Conducting Emergency Layoffs, Furloughs, and Salary Reductions in California as a Result of the Impact of COVID-19

On March 17, 2020, Governor Newsom issued Executive Order N-31-20 (N-31-20), suspending employers’ compliance with certain sections of the California Worker Adjustment and Retraining Notification Act (Cal-WARN) as long as they comply with certain other requirements. And as directed by N-31-20, on March 23, 2020, the Division of Labor Standards Enforcement and Employment Development Department issued guidance on the implementation of N-31-20 (the “Agency Guidance”).

Normally, Cal-WARN requires California employers to provide employees with 60-days’ advance written notice before executing a mass layoff, relocation, or termination at a covered establishment that has 75 or more employees. Employers who fail to provide the required notice are typically liable to all affected employees for up to 60 days of back pay, benefits, and attorneys’ fees, as well as potential civil penalties payable to the state.

Recognizing the impact of COVID-19 on California employers, “for the period that began March 4, 2020 through the end of this emergency,” N-31-20 temporarily suspends enforcement of California Labor Code sections 1401(a), 1402, and 1403 prescribing the 60-day notice requirement and liability for failure to comply, provided that employers otherwise comply with the following requirements:

1. As soon as practicable, the employer must provide notice to the following:
   1. all affected employees;
   2. the Employment Development Department (the “EDD”);
   3. the local workforce investment board; and
   4. the chief elected official of each city and county government within which the termination, relocation, or mass layoff occurs.
2. The notice must be in writing and include the following information:
   1. the specific date the layoff, relocation, or termination will be implemented;
   2. the specific reason for the layoff, relocation, or termination (this will be highly fact-specific to each employer, but an example may be to explain that the rapidly progressing responses to the threat of COVID-19 by federal, state, and local public health officials, which are outside the employer’s control, have significantly limited the employer’s operations with a consequent need to implement a reduction in force);
   3. a brief statement of the basis for reducing the 60-day notification period (in this case, that COVID-19-related business circumstances were not reasonably foreseeable as of the time that notice would have been required); and
   4. the following statement advising employees of the availability of unemployment benefits: “If you have lost your job or been laid off temporarily, you may be eligible for Unemployment Insurance (UI). More information on UI and other resources available for workers is available at labor.ca.gov/coronavirus2019.”

As explained by the Agency Guidance, N-31-20 does not suspend Cal-WARN in its entirety or for all covered employers; instead, it suspends only the 60-day notice requirement for those employers that satisfy N-31-20’s other specific conditions. Accordingly, it is critical that employers carefully review N-31-20 and the Agency Guidance, and consult with legal counsel to understand what N-31-20 does and does not require.

Cal-WARN (and Comparisons to its Federal Counterpart)

Triggering Events

Cal-WARN applies to employers that own or operate a “covered establishment,” which is “any industrial facility or part thereof that employs, or has employed within the preceding 12 months, 75 or more persons.” In contrast, only employers with 100 or more employees are subject to the requirements of federal WARN.

Cal-WARN’s notice requirements are triggered when an employer intends to order any one of the following:

1. a “mass layoff,” which is “a layoff during any 30-day period of 50 or more employees at a covered establishment;”
2. a “relocation,” which is “the removal of all or substantially all of the industrial or commercial operations in a covered establishment to a different location 100 miles or more away;” or
3. a “termination,” which is “the cessation or substantial cessation of industrial or commercial operations in a covered establishment.”

In contrast, the events triggering notice under federal WARN must affect, within any 30-day period, at least 500 employees, or 50 employees at a single worksite who constitute at least one-third (33%) of the full-time employees at that worksite. Additionally, notice may be triggered by multiple events at a single worksite within a 90-day period that each affect fewer than 50 employees, but when aggregated, affect 50 or more employees.

Exemptions from the Notice Requirements

Cal-WARN contains limited statutory exemptions from providing the required notice if a mass layoff, relocation, or termination is necessitated by “a physical calamity or act of war.” Whether the physical calamity exemption applies to COVID-19 is unclear. As explained by the Agency Guidance, “There are currently no precedential cases interpreting what constitutes a ‘physical calamity’ for purposes of the California WARN Act.” In any event, if an employer can prove that COVID-19 qualifies as a physical calamity, the exemption would permit an employer “to avoid providing any notice altogether.”

