This article was written by Robin Noah, SCORE Orange County Management Counselor
No question these are very difficult time for most businesses. . A major challenge is how continue operating within existing financial parameters. There are no rubber bands to stretch the budget; restructuring, reducing and cut backs are some of the issues business persons are facing. What has to be cut and where do you cut? One of the primary areas always looked at for making changes is the overhead costs. For most business the first stop is payroll. Cut or reduce payroll and you have personnel issues.
When dealing with personnel issues one needs to be concerned with labor laws. What may seem like a good decision may really be a costly action. For example if cutting back wages is an option you choose to exercise be sure that the basic minimum wages level is maintained for both exempt and non-exempt employees:
Non-Exempts = Mon $8.00 per hour
Exempts = $2,773.33 per month, or $33,280 per year.
When reducing exempt employees' salary, remember that falling below statutory minimum salaries is a violation of state and federal codes. This includes any cutbacks or reductions that are reduced by percentages that bring exempt employees below the minimum salary which will negate their exempt classification.
Reducing hours and pay for all employees: This works for nonexempt employees who are paid by the hour and do not have to be paid if they are not working. If you reduce exempt employees' hours to reduce their salary, then you are changing their classification bordering on a non-exempt classification. Exempt employees are paid to get a job done; not based on the number of hours worked – no time sheets are used.
Another option that is considered is using independent contractors which would reduce the cost of benefits and overtime pay since independent contractors are self employed and receive no “benefits “from the business they contract with. Independent Contractors (IC) are responsible for their unemployment insurance, workers' compensation and state and federal income tax.
The time bomb here is that simply calling someone an IC does not make it a legal classification. The most important factor is that the business has no control over the IC; the IC has the right to control the manner and means of accomplishing the desired result. The www.IRS.gov web site provides information for making the correct IC classification determination.
Be aware that if you hire someone as an IC but they are actually performing the job duties of an employee you have a misclassification problem. This can cost you significant penalties, such as back pay for unpaid overtime, missed meal and rest breaks, repaying your workers' compensation carrier, back taxes, etc. Carefully review the duties you are hiring someone to perform - if you think the individual is an employee, he/she probably is.
Another area rife with problems can be the hiring of temporary workers and treating them as IC’s’ .Whether an individual is an IC depends on the duties he / she was hired to perform and how he/she performs them. The less control a hiring entity has over the result or work product, the more likely the individual is an independent contractor.
In a recent newsletter the California Chamber of Commerce cautioned businesses to be careful in mandatory shut downs : “ Employers may find that certain times of the year are slower than others or that because of the current economic crisis, a temporary unpaid shutdown would be cost effective. Employers may want to require employees to use accrued vacation or PTO during the shutdown. The Labor Commissioner has opined in the past that reasonable notice of this requirement must be provided (reasonable notice being about 90 days). Even if you have a written policy in your handbook, CalChamber recommends providing additional notice when you intend to invoke this policy because if the notice you provide is deemed unreasonable, you can be liable for unlawfully withholding wages from employees.”
Additionally, the Chamber comments: - Employers whose employees have a lot of accrued vacation or PTO on the books may wish to wipe out the accrued time to decrease their potential liability for monetary payouts. Remember, California law considers vacation time and PTO as wages; once the money is earned, it belongs to the employee and cannot be taken away. Employers may consider adjusting the cap on vacation, requiring employees to take paid time off, or paying out employees for accrued vacation or PTO, but never institute a use it or lose it policy
Tough times mean tough decisions. Protect yourselves by carefully considering all possibilities, making responsible decisions that will reduce the potential for law suits concerning employee matters.