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Law360 (March 12, 2020, 3:27 PM EDT) --
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| Camille Gustafson |
Legal counsel can be an important partner to assist employers with evaluating options and mitigating risk.
California employers have options to reduce labor costs.[1]
Reduction in Hours in Connection With California's Work Sharing Program
This program[2] is permissible when the reduction of an employee's hours is expected to be greater than 10% but less than 60%. With this program, employees are eligible to receive partial unemployment benefits for up to one year but are not required to actively seek other employment, which can help employers retain trained employees for the long term. Employers must continue health insurance under the same terms and conditions as if the employees are working full time.
Temporary Reduction of Hours
With this option, employees continue working, but have reduced hours. When the reduction of hours is expected to be temporary in connection with the coronavirus, employees are eligible to receive partial unemployment benefits but are not required to actively seek other employment, which, as noted above, can help employers retain trained employees for the long term.[3]
If employees are working 30 hours or more per week, the employer must continue health insurance under the same terms and conditions as if the employee were working full time. However, if employees are working less than 30 hours, company-sponsored benefits may cease, in which case employees may be eligible for health benefits through COBRA.
Temporary Work Furlough
With this option, employees are off work altogether for a period of time. These employees will be eligible for unemployment insurance benefits.
Like the temporary reduction of hours option discussed above, if the expected duration is only a few weeks and in connection with the coronavirus crisis, employees are not required to actively seek other employment to receive unemployment benefits.
Layoff
Unlike the options previously discussed, a layoff is a termination of the employment relationship, which means employers will need to start anew with recruiting efforts when business picks up again. Employees who are laid off will be eligible for unemployment insurance benefits. Depending on the size of the layoff, the California Worker Adjustment and Retraining Notification, or WARN, Act may be at issue. Please see below.
Reduction in Pay
To help avoid layoffs, another option is temporarily decreasing wages. To reduce wages, employers must provide reasonable advance notice (at least seven days before the pay period begins) in writing.[4] These employees likely will not be eligible for unemployment benefits unless the reduction in pay is severe enough to constitute a constructive termination.
Unpaid Leaves of Absence
Communicating to employees that unpaid personal leaves are being more freely granted at this time than under usual business conditions may produce modest savings. Depending on the circumstances, these employees may be eligible for partial wage replacement benefits from the state of California such as paid family leave and short-term disability leave (a self-imposed quarantine may qualify).[5]
Offer severance benefits for voluntary resignations. Another option to help avoid involuntary layoffs is to offer severance benefits to workers in certain categories who volunteer to resign. Employers will need to work with legal counsel to ensure valid releases are signed in conjunction with any severance benefits.
Legal counsel should also be prepared to address several special issues.
Exempt Employees
To meet California's minimum salary requirement for the exemption test, employees must be paid on a salaried basis a minimum salary, which is currently at least $54,080 annually. This amount cannot be prorated for reduced work hours.
This means that if an employer wants to reduce an exempt employee's salary (either to reflect an expectation of less work each week or to generally cut costs), the employer must ensure that the employee is still making a weekly salary of at least $1,040 for any week that the employee is performing work.
For more highly compensated employees, moving to a reduced schedule at a reduced pay (or simply reducing pay) is an option without losing the exemption (provided that the employee will make at least $54,080 annually after the reduction). However, for exempt employees who are close to the minimum salary already, the employer would need to transition the employee to nonexempt (hourly) status before reducing compensation.
WARN Act Notice
If an employer has a plant closing affecting any number of employees or a mass layoff affecting 50 or more employees in 30 days, the California WARN Act requires 60 days' advance notice of the furlough or layoff to the affected employees as well as the applicable governmental agencies.[6] The federal WARN Act has an exception for "unforeseen business circumstances" that would seem to apply to reductions in business caused by COVID-19.[7]
However, the California WARN Act does not have a parallel exception. The closest exception under California law would be for a plant closure or layoff "necessitated by a physical calamity or act of war."[8] There does not appear to be any binding case law interpreting what qualifies as a "physical calamity." As a result, the conservative approach would be to assume that the California WARN Act applies — although there may be good arguments that COVID-19 should qualify as a physical calamity.
Paid Time Off
Employees should be permitted to use any form of paid time off that they have available and may wish to use to bridge the time until wage replacement benefits begin, and/or to make up any shortfall between their benefits entitlement and their usual wages. However, the California labor commissioner has opined employers cannot require employees to use paid sick leave for quarantine purposes.[9]
Reporting Time Pay
Generally, if an employee reports for a regularly scheduled shift but is required to work fewer hours or is sent home, the employee must be compensated for at least two hours or no more than four hours of reporting time pay. An exception to reporting time pay is where operations cannot commence or continue when recommended by civil authorities.[10] The exception would only apply in rare instances though.
For example, if a coronavirus case was identified onsite and the California Department of Public Health sent everyone home for the day, it would apply. However, having a slow day because the city government declared a state of emergency would likely not qualify.
Whatever labor cost reduction option is used, careful planning and thoughtful communications are essential to mitigate risk. Decisions should be made based on business need and be clearly communicated. Legal counsel can assist employers with these steps to implementation:
1. Determine the scale of the needed cost reduction.
2. Consider nonstaff related budget cuts first. If the employer will need to cut staff or hours, consider the optics of other planned expenditures.
3. Evaluate which of the options will best position the company to weather the current crisis and to resume full operations when the crisis passes.
4. Identify any departments which will be affected by cost-cutting measures. If not all employees in the same position or department will be affected, have decision makers identify objective criteria for implementing cuts prior to selecting which employees will be affected. During attorney-client privileged discussions, discuss preliminary decisions and determine whether there may be an unintended disparate impact on certain workers.
5. Document final employee selection decisions.
6. Craft a communications plan for both employees and external audiences.
7. Ensure compliance with all laws related to the selected course of action.
Camille Gustafson is an associate at Paul Plevin Sullivan & Connaughton LLP.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] If a collective bargaining agreement governs, restrictions or conditions may limit these options.
[2] https://edd.ca.gov/Unemployment/Work_Sharing_Program.htm.
[3] https://edd.ca.gov/about_edd/coronavirus-2019.htm.
[4] https://www.dir.ca.gov/dlse/FAQs-NoticeToEmployee.html.
[5] https://edd.ca.gov/about_edd/coronavirus-2019.htm.
[6] Cal. Labor Code § 1400.
[7] 20 CFR §639.9(b).
[8] Cal. Labor Code § 1401(c).
[9] See https://www.dir.ca.gov/dlse/2019-Novel-Coronavirus.htm.
[10] See https://www.dir.ca.gov/dlse/2019-Novel-Coronavirus.htm.
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