By comparison, federal WARN contains statutory exceptions for triggering events caused by “natural disasters” or “unforeseen business circumstances.” Such unforeseen circumstances are “not reasonably foreseeable as of the time that notice would have been required” because they were caused by “some sudden, dramatic, and unexpected action or condition outside the employer’s control.” Moreover, unlike Cal-WARN, an applicable federal WARN exception does not completely relieve employers of the obligation to provide notice to employees but only from providing the full 60 days’ notice; employers still must “give as much notice as is practicable.”

Employer Liability for Failing to Provide the Required Notice

In the normal course, failure to provide the required notice to employees can have significant consequences for employers, including liability to all affected employees for up to 60 days of back pay and benefits, as well as reasonable attorneys’ fees. Cal. Lab. Code §§ 1402, 1404. And failure to provide the required notice to the EDD, the local workforce investment board, or the chief elected official of each applicable city and county government may result in civil penalties payable to the state in an amount of up to $500 for each day the employer fails to provide requisite notice, plus reasonable attorneys’ fees. Cal. Lab. Code §§ 1403, 1404. Notably, if a court determines that an employer conducted a reasonable investigation in good faith and had reasonable grounds to believe that its conduct was not a violation of Cal-WARN, the court may reduce the amount of any penalty imposed against the employer. Cal. Lab. Code § 1405.

Impact of N-31-20

In issuing N-31-20, Governor Newsom essentially adopted federal WARN’s “unforeseen business circumstances” exception to Cal-WARN’s notice requirement for California employers, expressly acknowledging that “rapidly progressing responses to the threat of COVID-19 cause business needs and circumstances to change in ways that were not reasonably foreseeable as recently as just weeks and days ago, necessitating rapid changes in workforce needs.” The Agency Guidance explains that such business circumstances “should be understood to be consistent with the identical exemption under the federal WARN Act,” which includes a “government ordered closing of an employment site that occurs without prior notice.”

Thus, in recognition of the fact that employers have already had to act rapidly or may need to do so, N-31-20 also suspends employer liability for failing to provide 60 days’ notice, provided employers comply with N-31-20’s other notice requirements. In other words, employers finding themselves needing to execute a mass layoff, relocation, or termination as a result of COVID-19-related business circumstances will still be subject to liability under Cal-WARN if they fail to comply with any of the following requirements: (1) giving written notice to the specified parties, (2) giving as much notice as is practicable with an explanation why 60 days’ notice could not be provided, (3) ordering a mass layoff, relocation, or termination caused by business circumstances related to COVID-19, or (4) including a statement advising employees of potential eligibility for unemployment benefits.

What About Furloughs, Reduced Schedules, or Across-the-Board Salary Reductions?

As alternatives to terminating employees, employers may also be considering (i) furloughs that are essentially unpaid leaves of absence from work with a certain return date, during which time employees remain on the company’s payroll and possibly remain eligible for certain benefits, (ii) reduced schedules with a corresponding reduction in compensation, or (iii) reduced compensation with no change in work schedules. However, employers must be aware that even furloughs, reduced schedules, or across-the-board significant reductions in compensation that impact 50 or more employees at a covered establishment may trigger Cal-WARN requirements, other potential liabilities, and/or other requirements.

Employee Furloughs May Require Cal-WARN Notice

Employers considering employee furloughs must be aware of a 2017 California Court of Appeal decision, International Brotherhood of Boilermakers, etc. v. NASSCO Holdings Inc., 17 Cal. App. 5th 1105 (2017), holding that furloughs exceeding a de minimis amount of time would trigger an employer’s obligations to comply with Cal-WARN. The Court of Appeal did not, however, provide any guidance on what length of time is considered “de minimis.” The court explained that Cal-WARN’s use of the language “separation from a position” does not suggest that a severance of the employment relationship must occur but instead encompasses a temporary job loss, even if some form of the employment relationship continues and employees are given a specific return date. The court further explained that Cal-WARN lacked any time limitation, unlike federal WARN’s express rule that only a layoff exceeding six months triggers the notice requirement. Thus, the court in NASSCO concluded that a four- or five-week furlough is not de minimis and constitutes a “separation from a position” within the meaning of Cal-WARN, triggering its notice requirements.

Accordingly, under the NASSCO decision, employers contemplating furloughs that exceed a de minimis amount of time (perhaps two weeks) must comply with Cal-WARN’s notice requirements, as modified by N-31-20.

