A bit of planning can help reduce the risk of cutting labor costs

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The state of the economy has forced many companies to reduce costs to stay competitive.

Labor costs are typically a prime focus during tough economic times.  Efforts to reduce labor costs should be carefully considered, however, to avoid unintended and greater liabilities than the cost savings to be realized from the change.

In making decisions intended to save labor costs, you should consider the following:

Specific employee agreements and general company policies should be reviewed.  With regard to each employee considered for termination or other reductions, you should review any specific agreement concerning that person’s employment.

In addition, you should be aware of whether any of your general policies address hours or pay reductions or terminations without cause.

Both individual contractual agreements and general policies may impose penalties for pay and hour reductions, or terminations without cause.

In any event, breach of such agreements could give rise to breach of contract claims.

A reduction in hours may result in unemployment and other claims.  When an employee’s full-time hours have been reduced they may apply for unemployment.

Note, part-time employees are not eligible for such benefits.  Unemployment benefits will compensate the employee for a portion of the lost wages.

Depending on the circumstances of the reduction, however, the employee could receive a full award of benefits.

Unreasonable reduction in pay and substantial changes in working conditions are both statutory grounds for an employee to receive a full award of benefits if the employee quits as a result of such changes.

Terminations/layoffs should be based on objective criteria.  If you must terminate employees other than for cause as part of cost reductions, you should begin by outlining objective criteria you will apply in selecting employees.

Objective criteria might include items such as whether employees are on performance action plans or have been subject to other discipline within a specified time period, or perhaps employees with less than a specified period of service.

Similarly, an employer may seek to reduce any employees working in positions that are not revenue generating.  In such a case, it will be important to clearly define what makes a position revenue generating.

Once you identify employees meeting the objective criteria, a subjective review should be considered to ensure protected groups are not adversely impacted.

If you except an employee from the objective criteria you have formulated, the basis for the exception should be documented to ensure no discrimination has taken place.

Reassigning job duties may cause a loss of exemption status.  Staff reductions often result in the reassignment of job duties.  Such changes can impact exemption status.

For example, the executive exemption to overtime requires, among other things, that the employee customarily and regularly directs the work of at least two or more other full-time employees or their equivalent.

As staff reductions are implemented, and the job duties of a former executive become less managerial in nature, the overtime exemption could be lost.

At any time an employee’s work hours or responsibilities are changed, you should be mindful of the impact on their exemption status.  In some cases, such changes may even give rise to exempt status.

Unpaid time off and forced vacation may be required for some.  Often referred to as a furlough, employers may consider requiring employees to take time off without pay.

Furloughs have implications for both exempt and non-exempt employees.  With full-time, non-exempt employees, the reduction in hours may lead to unemployment claims as described above but is otherwise permissible.

An exempt employee’s weekly salary, however, cannot be affected by variations or reductions in the quality or quantity of work performed.  In addition, exempt employees must be paid their salary for any week in which they perform work; however, salary is not owed for weeks in which the employee performs no work.

In addition, since an employer is not required to provide any vacation time to employees, an employer is not prohibited from directing employees to take that vacation time on particular days — this applies to both non-exempt and exempt employees.

Rehiring employees and calling them independent contractors does not save costs.  Having a person work part-time or paying them as a consultant does not make the person an independent contractor.

Numerous factors must be considered in determining whether a person is an independent contractor, chief among them are whether the person owns their own business and the tools of their trade, works independently, and has the opportunity for profit and loss resulting from their work.

Under a new Colorado law, there are substantial penalties for misclassification of employees, thus, any decision to terminate employees and rehire them as independent contractors should be carefully considered.

Following these tips can help ensure that intended reductions in labor costs are actually realized.

Christie R. McCall is an attorney at Holland & Hart LLP. She can be reached at crmccall@hollandhart.com.