Several former employees of a telecommunications company filed a class action suit, claiming they had lost their exempt status when their employer instituted mandatory days off without pay in response to poor business conditions.

What happened. In response to declining profits, Tellabs, Inc.’s CEO in April 2001 decided to impose mandatory days off without pay during certain holiday weeks. Employees were told in advance that they would not be paid for 6 days (impacting a total of 4 pay periods) between July and December 2001.

The class members alleged that they were entitled to overtime pay for those weeks in which they worked more than 40 hours after the mandatory-days-off-without-pay program was instituted because they were no longer being paid on a salary basis under the Illinois Minimum Wage Law.

What the court said. According to Department of Labor (DOL) regulations, employers are prohibited from taking deductions from a predetermined salary “for absences occasioned by the employer or by the operating requirements of the business” (29 C.F.R. Sec. 541.118). However, DOL opinion letters have interpreted Sec. 541.118 as “allowing employers, in some cases, to prospectively ‘reduce’ employees’ salaries to address bona fide business needs.”

The Appellate Court of Illinois looked at a case (In re Wal-Mart, U.S. Court of Appeals for the 10th Circuit) where the employer reduced the hours and base salary of its pharmacists in response to a decline in sales during seasonal slowdowns. In rejecting the pharmacists’ claim for overtime pay, the court found that “the requirement that exempt employees receive at least a ‘predetermined amount’ as salary does not preclude an employer from making occasional prospective salary reductions before the affected pay period in response to business needs.” That court also relied on DOL opinion letters that “adhered to the position that ‘a fixed reduction in salary effective during a period when a company operates a shortened workweek due to economic conditions would be a bona fide reduction not designed to circumvent the salary basis payment.’”

The appellate court agreed with a lower court’s conclusion that Tellabs’s program did not convert the class members into hourly workers. Robinson v. Tellabs, Inc., Appellate Court of Illinois, No. 1-07-2731 (2009).

Point to remember: The court noted that the Tellabs program “reduce[d] the future work schedules of its white collar employees with a commensurate reduction in pay.” It made a distinction between pay deductions and reductions: “deductions occur in the instant pay period and are permitted only in certain enumerated circumstances; reductions, on the other hand, affect future pay periods and are permissible in the situations delineated in the DOL’s opinion letters.”