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