and procedures must be put into place outlining what can and cannot be done by the furloughed employees.

Finally, you need to consider the effects that any salary reduction, whether it is a pay cut or a furlough, will have on employee morale, especially if employees are asked to do the same amount of work for less pay and/or in fewer hours. Employers should check with counsel before implementing any changes.

As a benefit to employees affected by furloughs or partial layoffs, employers should investigate the Shared Work program offered by the New York State Department of Labor. The Shared Work program offers partial unemployment insurance payments to supplement a reduction in wages for full-time employees whose hours have been reduced. More information is at www.npccny.org/info/ pmei31.htm and www.labor.state.ny.us/ui/dande/sharedwork1.shtm.

Judith Moldover is Senior Staff Attorney with Lawyers Alliance. She can be reached at 212-219-1800, extension 250. Lawyers Alliance for New York’s Program Preservation Initiative offers guidance on legal issues, including furloughs, reduction in workforce, mergers, bankruptcy options, and more at www.lawyersalliance.org/news_legal_alerts.php.

This article originally appeared in the February 2010 issue of New York Nonprofits, the monthly publication of the Nonprofit Coordinating Committee of New York, Inc. www.npccny.org