Wednesday, December 02, 2009
By Dan Schulte, J.D.
MDA Legal Counsel
From the December 2009 issue of the Journal
Question: The economy has devastated my practice. The number of patient visits is dramatically down. I would like to begin reducing my payroll costs by requiring my staff to take furloughs. The furloughs would last a half day or full day each week. I am also contemplating doing this with my dentist associate who I hired a year ago pursuant to an employment agreement. I assume this is legal, since I see other businesses in the area are doing the same thing. Are there legal issues I should be concerned with?
Answer: I’ll divide my answer into two parts, first addressing employees without employment contracts, and then employees with employment contracts.
Employees without employment contracts. The answer to your question depends on the application of the Federal Fair Labor Standards Act (“FLSA”) to the employees of your practice.
A business will be subject to the FLSA if it engages in interstate commerce (e.g., uses the mail to receive payment and for other purposes) or has revenue exceeding $500,000 annually. There is no minimum threshold regarding number of employees that must be met for the FLSA to apply. You should assume that your dental practice is subject to the FLSA.
Under the FLSA, employees are divided into two categories: “non-exempt” and “exempt” employees. Non-exempt employees are those who are paid on an hourly basis only for those hours actually worked. Employers with non-exempt (hourly) employees are not exempt from the FLSA’s minimum wage and overtime provisions. Exempt employees, unlike non-exempt (hourly) employees, are paid a salary (i.e., a predetermined amount of compensation is paid no matter how many hours are actually worked in a pay period). Employers are exempt from the FLSA’s minimum wage and overtime requirements with respect to their exempt (salaried) employees.
Furloughing non-exempt (hourly) employees is generally not problematic. An employer is not required to compensate non-exempt (hourly) employees for hours the employees have not worked, even if the employer directed them not to work because of a lack of business. Mandatory furloughs are therefore permissible for non-exempt (hourly) employees.
Furloughing exempt (salaried) employees is a bit more complicated. An employer will violate the FLSA by requiring an exempt (salaried) employee to take short-term unpaid absences from work due to lack of business or budgetary concerns. Short-term absences are generally those that last less than one work week. An employer will not violate the FLSA by furloughing an exempt (salaried) employee for an entire work week because the employer is not required to pay an exempt (salaried) employee his/her salary in any work week in which the employee performs no work. Therefore, furloughing your exempt (salaried) employees should only be done for an entire work week at a time.
The consequence of violating the FLSA by improperly furloughing an exempt employee is that the employee will be deemed to be non-exempt (hourly) and therefore subject to the minimum wage and overtime requirements.
Employees with employment contracts. In addition to the FLSA concerns discussed above, you should carefully review the terms and conditions of any employment agreement you have in place with any employee you are contemplating furloughing. Generally, the employee may sue for breach of contract if the employment agreement does not give you the right to reduce working hours. To be safe, you should consider entering into an amendment to the employment agreement altering the compensation and/or the duties sections to accommodate an employer-designated furlough. Should the employee refuse to enter into an amendment and, instead, insist on full-time employment and full pay, your only option may be to terminate the employment agreement (you should have an at-will termination right in the employment agreement). Needless to say, termination is often a powerful incentive to gain an employee’s cooperation in these circumstances.