As federal agencies adjust their worksites to the realities of the COVID-19 pandemic, these changes will likely have a direct impact on government contractors and their employees who work at those sites.  If the government closes or reduces operations at a site, a contractor may be forced to furlough or reduce the hours of employees.  Some reduction actions could result in an employee who was exempt from overtime payments under the Fair Labor Standards Act (“FLSA”) being reclassified as non-exempt, which would require the employer to pay the employee overtime wages, with negative long-term repercussions.

An employee may volunteer to reduce her salary for any period of time without any FLSA consequences so long as her decision is completely voluntary.  To the extent the employer must impose involuntary reductions on an exempt employee, the following options are available that should not result in the employee being reclassified as non-exempt under FLSA:

  • Furloughs in full week increments:  With certain exceptions, FLSA requires that an exempt employee be paid a full week’s salary in any week in which she performs work.  However, there is no requirement that an exempt employee’s salary be paid if the employee has not performed any work for the entire week.  Notably, “no work” must be interpreted strictly to preclude any work of any kind.  “Work” could even include checking email from home or via mobile devices, which could entitle the employee to a full week’s pay.
  • Mandatory leave bank or paid time off deductions: An employer can require its employee to use accrued leave while on furlough. Once accrued leave is exhausted, the remainder of that furloughed employee’s leave may be without pay, so long as the employee performs no work while on furlough.
  • “Non-temporary” schedule and salary reductions: An employer may reduce an exempt employee’s hours and salary under certain circumstances without converting that employee’s FLSA status to “non-exempt.”  The Tenth Circuit Court of Appeals has opined that an employer may do so if the reduced hours and pay are for a fixed period of at least two months.  See In re Walmart Stores, Inc., 395 F.3d 1177 (10th Cir. 2005); see also Havey v. Homebound Mortgage, Inc., 547 F.3d 158, 166 (2d Cir. 2008) (holding that prospective quarterly pay adjustments did not cause employee to lose exempt status).  However, employers must be mindful that “pervasive manipulation of payments that makes a ‘sham’ of what purports to be salary” may cause loss of exempt status.  In re Walmart Stores, Inc., 395 F.3d at 1188.  Employers also must ensure that the reduced salary meets the minimum FLSA salary requirements for exempt status (which, in most instances, is $684 per week, increased from $455 per week effective January 1, 2020).

Non-exempt employees need only be paid for time worked.  Employers therefore may reduce a non-exempt employee’s hours (including furloughs of less than a full week) and wages without any FLSA consequences.  Of course, overtime, minimum wage laws (including regulations implementing President Obama’s Executive Order mandating a $10.10 minimum wage for contractors) and sick leave requirements (including FAR 52.2222-62) would still apply. Paid sick leave requirements may be expanded this week, as this past weekend the House of Representatives passed the Families First Coronavirus Response Act, expanding paid sick leave under the Family Medical Leave Act and adding a new provision for emergency paid sick leave for those staying home for COVID-19 related causes.  This bill is still under consideration by the Senate.  Finally, existing, and potential new, state laws should also be reviewed for applicable wage, hour and sick leave laws.

For more information on these and other employment law issues relating to the pandemic, such as notice requirements for mass layoffs, please see Covington’s COVID-19 Legal and Business Toolkit. The U.S. Department of Labor, Wage and Hour Division, also has established a website to address COVID-19 related FLSA-compliance questions.

We will continue to track the latest on potential government actions and their impact on contractors. If you have any questions concerning the material discussed in this client alert, please contact the following members of our Government Contracts practice:

Dan Johnson
Lindsay Burke
Nooree Lee

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Photo of Dan Johnson Dan Johnson

Dan Johnson has more than 30 years of experience helping government contractors and other clients successfully resolve contract and employment disputes.

Dan has extensive trial experience, resulting in bench verdicts, jury verdicts and arbitration awards in favor of his clients. These include trial…

Dan Johnson has more than 30 years of experience helping government contractors and other clients successfully resolve contract and employment disputes.

Dan has extensive trial experience, resulting in bench verdicts, jury verdicts and arbitration awards in favor of his clients. These include trial victories in multi-million dollar trade secret cases, complex business litigation arising from prime-sub relationships, and other business disputes.

Dan also helps employers resolve a host of matters arising out of the employment relationship. These include employment agreements, covenants not to compete, employee discipline and terminations, and discrimination, whistleblower, retaliation, wage and wrongful termination claims.

Dan is a contributing author to “The Comprehensive Guide to Lost Profits Damages for Experts and Attorneys” published by Business Valuation Resources, LLC.

Photo of Nooree Lee Nooree Lee

Nooree advises government contractors and financial investors regarding the regulatory aspects of corporate transactions and restructurings. His experience includes preparing businesses for sale, negotiating deal documents, coordinating large-scale diligence processes, and navigating pre- and post-closing regulatory approvals and integration. He has advised on…

Nooree advises government contractors and financial investors regarding the regulatory aspects of corporate transactions and restructurings. His experience includes preparing businesses for sale, negotiating deal documents, coordinating large-scale diligence processes, and navigating pre- and post-closing regulatory approvals and integration. He has advised on 35+ M&A deals involving government contractors totaling over $30 billion in combined value. This includes Veritas Capital’s acquisition of Cubic Corp. for $2.8 billion; the acquisition of Perspecta Inc. by Veritas Capital portfolio company Peraton for $7.1 billion; and Cameco Corporation’s strategic partnership with Brookfield Renewable Partners to acquire Westinghouse Electric Company for $7.8+ billion.

Nooree also counsels clients navigating the Foreign Military Sales (FMS) program and Foreign Military Financing (FMF) arrangements. Nooree has advised both U.S. and ex-U.S. companies in connection with defense sales to numerous foreign defense ministries, including those of Australia, Israel, Singapore, South Korea, and Taiwan.

Over the past several years, Nooree’s practice has expanded to include advising on the intersection of government procurement and artificial intelligence. Nooree counsels clients on the negotiation of AI-focused procurement and non-procurement agreements with the U.S. government and the rollout of procurement regulations and policy stemming from the Executive Order on Safe, Secure, and Trustworthy Artificial Intelligence.

Nooree maintains an active pro bono practice focusing on appeals of denied industrial security clearance applications and public housing and housing discrimination matters. In addition to his work within the firm, Nooree is an active member of the American Bar Association’s Section of Public Contract Law and has served on the Section Council and the Section’s Diversity Committee. He also served as the firm’s Fellow for the Leadership Council on Legal Diversity program in 2023.