During tough economic times, small and midsized businesses may face a slowdown and have trouble making ends meet. Business owners considering laying off workers to cut costs have another option to reduce salaries: a furlough. Doing so may be a better option for both employees and the business.

What Is a Furlough?

A furlough generally occurs when employees work fewer hours, or take a certain amount of unpaid time off, generally in the face of an economic challenge. During this time, non-exempt employees who don't report to work will not collect wages. A furlough helps employers avoid laying off staff when business is slow. It can also let employees retain their benefits.

Can Business Owners Reduce Salaries?

Business owners considering reducing salaries must ensure that their decision is consistent with applicable state and federal compliance laws for this action and consider how it could affect productivity. First, ensure that any salary and/or workweek adjustments are consistent with wage and hour rules. It's not only a best practice to provide advanced written notice to employees of any changes, some rules may require advanced notice. The Small Business Administration recommends contacting your state's department of labor to determine any applicable rules.

Under the Fair Labor Standards Act (FLSA), requirements differ for workers who are exempt and non-exempt from the FLSA's minimum wage and overtime rules. Employees can generally decrease scheduled hours for non-exempt employees, provided they continue to adhere to minimum wage and overtime rules, and any applicable fair scheduling requirements. Reducing hours for your non-exempt employees can help cut overtime costs.

Under the FLSA, exempt employees receive the same pay each week, regardless of the number of hours they worked. To qualify for an exemption, the current regulations require that that most exempt workers be paid a salary of at least $455 per week, and perform certain job duties. According to the Department of Labor, exempt employees must be paid exempt the full predetermined salary amount "free and clear" for any week in which the employee performs any work without regard to the number of days or hours worked. However, there is no requirement that the predetermined salary be paid if the employee performs no work for an entire workweek.

When reducing hours or salary of exempt employees, employers must ensure they do not reduce the salary below the FLSA's minimum thresholds which would then entitle the worker to protection under the law's overtime rules. Employers must also ensure that any reduction does not appear to be based on any variation in the quality or quantity of the work performed which can also defeat exempt status. Additionally, employers should be sure that reductions aren't based on day-to-day or week-to-week business operations, as that may also result in loss of the exemption.

If you're considering reducing or cutting employee benefits, consider the laws for these situations as well. Also, language in plan documents, agreements, contracts or other documents controlling administration of benefits may have relevant language about whether employers must provide benefits. Be aware of your obligations before taking action.

Why Reducing Salaries Is Preferable to a Layoff

A furlough can be preferable to laying off staff because it allows all employees to continue in their positions and retain their benefits, with reduced hours and pay, instead of cutting jobs for some. With a furlough, business owners don't have to spend time and money going through the hiring process to find new workers once conditions improve. Instead, they can reinstate their full-time staff to pre-furlough incomes and hours. This may instill and/or improve company loyalty among staff.

Deciding whether to reduce salaries, reduce hours or lay off employees can be difficult. Understanding your options and legal requirements at the federal, state and local levels as a small business owner can help make the process go a little more smoothly and leave you better positioned to weather tough financial times. Consider speaking with a trusted legal advisor when contemplating employee layoffs, or a reduction in work schedules and/or salaries.

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