The Pandemic Hits the Payroll: Employer Options for Cutting Costs and Staying Compliant in the Time of COVID-19

March 31, 2020 | By Michael S. Pepperman, Ivo J. Becica

Given the significant economic impact of the COVID-19 pandemic, many employers of all sizes are unfortunately struggling due to the sudden financial downturn. There are several different options that companies can make use of to reduce payroll costs during the next several months – or potentially longer – depending on their size. However, employers need to be aware of the federal and state laws that may apply depending on their size and what option(s) they choose. Some of these options, and the legal considerations that go along with each, are outlined below.

1) Involuntary Layoffs / Reductions in Force (“RIF”)

“Layoff” is the term most often used to describe an actual termination or extended period of unpaid leave with no benefits, but which also offers the potential for a possible re-hire at some undetermined future date. Layoffs are also referred to as “Reductions in Force.”  Unfortunately, COVID-19 has prompted many layoffs across the country.

Employers with 100 or more employees who are considering layoffs must comply with the notice requirements of the Federal Worker Adjustment and Retraining Act of 1988 (“WARN Act”), if such a layoff meets the definition of either a “Mass Layoff” or a “Plant Closing.”  A “plant closing” is defined under WARN as “the permanent or temporary shutdown of a single site of employment, or one (1) or more facilities or operating units within a single site of employment, if the shutdown results in an employment loss at the single site of employment during any 30-day period of 50 or more employees, excluding any part-time employees.” A “Mass Layoff” is the employment loss at a single site of employment (that is NOT the result of a plant closing) during any 30-day period for at least 33% of the site’s employees (excluding part-time employees) and which totals at least 50 employees (excluding part time employees) OR of at least 500 employees total (excluding part time employees).

The WARN Act typically requires sixty (60) days’ notice of layoffs be sent to employees, the employees’ representative (if they are represented by a union), the chief elected official where the layoffs are occurring (oftentimes, a mayor), and the respective state’s dislocated workers’ unit.  There is an exception for “unforeseen business downturns,” under which the COVID-19 pandemic would likely qualify. However, even with this exception, companies still must provide as much written notice as practicable to impacted employees.

In addition, many US states now have “mini-WARN Acts” that can provide more stringent notice requirements. These states include: Alabama, California, Connecticut, Delaware, Georgia, Hawaii, Illinois, Iowa, Kansas, Maine, Maryland, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New York, Ohio, Oregon, Pennsylvania, Tennessee, Washington, and Wisconsin.  Employers laying off employees in these states need to determine whether those layoffs are large enough to trigger any mini-WARN acts, and then do a separate analysis to determine whether any exceptions apply.  Notably, California has partially suspended its mini-WARN act in response to COVID-19, but not all other states have followed suit.

Employers often seek to reduce risk by offering laid-off employees severance pay in exchange for a written release of legal claims through severance or separation agreements.  While this is generally a good practice, employers must carefully consider the language of their agreements whenever two (2) or more impacted employees are forty (40) years of age or older.  Under the Older Workers’ Benefit Protection Act (“OWBPA”), employers must give employees over 40 at least forty-five (45) days to review such severance and general release agreements, and seven (7) days to revoke the agreements after signing them.  Each impacted employee over 40 must also receive, along with the agreement, a “decisional unit” notice describing the group of employees that was subject to layoffs, eligibility factors for the layoffs, and a listing of the ages and job titles of employees who were selected and not selected to be laid off.                                                                                     

Prior to finalizing any layoff decision, employers must be mindful of potential discrimination claims – particularly if only some employees at an office or worksite (or within a certain job title) will be laid off.  In these cases, employers should take a holistic look at the protected statuses of chosen employees versus non-chosen employees (i.e. race, gender, age, ethnic origin, etc.).  If it appears that the potential layoff would impact certain groups significantly more than others, employers should speak with their counsel and consider adjusting the layoff criteria.  To the extent possible, employers should utilize objective criteria (i.e. documented work performance, qualifications, seniority, experience, time-in-title) to make these difficult choices.

Unfortunately, layoffs (even if temporary) can also trigger the end of employee health care coverage, necessitating the need for businesses to issue COBRA notices pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”). Employers should consult with their coverage providers about the impact of layoffs on coverage.

Finally, small businesses with fewer than 500 employees have an incentive to avoid layoffs if possible.  The recently-passed Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) provides for loans to small business that can general total up to 2.5 times the employer’s average monthly payroll costs, up to a cap of $10 million.  While these loans can be forgiven, the amount of loan forgiveness will be reduced by the percentage of employees who are laid off during the 8-week period immediately following the issuance of the loan.  Loan forgiveness will also be reduced if employers reduce the salary of employees making less than $100,000 by 25% or more.

