DISCLAIMER—This information does NOT constitute legal advice.
Over the last few months as I’ve blogged about making flexibility part of a downsizing strategy, I’ve received a number of questions about the legal considerations. Every circumstance is unique and should be reviewed directly with an attorney; however, New Jersey-based employment attorney, Leslie A. Lajewski, was willing to offer some broad insights to get leaders started.
Ms. Lajewski is the Employment Litigation, Training and Counseling Practice Group Leader, Coughlin Duffy LLP in Morristown, New Jersey. She is careful to emphasize that “these are my opinions, not the opinions of my firm and this does not constitute legal advice and should not be relied upon as legal advice.”
I am not an attorney, but after reviewing Ms. Lajewski’s opinions below, it seems that reducing schedules and salaries, incorporating additional unpaid days off, and/or offering sabbaticals and furloughs to reduce labor costs can be done with some planning and due-diligence. Transitioning an employee to project-based, contractor status, however, requires an extra level of compliance. Hopefully, this information will give you a place to start a conversation with your own counsel who will then draw a legal opinion.
1) Salary and Schedule Reduction: “If I wanted to reduce the salaries and schedules of a percentage of my employees, what legal issues would I have to consider? Is it different for exempt and non-exempt employees?”
First, check if there are contracts or employment or other agreements (handbook policies, union collective bargaining agreements, etc.) that prevent or limit you from reducing salaries or schedules.
Next, you need to consider whether the employees are exempt or non-exempt as that affects how you should implement the reduction in salaries and schedules. A non-exempt employee is one who is paid on an hourly basis or whose salary is calculated by an hourly basis and who receives overtime pay for hours worked over 40 hours a week (or 8 hours a day in California).
To reduce the payroll cost associated with an hourly non-exempt employee, the employer may simply reduce the number of hours the person works and correspondingly reduce the amount of money paid to that person each week. If the person is a salaried non-exempt employee, the employer should reduce the salary by the same percentage as the reduction in hours. For example, a salaried non-exempt employee makes $500 a week and works 40 hours a week. The employer decides to reduce the employee to 32 hours a week (or 4/5ths of what she was working previously). The employer would then reduce the salary by 1/5th as well (or by $100), for a new salary of $400 a week.
With regard to exempt employees, the reduction in salary cannot be based on hours worked. This is because part of the definition of an exempt employee is that their pay is not calculated on the number of hours they work in a week - the salary is the same whether the employee works 30 or 50 hours in one week. A reduction in salary for an exempt employee should simply be based on the amount or percentage that the employer seeks to save. To tie a reduction in salary for an exempt employee to their hours worked will essentially change the classification of the exempt employee to one of non-exempt employee status in the eyes of the NJ and Federal Wage and Hour Divisions. This means that the employee would then be entitled to all overtime payments for hours worked over 40 in a week.
Another legal consideration is whether the reduction in salaries and schedules has a discriminatory impact on any particular protected class of employees. This means that, intentionally or unintentionally, the group of employees being affected by the reduction in salary are all minorities, women, older, etc. It is illegal to implement a policy or practice that has a discriminatory impact on any protected class so employers should review the employees being affected to make sure the impact does not affect any one particular protected class over another.
2) Non-paid Vacation Days: "If I wanted to add additional non-paid vacation days what issues would I need to consider?"
The issues raised above would need to be considered in relation to this implementation as well.
3) Transition to Project-based Contractor: "If I wanted to transfer an employee from full-time to contract, project-based status what do I need to think about?"
The first thing that should be determined is whether the employee has any contract (whether oral or in writing) or other agreement (such as a policy distributed by the company or contained in the company handbook) that would prevent the employer from modifying their status or that would trigger other rights and obligations if the employment status is changed.
If there is no impediment to changing the status, the next issue to consider is how you want to pay the employee. If you are still paying them as an employee, deducting withholdings, etc., there should be no issue. It sounds like you are thinking of making the employee an independent contractor; however, the Wage and Hour Divisions and NJ Courts take a very strict view of what constitutes an independent contractor versus and employee (because they do not want employers misclassifying employees as independent contractors to avoid paying employee taxes, providing employee benefits, etc.).
The following factors are considered in determining whether a person is an employee or independent contractor. The more factors that apply to the person, the more likely they are truly an independent contractor.
a. The person is customarily engaged in an independently established trade, occupation, profession or business.
b. The person is incorporated, in a business partnership, or is registered as a State or Federal employing unit.
c. The person owns and uses their own equipment, tools, supplied, vehicles, etc. in performing the services.
d. The person independently advertises their services in phone books, print ads, etc.
e. The person has their own business stationary, cards, address, phone number and email.
f. The person rents or owns her own office space.
g. The person has their own employees.
h. The company does not control the details or means by which the person's services are performed.
i. The person maintains control over their schedule and sets their own hours of work.
j. The services do not need to be performed personally by the person.
k. The person provides their own billings statements to the company for services rendered.
l. The company does not withhold income taxes for the person's pay; the person pays their own income tax and self-employment tax.
m. The person keeps track and pays their own expenses.
n. The company does not provide benefits or insurance to the person.
o. The person's remuneration is spread out among the company and other customers with whom the person works.
p. The person can realize a profit or loss on the services rendered
As you can probably tell from the list above, it would be difficult for an employer to change an employee's status to that of an independent contractor.
4) Sabbatical or Furlough: If I wanted to offer a portion of my workforce a sabbatical either with or without benefits, what are the legal issues to think about?
You have the same considerations described in response to Question 1. In addition, if the employer is subject to the FMLA or the NJFLA recognize that providing benefits to people who take sabbaticals could trigger a responsibility under either of those Acts to provide benefits to employees taking leave under those Acts. (Pursuant to those Acts, employees on leave are entitled to the same benefits and pay as the company gives to employees on other types of leave.)
Finally, from the employee-relations perspective, make sure any reductions in pay hit the people at the top as well as those in the middle and at the bottom. If the company wants buy in (instead of a revolt), people need to know the pay reduction is affecting the decision makers - that everyone is sharing in the pain.
Thank you to Leslie Lajewski, Esq., for sharing her insights and giving us a place to start.