Salary Reductions for Exempt Employees—Know the Parameters

With the tough economic climate employers continue to face, we have received a number of inquiries regarding the circumstances under which an employer can reduce the salary of an exempt employee without destroying the employee's exempt status under California law. As a general rule, an employer may lawfully reduce an exempt employee's salary, on a prospective basis, so long as the employee's guaranteed salary does not drop below two times the California minimum wage (currently equating to a minimum salary of $33,280 annually). Where the reduction becomes problematic is a situation where the reduction is tied to the employee's hours/days of work and/or to some measure of production. Many times this arises where the employer tries to give the employee something positiveto "offset" the reduction in salary and negative morale that flows from the reduction. For example, an employer might consider reducing exempt employees' salaries by 20% in exchange for giving the employees Fridays off. California's Department of Labor Standards Enforcement takes the position that this type of salary reduction violates the salary basis test and destroys exempt status (meaning that meal and rest breaks and daily/weekly overtime rules would apply to the affected employees). The DLSE reasons that exempt employees are paid for the value of their work, not for the number of hours or days they work, and it is generally up to the exempt employee to determine the number of hours to work to accomplish his or her job duties. Tying the amount of an employee's compensation to the quantity of work the employee performs is at odds with the notion of being a salaried employee. Any California employer considering salary reductions for exempt employees should review the following opinion letter issued by the DLSE on the subject: DLSE Opinion Letter.

The bottom line is that if you are considering salary reductions for exempt California employees, the reductions can be made, but the reduction should not be linked to any corresponding change in days or hours worked. In addition, the employees' salary must not fall below twice the minimum wage, and the employees' job duties must still meet the test for exempt status.

On a final note, the foregoing applies to circumstances under which employers reduce salaries as a result of the operational requirements of the business. Different rules apply where an exempt employee voluntarily seeks to work a reduced schedule for personal reasons.