Workforce Reduction Options Amid COVID-19

By Lymari Cromwell and Bob Horton

This article was originally published by Bass, Berry & Sims on March 23, 2020.

The economic repercussions of COVID-19 have been immediate and in many cases, debilitating, to American business across all industries, from food & beverage to manufacturing to healthcare.  Challenges faced include government-mandated closures of certain “non-essential” businesses and reduced demand of products and/or services.  As business revenue plummets, many companies are faced with the need to cut significant human capital costs in order to keep their business afloat.  Below are some options for companies to consider as they work to address reduced staffing needs.

Furlough

While the term furlough is used to describe various arrangements, typically a furlough is an unpaid leave of absence.  A furlough is often ideal for employers who anticipate a temporary need for reduced staffing.  Employees on furlough are still technically employed by the employer and, as a result, may be able to remain on the employer’s group health plan(s) if permitted by the terms of the plan(s).  Employers may require employees to pay the applicable employee portion of the premium during the furlough.  If the employer’s group health plan(s) is not available to employees on furlough, COBRA coverage would commence.  Also, many states allow for unemployment compensation to employees on an unpaid furlough.

Rotating Furlough

An example of a rotating furlough is to take a department and divide it into two groups: Group A and Group B.  Group A goes on unpaid leave for two weeks, then returns as Group B goes on unpaid leave for two weeks.  The rotation continues for the entirety of the furlough period.  The key here is making sure that each group contains all of the positions needed to keep the department running smoothly while the group on furlough is on leave.

Obviously, a rotating furlough can be a bit more difficult to implement logistically and may create more of a challenge from an administrative standpoint as payroll for each group switches from paid to unpaid.  Keep in mind that exempt employees must be paid their normal salary for any week in which they perform any work, so rotating furloughs beginning with a new workweek are ideal.  The upsides to a rotating furlough may include employee morale and a distribution of the compensation loss across the entire department instead of centralizing it in a select few of the department’s employees.

Reduced Hours or Pay

Reducing the hours of a non-exempt employee is fairly straight-forward, in that non-exempt employees must only be paid for the number of hours actually worked.  When considering reducing the salary of an exempt employee (perhaps as a component of reducing the number of hours worked by a salaried employee), remember that a key requirement for most exempt employees is that they be paid on a “salary basis” meaning the same salary amount must be paid every week regardless of the number of hours worked or the amount of work available each week. A fluctuating reduction in salary that varies from week to week will be seen as an attempt to circumvent the salary basis requirement.  However, reducing the amount of salary paid to an exempt employee is acceptable if it is for an extended (even if temporary) time period (such as six months) without variation.  Employers must be mindful that an exempt employee must earn at least $684 per week to maintain his/her applicable exemption under the Fair Labor Standards Act (FLSA).

When cutting the hours of full-time employees, employers should be mindful of whether the cut will render the employee ineligible for benefits.

Voluntary Leave or Voluntary Reduction in Pay

Companies may also consider seeking volunteers to take an unpaid leave of absence or reduction in pay.  Some companies have found their executive team amenable to reduced pay for a specified amount of time to assist with the company’s cash flow.  For those executives under an employment agreement, employers should enter into a written amendment to the employment agreement memorializing the temporary reduction in pay and acknowledging that such reduction is voluntary and does not constitute a breach of the employment agreement or good reason to terminate the employment agreement.

Some companies have also found that there are employees in the workplace willing to volunteer to take an unpaid leave of absence to avoid potential COVID-19 exposure.  Before resorting to mandatory cuts, those companies have taken advantage of reduced human capital costs provided by employees who have responded to calls for volunteers to take an unpaid leave.

Lay-Offs or Terminations

Termination of employment is obviously another option for businesses fighting to stay afloat during these difficult economic times.  Many companies are analyzing their workforce to determine the bare minimum of positions that are needed to run the business successfully during the next several months.  As is the case in all instances of group layoffs, employers should analyze their decision-making process to ensure that it does not have a disparate impact on any protected class and may consider providing some severance to laid-off employees in exchange for a release of claims.  The current market is not ideal for job seekers, and therefore, terminated employees may be more incentivized than usual to bring a lawsuit for discrimination; provided, however, that employers will not have a difficult time proving a legitimate non-discriminatory reason for the layoff given the rapid economic downturn. Finally, with respect to any employment action addressed above, employers should review applicable state law, the Worker Adjustment and Retraining Notification Act (WARN), and any state mini-WARN laws to ensure compliance.  Generally, WARN does not apply to layoffs lasting less than six months or to a reduction of hours unless hours are reduced by more than 50% during each month for a six-month period.  WARN also contains an “unforeseeable business circumstances” exception and “faltering company” exception that may relieve the employer from being required to provide WARN notice a full 60 days in advance.