Businesses are continuing to grapple with the myriad challenges brought on by the novel coronavirus pandemic. Workforce reductions are an unfortunate but inevitable byproduct of this national crisis. Employers across the country are considering layoffs (ranging from marginal to mass), furloughs and reductions in employees’ hours and wages. However, employers must not make such decisions based strictly on finances, as there are significant legal pitfalls for those who act in haste. Additionally, employers should consider the impact that these decisions may have on employer-sponsored benefit plans.
Layoffs and Furloughs
The terms “layoff” and “furlough” are sometimes used interchangeably, but they are distinct concepts. A furlough is considered a mandatory, temporary and unpaid leave. A layoff is a permanent separation of the employee from the business for a reason unrelated to the employee’s performance. The primary distinction is that, in the case of a furlough, the employer intends to retain the employee and the employee intends to return to work after a certain amount of time passes, whereas a layoff contemplates a complete termination of the employer-employee relationship.
There are significant legal differences between layoffs and furloughs. If an employer lays off a large enough segment of its workforce, it may be obligated to provide advance notice to employees and the Department of Labor under the federal WARN Act and/or the “mini-WARN” acts of some states, including New York. The failure to give the appropriate notice exposes employers to significant monetary damages and potential civil penalties.
While furloughs might also trigger employer obligations under the WARN Act and/or mini-WARN laws, this is not necessarily the case. Even when a large segment of the employer’s workforce is furloughed, advance notice may not be required if the furlough is short term, i.e., less than six months in the case of New York’s mini-WARN law.
One important thing to remember is that compliance with WARN and mini-WARN obligations may not be necessary when sudden and unexpected circumstances cause large-scale workforce reductions. Whether layoffs and furloughs resulting from the COVID-19 pandemic meet that criterion remains to be seen, although the New York State Department of Labor’s website suggests that will be the case.
Reductions in Hours and Compensation
Rather than implementing layoffs or furloughs, some employers are considering reducing the hours and/or compensation of their employees. This strategy also has serious legal implications if not handled correctly. For example, in some cases, the WARN Act and mini-WARN laws may apply if a reduction in hours lasts long enough and/or affects a large enough proportion of an employer’s workforce.
Assuming the WARN Act and/or mini-WARN laws do not apply, employers can ordinarily cancel shifts or reduce hours of non-exempt employees (i.e., those who are entitled to overtime) without notice. Those employees must still continue to be paid at least the minimum wage for all hours actually worked (plus overtime, where applicable). If, however, an employee reports to work and is then sent home, an employer in New York may be responsible to provide “call-in pay” (i.e., pay for four hours at minimum wage or pay for the actual duration of the shift, whichever is less).
Things become more complicated when dealing with exempt employees. Employees who are properly classified as exempt are not compensated based upon hours worked. Rather, they are paid a pre-determined amount on a weekly (or less frequent) basis, which cannot be reduced for variations in the quality or quantity of work performed. An exempt employee who performs any work that is more than de minimus in a given week is entitled to their ordinary weekly compensation. This means that, even if an employee is simply returning calls or sending and receiving e-mails, they are typically entitled to a full week’s pay.
Although there are certain exceptions to these rules, they are fact-specific and must be applied with precision to avoid violating the law. For example, an exempt employee does not need to be compensated for any week in which he or she does not perform any work. Thus, if an employer furloughs an exempt employee for an entire week, rather than reducing hours worked in a given week, it may be able to cut payroll costs safely. The problem is in ensuring that exempt employees perform no work whatsoever during this time. It is recommended that employers disable employees’ phones and e-mail access to ensure that no work is performed, in addition to instructing employees in writing that they must not perform any work during the relevant period.
Reductions in the salary of an exempt employee also pose concerns. Employers are not permitted to reduce the salaries of exempt employees based on day-to-day or week-to-week variations in business operations. An employer can make prospective salary reductions based on legitimate long-term business needs, but must ensure that it does not reduce salaries to the extent that exempt status is lost.
In New York, for example, an employee is usually only properly classified as exempt if he or she makes more than a certain amount (i.e., for the year 2020, $925 per week or more in Nassau, Suffolk and Westchester counties). If an exempt employee’s salary is reduced below that threshold, the employee becomes non-exempt, must be paid hourly and is entitled to overtime. There are some exceptions. Physicians, lawyers, outside salespersons or teachers in bona fide educational institutions are not subject to any salary requirements, and their pay can be reduced (if all other legal requirements are met) below the ordinary thresholds without any resulting loss in exempt status.
Health Insurance Coverage
Employers also need to ensure that they take appropriate action with respect to employer-sponsored health plans in the event of a layoff, furlough or reduction in hours. In these circumstances, plan language and terminology is key. For example, distinctions are usually drawn for benefits available to employees who are laid off versus those who are furloughed.
In some instances, when an employee is furloughed, they remain eligible for employer-sponsored health benefits. However, depending on the terms of the employer’s plan and its employee eligibility requirements, there are instances where a furlough can trigger a loss in an employee’s health care coverage. If that is what the employer’s plan requires, a furlough may be a COBRA-qualifying event. For example, in a health plan that only provides coverage to regular, active employees who work 30 or more hours per week, a furlough would result in the termination of coverage and the employer would need to give notice as required by COBRA.
Employers may opt to continue coverage for furloughed employees if they would otherwise lose coverage. They may do this by either: (1) amending their plan to extend active employee coverage to a laid-off, furloughed or part-time employee for a pre-determined period of time; or (2) subsidizing employee COBRA premiums, which will generally not treated as taxable wages (unless the subsidy favors highly compensated employees and is the plan is self-funded and not fully insured).
Retirement Plans: Withdrawals and Loans
In the current climate, it should be expected that participants in employer-sponsored 401(k) and 403(b) plans may seek to make withdrawals from and/or borrow from their accounts.
The IRS permits “hardship withdrawals” related to FEMA-declared disasters. However, FEMA has yet to declare the novel coronavirus pandemic as a federal disaster; it has only declared the pandemic as a “national emergency,” which is not grounds for a hardship withdrawal.
At this moment, the Coronavirus Aid, Relief and Security Act (CARES Act) has passed the Senate and is being considered by the House of Representatives. If enacted, the CARES Act would allow employees to make an emergency withdrawal (i.e., a “hardship withdrawal” related to a FEMA-declared disaster) of up to $100,000 from their 401(k) and/or 403(b) account during the COVID-19 pandemic. Under this construct, employees under age 59 1/2 could withdraw funds while avoiding the 10% early withdrawal penalty that would otherwise be assessed. The distributions would still be taxable, however.
Additionally, employer-sponsored retirement plans may entitle participants to take loans, but eligibility may depend on employment status. Therefore, depending on the terms of the relevant plan, a furloughed or laid-off employee may or may not be able to borrow from his or her account.
For employees who have already taken out a loan against their retirement plans, the terms of the plan will determine whether the employees may suspend loan payments during a period of an unpaid leave of absence or furlough. All borrowers (whether furloughed or laid off) should also be aware that, barring a change in the law, any loan default will be reported to the IRS on Form 1099-R and will be treated as a taxable distribution.
Clearly, there are many moving parts involved in any workforce reduction. Consultation with competent counsel can prevent costly, and sometimes devastating, errors.