Employee Furloughs May Expose Employers to Liability Under California Wage and Hour Law

Even if a furlough is for a de minimis amount of time and does not trigger Cal-WARN, employers risk potential exposure under California Labor Code sections 201 and 203. Section 201 requires employers to pay an employee’s final wages immediately upon termination, and Section 203 imposes a penalty on employers who willfully fail to timely pay final wages in an amount equal to the employee’s daily rate of pay, up to a total of 30 days.

In a 1996 opinion letter, the California Division of Labor Standards Enforcement (the “DLSE”) opined that a furlough extending beyond the employee’s normal pay period in which the furlough begins requires the employer to pay final wages under Section 201. In a 1993 opinion letter, the DLSE stated that a furlough with a definite return-to-work date that does not exceed 10 days does not result in a termination. Under these opinion letters, a furlough that does not have a definite return-to-work date within the shorter of 10 days or the employee’s normal pay period may be construed as a termination, triggering the requirement to pay final wages under Section 201. Notably, the DLSE’s opinion letters are not binding authority on California courts, but they may nevertheless be considered and cited as persuasive authority in some circumstances.

Under California and federal wage and hour law, employers should avoid placing exempt employees on a complete furlough in the middle of a workweek. While employers generally may reduce the hours of non-exempt employees at any time, exempt employees typically must receive their weekly base salary if they perform any services within the workweek. Thus, an employer should commence a furlough for exempt employees at the beginning of a workweek (and make clear that no work may be performed during that week). And regardless of whether an employee is exempt or non-exempt, employers should not allow any employees on a complete furlough to perform any active work (including any requirement to monitor email or voicemail). If an employee on a complete furlough actually does perform such work, then the employer will be required to compensate the employee, and in the case of an exempt employee, that could mean an entire workweek’s salary, regardless of the amount of work performed (as discussed further below, there are different considerations for exempt employees placed on a partial-week furlough).

Under California law, there could be legal risks arising from requiring employees to use paid time off when placed on a furlough. The DLSE has taken the position that if an employer offers the benefit of paid time off, employees should have a reasonable opportunity to take advantage of the benefit. Specifically, a California DLSE internal memorandum indicates employers must provide a minimum of 90 days’ advance notice when requiring exempt employees to take mandatory paid time off. Thus, in California, if an employer desires for employees to use their paid time off during a furlough, it should consider offering employees the ability to elect to use paid time off rather than requiring it. ¹

Employee Furloughs May Impact Benefits Eligibility and/or Immigration Visas

Additionally, whether employees placed on a furlough will remain eligible to continue receiving benefits, including but not limited to health coverage, paid time off accrual, retirement plans, and/or equity vesting, will depend on the terms and conditions of the employer’s various benefit plans, policies, and agreements. For instance, placing employees on a furlough, particularly one lasting several weeks, may trigger a “qualifying event” under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) and/or its state counterpart Cal-COBRA, requiring notice to the furloughed employees that they will be able to maintain health coverage for themselves and their eligible dependents only if they timely elect to do so and pay the required premiums. While layoffs or furloughs generally will not, by themselves, cause an employer to be subject to penalties under the Affordable Care Act (the “ACA”), if an employer has full-time employees to whom it does not offer health plan coverage, that employer should consider the potential impact of whether layoffs or furloughs might trigger ACA penalties. As another example, a furlough for participants in retirement plans, such as a 401(k), may impact vesting, contributions, employer match, participant loan repayments, and/or hardship withdrawals.

Moreover, employers must factor in the recent federal Families First Coronavirus Response Act (Families First) signed on March 18, 2020 and set to go into effect on April 2, 2020. While Families First does not appear to cover economic furloughs, employers subject to Families First (which generally applies to employers with fewer than 500 employees) must consider the risk that furloughed employees may still be or become eligible for the emergency paid family and medical leave and/or paid sick leave for one of the qualifying needs provided by Families First, such as if they or a family member becomes ill with COVID-19 or they need to care for a child whose school or place of care has been closed. Consequently, placing employees on a furlough may not result in the immediate cost savings that employers may be hoping to achieve. That said, employers that do pay wages under Families First will receive a refundable quarterly tax credit that may offset certain other employment tax liabilities. For additional information on Families First, please review our Client Alert issued on March 19, 2020.

If the employer sponsors foreign workers for green cards or visas, there may be obligations to notify the United States Citizenship and Immigration Services or Department of Labor about the change in work status depending on the length of the furlough or reduction in schedule or salary that impact such foreign workers. Employers should consult their immigration counsel in connection with any such change in work conditions.

