Overview of California Furlough Laws
California Furlough Laws
This post is part of our ongoing series on California employment law. Recently a number of companies asked us about the current legal landscape for California employment law subjects such as contingent workers and furloughs. This series will seek to explain the law in plain English. This post is also the beginning of a new series of posts about California employment law. As the economy continues its slow recovery, many California employers might be forced to reduce their workforce. Although terminating employees might seem like a straightforward solution to open positions, layoffs and downsizing remain a last resort for many employers. In fact, many employers are using "furloughs," or temporary layoffs, as an alternative to permanent termination of employees. A furlough is a temporary leave of absence imposed upon an employee by an employer. An employer’s ability to impose a furlough depends on the costs and benefits of termination versus furlough, and the parameters of federal, state, and local law.
Furloughs have become particularly prominent in the public sector, where government budgets are under unprecedented strain. But they have also been used by many private employers in California, particularly in the past year. These employers are often faced with making difficult decisions between "permanent" layoff of employees – which is the simplest option but also necessitates the payment of high unemployment insurance costs – or maintaining a larger number of employees through occasional furloughs, which are costly in terms of the low productivity of furloughs and the complexity of handling furloughs. As a short summary, a furlough usually consists of one-day or one-week scheduling adjustments in which an employee is not required to report for work or is limited to working a reduced number of hours. Furloughs may be paid or unpaid, and they may apply to one employee , a class of employees, or an entire facility. Furloughs can be applied to white-collar and blue-collar workers. They may also apply to exempt and non-exempt employees. The distinction between paid and unpaid furloughs may be significant because exempt employees must receive a guaranteed salary for any week in which they perform work, regardless of the number of hours worked. Thus, furloughs that apply to exempt employees may create liability unless the employee is paid at least the full salary that week. Paid furloughs might include scheduled reductions of wages, while in unpaid furloughs employees take time off without pay. In either event, the goal of a furlough is to limit losses during economic downturns and preserve jobs – which ultimately helps maintain the company’s reputation among clients and prospective employees. However, both paid and unpaid furloughs may be subject to legal restrictions. For example, the Fair Labor Standards Act (FLSA) requires that non-exempt employees working more than 40 hours per week must be paid time and a half for overtime worked. It may be illegal to subject non-exempt employees to a furlough if the employee does not have a modified rate of pay, such that the employee receives less than time and half for hours in excess of 40. Conversely, employers that only pay their employees for scheduled hours worked may comply with the FLSA while implementing furloughs. State and local laws may also impact the extent to which employers can use furloughs as an alternative to termination. For example, California’s Labor Code generally prohibits employers from imposing partial days off upon employees, including scheduling furloughs for only a few hours. In addition, California generally requires employers to provide employees with at least 72 hours notice of a furlough. In the next post we will continue this discussion with a look at how employers can avoid potential legal liability.
Furloughs Under the Law
Section 980 of the California Labor Code provides that a mandatory furlough or temporary leave of more than seven days "for economic reasons or as a result of a civil or other disaster" demands that for every one day of furlough taken in a month, the employee will receive at least a 10 percent reduction in their salary. Labor Code Section 980(b) defines "furlough" to be an "order exhibited by an authorized person suspending for a limited period of time the performance of any available work . . . ." In addition, Labor Code Section 970 requires that employers pay employees the "overtime rate" of their wages for any hours worked or accrued during a "period of rest." This could present the case for an employer to incur wage and hour liability if they survey the employees for their preferred time for furlough and employees choose to take a furlough in the middle of the week. An employee who is furloughed in the middle of the week may be owed an abnormally high amount of overtime pay for that week, further opening the door for wage and hour violations for a wide set of questions.
A furlough can be established by either a collective bargaining agreement or an employer’s unilateral implementation, and the rules are not the same for both. Labor Code Section 970 only applies when the furlough is enacted unilaterally. Unilateral furloughs which are enacted through a written policy must be for an "economic or other urgent necessity." Labor Code Section 970 defines an "economic or other urgent necessity" to be a "temporary suspension of an employer’s operations due to a material decrease in the employer’s normal rates of production, sales or revenue . . . ." Presumably, a natural disaster or an unusual and unexpected shortage of a significant input could also qualify. The law requires that, in addition to enacting the unilateral furlough, the employer must give the employee six days’ notice of the furlough and any other reductions in work hours. Employees must be paid for any work performed during a furlough.
Employer’s Responsibilities in a Furlough
When implementing a furlough, an employer’s obligations are largely governed by California’s wage and hour laws. When employers implement involuntary furloughs, they must be cognizant of the potential impact this can have on the employees’ pay status.
