California’s DLSE Now Allows Pro-Rata Reduction of Exempt Salaries
Reversing one of its earlier opinion letters from 2002, California's Department of Labor Standards Enforcement issued a new opinion letter on August 19 stating that employers may implement a pro-rata reduction of exempt employee salaries, in exchange for a shortened workweek. Specifically, the opinion letter addresses whether an employer may shorten the workweek from five days to four days and reduce salaries by a proportionate 20%. The DLSE opined that an employer could properly do this, without violating the salary basis test and without jeopardizing the exempt status of its employees under federal or California law. The DLSE relied on several federal Department of Labor opinion letters and related federal caselaw upholding the lawfulness of a pro rata salary reduction in circumstances where an employer shortens its employees' workweek due to economic necessity.
As many California employers know, the DLSE's new opinion letter flatly contradicts a prior opinion letter on the same subject, in which the DLSE concluded that employers could not reduce an exempt employee's salary in exchange for a commensurate reduction in the hours of work, without violating the salary basis test and jeopardizing the employee's exempt status. In the DLSE's prior opinion letter, the DLSE reasoned that tying an employee's compensation to the amount of hours or days the employee works is inconsistent with the notion of being a salaried employee and, therefore, violates the salary basis test.
The DLSE's new guidance on the subject is consistent with federal law and provides employers more flexibility in making necessary reductions in exempt salaries during tough economic times, by allowing employers to provide affected employees with a reduced workload in exchange for the salary reduction. That being said, the DLSE's shifting positions on the requirements of California's wage and hour laws (shifts that are notable not only in this area, but also in many others, including the subject of meal period requirements) begs the question: if the agency charged with the responsibility of interpreting California's wage and hour laws cannot seem to decide what the laws require, how is it fair to hold California employers strictly responsible for understanding the specific requirements on threat of having to defend costly class action litigation and potentially pay a judgment for getting it wrong based on the interpretation of the day?