Photo by Simon Abrams 

The decision to layoff, furlough, or reduce compensation may constitute an “adverse employment action,” meaning employees may claim discrimination. Even though the motive for the action is obvious – the pandemic and economic impact – the reason for who is selected is not always as clear.

Employers should rely on legitimate, non-discriminatory and well-documented business reasons for selecting the employees subject to layoff, furlough or compensation reductions. Reasons like job classification and tenure are facially neutral and easier to defend versus performance or other subjective reasons.

Employers should engage legal counsel to evaluate their decisions, and to protect communications from disclosure in later litigation.

Layoff (End of Employment)

A layoff is a termination of the employment relationship. Laid off employees are eligible for unemployment benefits (see more below). Employers considering layoffs should take the following steps.

Review employment policies and contracts for obligations due on a reduction in force or layoff situation. Documents may include language about layoff procedure, negating at-will employment, treatment accrued paid time off benefits (vacation must be paid at termination), and severance pay mandated by an express or implied policy.

Review any collective bargaining agreement (“CBA”) to identify any duty to bargain over the layoff decision, to understand the effect of the layoff on the unionized workforce, and to determine whether the CBA outlines specific layoff procedures.

Consider if the proposed layoff will trigger the federal Worker Adjustment and Retraining Notifications (WARN) Act or the Cal-WARN Act, which require certain written notices before the layoff takes place (see more below).

Provide the required documents for employees to seek unemployment insurance, including the Notice of Change in Relationship, found here, and the Unemployment Insurance Guide, found here.

Consider offering severance pay in exchange for a separation agreement with release of claims (which does not prevent the employee from seeking unemployment insurance benefits). If a group layoff includes employees who are 40 years of age or older, use the appropriate agreement to comply with the federal Older Workers Benefits Protection Act.

Furlough (Unpaid Leave)

Another option for employers seeking to reduce labor costs is a furlough. A furlough is akin to an unpaid leave of absence. Furloughed employees retain their jobs but cease working for their employers for a period of time. Furloughed employees in California are eligible to receive unemployment insurance benefits.

Furloughs should be communicated to employees in writing, before the start of the furlough period. Any work performed must be paid.

Federal regulations require that employers pay an exempt employee performing any work during the course of a week their full weekly salary if they do not work the full week because the employer failed to make work available. An exempt employee who performs no work at all during a week may have their weekly salary reduced. The California Labor Commissioner recently provided further guidance on this topic, found here.

Employers face a risk in extending a furlough beyond the normal pay period and not paying all wages earned, including vacation and paid time off, through and including the date of the furlough, insofar as the Division of Labor Standards Enforcement (DLSE) Policies and Interpretations Manual (found here) states at section 3.2.2:

“Layoff. If an employee is laid off without a specific return date within the normal pay period, the wages earned up to and including the layoff date are due and payable in accordance with Section 201. (Campos v. EDD (1982) 132 Cal.App.3d 961; 183 Cal.Rptr. 637; see also O.L. 1993.05.04 and O.L. 1996.05.30)”

A furlough lasting longer than 30 days may trigger the obligation to provide a 60-day notice of layoff pursuant to Cal-WARN. While the federal WARN Act requires notification only when a layoff is to exceed more than six months, Cal-WARN does not specify how long a mass layoff must last to qualify for protections. Employers must follow the Cal-WARN Act’s notice provisions when the layoffs will be for a short period of time.

Many new laws provide paid time off for COVID-19 related reasons. These include the federal Families First Coronavirus Relief Act (see the Department of Labor FAQ here), and the Los Angeles City Paid Sick Leave Ordinance . Other counties and cities are passing similar ordinances, which may apply to furloughed employees.

Compensation Reduction

An employer may also decrease labor costs by reducing employee compensation.

For employees subject to employment contracts, review the contracts prior to cutting compensation to ensure compliance with the agreement. Most contracts require certain steps by the parties to modify the terms of contract and to avoid a breach of the agreement.

For at-will employees, compensation cuts must be announced in writing before the start of the work covered by the new pay rate, and preferably in advance of the start of the pay period in which the cut is effective, to avoid both complexities in deducting from an exempt employee’s salary and in overtime calculations with two different rates for non-exempt employees. The written notice, preferably a memorandum individually addressed to each employee, should provide the reason for the reduction in compensation, when the cut in compensation is set to take place, and what type of pay is being cut (i.e. salary or hourly pay, versus incentive pay.)

To avoid creating a contractual obligation, make no verbal promises regarding when a compensation increase will take place, to avoid creating contractual obligation about timing or amount.

Employers should provide employees with the New Hire Wage Theft Protection Notice, indicating the new compensation rate, found here. Typically, employers should also provide the Employment Development Department’s (EDD) Notice of Reduced Earnings form, found here, but the EDD issued guidance stating that this is not needed: Because of “the COVID-19 pandemic, the EDD is not requiring workers who are working reduced hours or are completely laid off to seek work. There is no need to participate in the Partials program at this time.”

Do not reduce the compensation for any exempt (salaried) employee below the minimum salary level threshold for the exemption. Instead, consider re-classifying the employee from exempt to non-exempt (i.e. require timekeeping, compensate for overtime work, and provide meal and rest breaks). Do not reduce the compensation for any non-exempt (hourly) employees below the applicable minimum wage.

Guidance from the Department of Labor about reducing employee compensation is here and here, and guidance from the California Department of Industrial Relations is here.

Unemployment Insurance Benefits in California

Unemployment insurance benefits are administered by the California Employment Development Department (EDD). Employees are eligible for unemployment insurance benefits (UI) when they are laid off, furloughed, or have hours or compensation reduced (see here for the EDD’s FAQ on Coronavirus and here for our blog post).

EDD considers a person “unemployed” during any week in which regular wages (minus the greater of $25 or 25 percent of those wages) is less than they would earn as a weekly unemployment benefit. If the person is otherwise eligible, they would receive UI benefits for the difference, up to a cap. The EDD uses a complex calculation method for benefits based on the past 4 quarters worked as a base to calculate benefits, found here.

Employees may be eligible for up to 26 weeks of California state UI. Under the federal CARES Act:

  • The Pandemic Unemployment Assistance program, which casts a broader net to provide unemployment insurance benefits to people who would not traditionally receive any unemployment insurance benefits.
  • The Pandemic Emergency Unemployment Compensation program, which provides employees with an additional 13 weeks to regular state UI claims.
  • The Emergency Increase in Unemployment Compensation Benefits, which adds $600 per week to all unemployment insurance claims through July 31, 2020, including Pandemic Unemployment Assistance claims, and to the 13 extended weeks under the Pandemic Emergency Unemployment Compensation program.