Before placing non-exempt employees on an involuntary furlough or temporary leave from work, employers must ensure that any hours of leave are docked from their pay checks. For example, if a non-exempt employee works less than full time on a certain day, that employee’s pay must be docked for the hours missed. Failure to ensure a non-exempt employee’s scheduled time is docked from their pay could result in that employee being considered as working over 40 hours per week, thus making the employer liable for paying the mandatory overtime wages. Further, when a non-exempt employee’s pay is docked when they miss a full day of work, this could result in the employee’s hourly rate exceeding the minimum wage ($12.00 for employers with over 26 employees; $11.00 for employers with 26 employees or less). This is problematic, as there is a $0.50/hour penalty when an employee’s regular hourly rate is reduced below the minimum wage. (IWC Wage Order 5-2001 (9)(A).)
Exempt employees are entitled to the same salary even if all or part of any week(s) that they miss is designated as furlough. Although the employer will be losing money when exempt employees take furlough days, the employer is not deprived of an exemption when bona fide furlough days are given.
Employers must also ensure that they provide advance written notice to the affected employees of the furlough at least one pay period in advance of the furlough’s commencement or by other means authorized by the DLSE.
If a furlough causes the employer to stop contributing to any employee benefit plans, including 401(k) plans, etc., employers must give employees advance notice of the furlough.
Employee Protections and Rights During Furlough
Under California law, certain employee rights and protections still apply in the event of a furlough. Many employees who are furloughed require unemployment insurance benefits to support themselves and their families. Under California law, a furloughed employee is eligible to receive unemployment insurance benefits. In fact, if you are a furloughed employee, you should immediately file a claim for unemployment insurance benefits, even if you only expect to be furloughed for a brief time. If you qualify, the Employment Development Department ("EDD") will begin making benefit payments within about three weeks after you file your claim.
In the event the furlough is of such a duration or nature as to effect an unlawful layoff, the employer could be liable for unpaid wages, as well as benefits, fines, and penalties. An unlawful layoff (i.e., a layoff that did not comply with the terms of the applicable collective bargaining agreement(s) and/or the WARN Act, if applicable) could also trigger liability under the federal Worker Adjustment and Retraining Notification (WARN) Act, so long as the employer meets the 100-employee "threshold" and is thus a "covered employer" that must give 60 days’ notice prior to a mass layoff or facility closure (mass layoffs include separations for any reason at or above a trigger percentage (or amount) of at least 50% of the affected employees in a 30-day period). Under the WARN Act, the affected employees are entitled to (a) payment of wages and benefits equal to the 60-day notice period, and (b) injunctive relief against future violations and attorney’s fees.
Implementing Furloughs: Tips for Employers
It is crucial that employers communicate the reasons and parameters of a furlough effectively. Ideally, the communication should be done in person before the actual furlough is effective. In addition, the employer should confirm that exempt employees understand the need to track their hours during the furlough period and to record such time accurately on their timecards. Failing to do so could constitute impermissible deductions, converting the position to non-exempt status and jeopardizing an exempt employee’s exemption status. Before implementing a furlough, consider the following best practices: When planning a furlough, California employers may want to consider staggering furloughs so that the business operations do not suffer from the potential loss of manpower and productivity. Staggering may also help the employer avoid the risk that its furlough decision will result in scheduling challenges under a CBA.
Effects of a Furlough on Employment Contracts and Terms of Employment
The implementation of furloughs can also lead to changes in an employee’s employment contract or at-will employment status, especially if the furlough is being used to reduce costs in order to ensure the employer’s financial viability. Furloughs can have a substantial effect on an employment contract that specifies a set annual salary or other forms of compensation, such as a commission for sales employees. For example, if the employee is reading his contract literally, he may think he should still receive full commissions on sales made during a furlough, despite the fact that he did not actually work during that period. However, if the employee provides professional services (i.e., lawyer, accountant, architect), it has been held that during periods when an employee performs no professional services, the employer is not required to pay the specified annual salary, even if the employee is not actually furloughed because he is not performing any services. In this case, the employee could argue he is nevertheless being impeded from performing professional services because of his employer’s poor financial condition. Labor Code section 221 provides: "It is unlawful for any employer to collect or receive, directly or indirectly, any part of the wages thus paid to an employee . . . ." However, the employee may be unable to collect for work not actually performed if the employee is "temporarily absent" from his usual work hours by agreement with the employer. Other forms of compensation provided for in an employment contract , such as bonuses, commissions or retirement benefits, can also be affected by a furlough. An employer may not be obligated to pay any disputed commissions due to a temporary furlough. In most cases, the employer is required to pay all commissions that have been earned due to the commission agreement, but if the employee is fired for exceeding an expense limit, the employer is generally not required to pay commissions unless his contract specifies otherwise. Even if the employee is absent from work except for one day each week, and is not working the second day, the Court of Appeal has upheld consideration paid by an employer for additional commissions for a period during which the employee is only required to work one day. For non-salaried employees who are hourly employees, withholding wages for hours the employee does not work could violate California’s Wage Order requirements regarding frequency and payment of wages. Labor Code section 204 requires wages to be paid to non-exempt employees "twice during each calendar month on days specified in advance by the employer as the regular paydays." Presumably, the unpaid daily wage rates will be deducted from the employee’s next paycheck, but to avoid possible Wage Order violations regarding the "payment of wages," the employer should pay furloughed employees their daily rate until the employer is able to deduct the amount from their next regular paycheck.