Finally, as noted by Governor Newsom in N-31-20, employers should advise workers placed on furlough that they may be eligible for unemployment insurance benefits and that information about applying for unemployment benefits is available at labor.ca.gov/coronavirus2019.

Reduced Schedules and Pay Also Raise Certain Concerns

Instead of furloughing employees outright, employers may look to reduce work schedules (i.e., partial-day or partial-week furloughs) and/or pay. Cal-WARN notice may also be triggered in these contexts, depending on the extent of the reduction. While California courts have not expressly held that a reduction in hours or pay triggers Cal-WARN, it is possible that a reduction in hours and/or pay could be considered a “separation from a position” within the meaning of Cal-WARN.² In a 2005 decision finding that no “separation from a position” occurred because there was no changes in the terms of employment where the employees transitioned from one employer to another following an asset purchase, the Court of Appeal explained in a footnote that the situation might be different if the employees were given a much lower wage or inferior working conditions. MacIsaac v. Waste Mgmt. Collection & Recycling, Inc., 134 Cal. App. 4th 1076, 1087 n.8 (2005). Accordingly, employers considering reduced schedules and/or pay must be aware that a significant reduction could trigger Cal-WARN.

Partial-week furloughs raise additional issues specific to exempt employees. As explained above, the salary basis test under both California and federal wage and hour laws requires that exempt employees receive their weekly base salary if they perform any services within the workweek. In a 2009 opinion letter, the DLSE approved an employer’s reduced schedule coupled with a salary reduction for exempt employees as an alternative to avoid layoffs in a difficult economic environment. To avoid violating the salary basis test in implementing partial-week furloughs for exempt employees, employers should take certain steps, including: (1) providing exempt employees with advance notice of the schedule and salary reductions; (2) indicating that they intend to restore full schedules and salaries as soon as business circumstances permit; (3) avoiding adjusting schedules and salaries any more frequently than indicated; and (4) avoiding reducing schedules and salaries that would cause exempt employees to be paid less than the applicable salary minimum.

As pointed out above, employers must also review their various benefit plans to examine whether a significant reduction in hours and/or compensation impacts continuing benefit eligibility, such as triggering a “qualifying event” under COBRA and/or Cal-COBRA, as well as the impact on 401(k) and other retirement plans. And employers should consult with immigration counsel to determine the impact of reduced hours and/or compensation on foreign workers sponsored by the employer for visas.

For employers considering whether to impose an across-the-board compensation reduction without a corresponding reduction in hours (and regardless of Cal-WARN’s applicability), they should also consider (a) whether the salary reduction would trigger liability under any collective bargaining agreement or executive employment agreement (e.g., if an executive has a right to resign for “Good Reason” if he/she suffers a material reduction without his/her consent, it could trigger an obligation to provide severance benefits under the terms of the contract); and (b) whether the salary reduction will cause any employee to fall below the minimum salary threshold that is necessary to classify an employee as exempt from California’s overtime regulations.

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Governor Newsom’s Executive Order N-31-20 came only two weeks after his declaration of a State of Emergency on March 4, 2020, during which a flurry of subsequent actions had been taken at the state and local level to mitigate the COVID-19 pandemic that unforeseeably altered business needs and circumstances. And on March 23, 2020, the DLSE and EDD issued the Agency Guidance regarding how N-31-20 will be implemented.

We find ourselves in unprecedented times, with government agencies issuing orders and guidance at a breakneck pace in essentially real time with the circumstances necessitating them. Employers must be on the lookout for updates in this ever-changing landscape and make sure to seek legal advice before taking action.

¹ On the other hand, federal law appears to allow employers to mandate employees to use paid time off during a furlough. A US Department of Labor Wage and Hour Division opinion letter regarding forced use of paid time off for exempt employees during a plant shut down states: “Since employers are not required under the FLSA to provide any vacation time to employees, there is no prohibition on an employer giving vacation time and later requiring that such vacation time be taken on a specific day(s). Therefore, a private employer may direct exempt staff to take vacation or debit their leave bank account […] whether for a full or partial day’s absence, provided the employees receive in payment an amount equal to their guaranteed salary.”

² In comparison, federal WARN expressly provides that its notice requirement is triggered by a reduction in hours of more than 50 percent during each month of a 6-month period.