2) Involuntary Furloughs

A “furlough” is a softer term for a temporary unpaid leave of absence that is typically used to in the context of public employees. However, during this pandemic, many private employers have implemented furloughs to help cut costs. Framing a leave of absence as an involuntary furlough often gives employees some sense of comfort that the employer believes the furlough is temporary, and that the employees can expect to return to work at some time in the future. Furloughed employees can often remain on health care coverage without the necessity of COBRA. While on an involuntary furlough, employees do NOT need not be paid. However, salaried exempt employees must be paid for any week in which they perform any work.

Temporary furloughs of less than six (6) months are not considered layoffs under the WARN Act. However, given the current uncertainty surrounding COVID-19, some employers could be forced to extend unpaid furloughs beyond 6 months. If this occurs, furloughs could be deemed “layoffs” under WARN. Employers who are concerned that temporary furloughs could stretch beyond 6 months should consider issuing WARN-compliant notices to employees.

3) Involuntary Reductions in Hours or Pay – Salaried Exempt Employees

Short of laying off or furloughing workers entirely, companies can also reduce their employees’ salaries under federal wage and hour laws in the event of an economic slowdown. However, under the Fair Labor Standards Act (“FLSA”), businesses must continue to pay employees at least $684 per week in order for those employees to retain their exempt status. Moreover, employers should not make deductions from an exempt employee’s pay based on the hours they worked in a week, as doing so could destroy their exempt status under the FLSA.

If employers opt to reduce employee hours or pay, they should check whether any impacted employees have employment agreements that define their salary, as is the case with many management or executive-level employees. In many cases, these agreements cannot be changed without the consent of both the employer and employee. Sometimes, this can be done through a written amendment signed by both the employee and the company, but the proper course of action is highly dependent on the specific language of the agreement.

4) Voluntary Unpaid Leaves of Absence – High-Level Salaried Employees

Executives and other higher-paid employees of an employer can also volunteer for unpaid furloughs, and would not need to be paid for any week in which they do not perform any work (which includes no telecommuting, monitoring of e-mail, etc.). Depending on the language of applicable employment agreements (if any), employers should consider having employees acknowledge, in writing, that they have agreed to unpaid leave. In order to avoid potential wage and hour issues, employers should also consider asking impacted employees to acknowledge that no work will be performed during these unpaid furloughs.

5) Temporary Reductions in Pay and Work Hours – Non-Exempt Employees

Companies are generally free to reduce the pay and hours of hourly non-exempt employees, with some exceptions (i.e., if employees are subject to employment agreements or Collective Bargaining Agreements (CBAs) through a union). Pay rates must remain above the applicable federal, state or local minimum wage, and some states require written notice to employees prior to making any pay reductions.

Reductions in hours can sometimes trigger the WARN Act, which defines “employment loss” to include “a reduction in hours of work of individual employees of more than 50% during each month of any 6-month period.” Businesses subject to WARN that hit this threshold should provide such notice as soon as practicable.

Finally, depending on the language of the applicable plan, hours reductions could trigger the loss of health care benefits and require the company to issue a COBRA notice.

6) Mandatory Use of Paid Time Off (PTO)

Employers can generally require both exempt and non-exempt employees to take time off and draw down their Paid Time Off (“PTO”) balances for such time. However, such policies could run afoul of employment agreements or state and local sick leave laws, particularly if the employer is relying on all-purpose PTO time to satisfy their obligations to provide sick time.

HR Legalist Takeaways

While many of our readers and clients have recently had to consider or implement one or more of the options above, we remain hopeful that the negative impacts of COVID-19 will ultimately pass. In the meantime, we remind our readers in the employer community that the best option for you will depend greatly on your size and the nature of your business and workforce. In addition to an understanding of the legal issues in play, a creative mindset and frequent, compassionate communications with employees are important ingredients in any pandemic response plan.

For more resources and recommended steps specific to your own business, please feel free to contact an attorney in Obermayer’s Labor & Employment Group, who can assist you in navigating the many requirements and common pitfalls, which are particular acute in such times as these. Both Obermayer’s COVID-19 Response Team and our labor and employment attorneys will continue to monitor and keep clients apprised of relevant legal developments during this challenging time.


The information contained in this publication should not be construed as legal or medical advice, is not a substitute for legal counsel or medical consultation, and should not be relied on as such.

About the Authors

Michael Pepperman

Michael S. Pepperman

Partner

Mike is the Chair of Obermayer’s Labor Relations and Employment Law Department. Mike is an accomplished attorney known for his tireless advocacy on behalf of his clients. He focuses his practice exclusively...

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Ivo Becica

Ivo J. Becica

Partner

Ivo is a partner in Obermayer’s Labor Relations & Employment Law Department. He focuses his practice on representing employers, including advising companies on how to handle employee issues, and defending employee claims...

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