Trends and Changes in Furlough Laws
Since the passage of the WARN Act, California has received multiple inquiries about the applicability and enforcement of the statute and the rules surrounding furloughs. In response, California has developed regulations to clarify specific aspects of the law, including: However, no new substantive legislation has been adopted by Governor Brown in regard to the WARN Act. Additionally, the COVID-19 pandemic has birthed new regulations addressing furloughs and layoffs. In May 2020, Assembly Bill (AB) 5 prohibited employers from discharging et. seq. of independent contractors who were laid off for reasons related to the COVID-19 pandemic. In June 2020, AB 196 and Senate Bill (SB) 94 exempted small businesses and non-profits with less than 100 employees in California from the no-fault rule contained in California’s Worker Adjustment and Retraining Notification (WARN) Act. The new legislation applies to entities that voluntarily furloughed or laid off 75 or more employees due to the COVID-19 pandemic and meet additional criteria.
Common Myths Regarding Furloughs
Furloughs are often misunderstood and subject to misinformation. Due to a lack of familiarity with the law, employers may make mistakes arising from misunderstanding their obligations under the law and employees who have been furloughed may question whether their employer has treated them properly. The following explains some of the more common misunderstandings about furloughs under California law: Employees on furlough do not have to be paid. False. However, most employees are exempt from the federal Fair Labor Standards Act ("FLSA") and the state law equivalent under California law if they are paid a prescribed minimum salary level and perform certain tasks (this is referred to as the "white-collar exemption" under both the federal Fair Labor Standards Act and the California applicable wage order). If an employee meets the test for a white-collar exemption under federal law, then payment of any amount will meet the $455 minimum under California law but, as stated above, employees must be paid even if they are furloughed for just an hour. There is no reduction if the employee is furloughed even for part of a shift. Furloughs are a type of layoff. False. Furlough is a temporary leave of absence applied to all members of a department or business unit, whereas a layoff is usually the release of specified terminated employees, often in response to conditions that are temporary. A layoff is usually permanent whereas a furlough would be temporary, although that is not always the case. There is no way to convert a position to non-exempt other than to reduce its minimum salary. False. An employer may have the employee clock in and out and deduct any work time from the employee’s pay. Employers can also create a percentage of time rule so that when an employee performs exempt duties more than 50% of the time, they receive the higher exempt pay. Employers may also have a combination of the two rules. Anything above the FLSA minimum of $455 per week is legal and can be set at an appropriate amount. Employers may not reduce hours worked or rate of pay of an employee on a furlough. False, under certain circumstances. Fundamental reality is that employers may not discriminate against employees by paying them less than their co-workers because of their protected characteristics (race, gender, age, etc.). However, an employer may, under certain circumstances, pay its employees what it deems they are worth. A caveat is that this does not mean employers may discriminate against their employees based on protected characteristics.
Takeaways and Key Points
In this article, we have explored the fundamentals of California’s furlough laws, the various types of furloughs, how to implement them effectively, and the exceptions that may apply. We have also discussed the legal requirements for exempt employees and the steps that employers must follow to ensure compliance. The critical takeaway for employers is to carefully assess whether a furlough policy is right for their business while ensuring such policy adheres to state and federal employment laws. A poorly designed furlough policy can lead to unexpected liabilities, as courts have a low tolerance for situations in which an employer may be seen as taking advantage of its workers. The worker’s compensation process is burdensome and expensive for any company, so working to prevent liability before it occurs saves headaches , lost time and money. Ultimately, furloughs can be a valuable tool for managing labor expenses during economic downturns, but they should be used sparingly and judiciously. Employers should consult with legal counsel to ensure that their furlough policies are clear and legally compliant, and should consider other options—such as cuts to hours or wages, temporary office closures or unpaid leaves—that might offer some liquidity without the negative employee morale that furloughs can often foster. As the economy continues to shift and evolve, furloughs are likely to remain a common human resources issue in California for the foreseeable future. By understanding furlough laws and making an effort to avoid liability when implementing furloughs, California employers can avoid unexpected workplace litigation liabilities.