Reducing Payroll and Avoiding Lawsuits During the Coronavirus/COVID-19 Pandemic

Ruth Binger

By Ruth Binger

No one knows how long the COVID-19 Pandemic will last.  The predictions are all over the place, from 6 weeks to 4-6 months.  Last week, businesses instituted a hiring freeze. This week businesses are looking at terminating their entire workforce in some cases and shutting down or taking other measures.


According to Moody’s Analytics, over 50% of the 153 million jobs in the economy are at high or moderate risk of being lost.  (In perspective, there were 800,000+ jobs lost in March 2009 during the Great Recession). According to Mark Zandi, chief economist at Moody’s Analytics, “…as many as 10 million of those workers could see some impact to their paychecks — either layoffs, furloughs, fewer hours or wage cuts.

What are your company’s payroll options when your orders disappear or are substantially reduced?

As flight director Gene Kranz says in Apollo 13, “Work the problem, people.”

  • Temporary total shut down. 
    • Given you are not discriminating against any particular protected class of employees with rights, your company should be in a defensive position.
    • The shutdown is indefinite so announcing a furlough (where you expect to rehire)  is not applicable. 
    • Please review the Worker Adjustment and Retraining Notification Act (WARN) and your applicable state law to determine if you have a mini-WARN in case you need to give notice or notice pay.  
      • WARN applies if there is a reduction in workforce at a single site of employment where 100 or more full-time workers are employed if at least 33% of the full-time employees and at least 50 full-time employees are laid off
      • Under the WARN Act, the employer must provide a 60-day notice to all affected employees. 
      • WARN employee calculations do not consider employees that have worked less than 6 months in the last 12 months and employees who work an average of less than 20 hours a week.
  • Shutdown for one or two weeks.  
    • Beware of the Fair Labor Standard Act (FLSA) Exempt Rules for employees who do not receive overtime.  
    • Whether an employee meets the exempt from overtime test is determined by whether the employee meets the (1) Salary Level Test, (2) Salary Basis Test, and (3) Duties Test under the Code of Federal Regulations (“CFR”).
    • Exempt employees must be entirely relieved from work, otherwise business runs afoul of the Salary Basis Test.  The Salary Level Test is $684 per week or $35,568 per year.
  • Furlough and termination: Continue in business but  terminate some employees and furlough other employees with a recall date of 8-16 weeks. 
    • With respect to furloughing—essentially laying off—employees with a definite date of return, check with your state unemployment office with respect to employees being able to both file for unemployment and not look for a job.
    • If you are treating employees differently and only some are affected, then you must choose a selection process as to “who” that is not in violation of law or otherwise discriminatory.
      • Establish objective, business-related criteria that will be used in selecting the employees to be furloughed or terminated.
      • Seniority, performance evaluations or systems, attendance and ability to do a cross section of jobs are commonly used (Discrimination Test).
    • The department/company/job duty context is important; business circumstances may justify a company applying different selection criteria to each. 
    • Like all of employment law, once you pick a strategy, you need to apply it consistently in order to manage discrimination claims.
  • Continue in business but have some employees work from home. 
    • Apply the Discrimination Test: Do not pick old and sick people or you will have issues under the Age Discrimination Act and the Americans with Disabilities Act (“ADA”).  
    • Remember that under the ADA you must reasonably accommodate qualified employees who can perform the essential functions of their job. Please  engage in the ADA interactive dialogue with employees requesting accommodation. 
    • Keep in mind the Fair Labor Standards Act with respect to hours worked. 
      • Have everyone keep track of hours worked and make expectations and deadlines specific. 
      • Hourly employees must be paid for all hours worked.  
      • Management will have to step up and make frequent and consistent check-ins both face-to-face (video conferencing, Skype, Slack, IM) and voice-to-voice. 
      • Bonding with employees and strengthening relationships with employees is essential.  This means “water cooler” conversations where management takes an interest in the personal life of employees.
  • Continue in business and adopt a reduced workweek schedule. 
    • Announce for an extended period that hourly employees will work less than 40 hours and exempt employees will work less than full-time.  Again, keep track of hours worked. 
      • Exempt employees must still meet the Salary Level Test of $684.00 per week but will not run afoul of the docking rules under the Salary Basis Test if enough notice is given.   
      • Under the Salary Basis test, an employee must regularly receive a predetermined amount of salary on a weekly or less frequent basis that is not subject to reductions because of quality or quantity of work performed. 
    • Please check your state unemployment statute, may states have Shared Work Programs that allow the employee to collect unemployment while working less than full time.  Employers must apply to the applicable state.
  • Reduce pay without any reduction in the workweek.
    • Absent contractual requirements (employment agreements/union contracts) that set salaries or wage rates, employers generally are free to set pay at whatever level they wish. 
    • Of course, nonexempt/hourly employees must be paid at least the minimum wage and time and one-half their regular rate for hours worked over 40 in a workweek (or over 8 hours in a day in some States).
    • Exempt employees must be paid a salary of at least $684 per week with no loss in pay due to lack of work.  Beyond those minimum thresholds, employers have wide latitude in setting (or reducing) pay.  Beware that some states have notice requirements when reducing pay, so please check them.

Employers may qualify for the “unexpected circumstances” exception to the WARN Act. However, in order to qualify, the employer must provide a carefully-worded notice of layoff/shut-down to their employees and local government agencies.  Our employment lawyers are prepared to assist you in drafting such a notice.

We are in a brave new world where there is no real rule book.  The last pandemic was the Spanish Flu in 1918-1920.  Look ahead and plan for the future – even if it is very murky.  As always, if you have any questions, please contact us.

Additional Resources:

COVID-19 Business Operations for Danna McKitrick

Coronavirus/COVID-19 Resource Center

Posted by Attorney Ruth A. Binger. Binger serves both emerging and mature businesses concentrating in corporate law, intellectual property and technology law, cybersecurity, digital media law, and labor and employment law. Her commitment to the success of small to medium-sized businesses, and her understanding of multi-faceted issues inherent in operations, are what distinguish Binger’s practice.

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