Employer Alternatives to Layoffs: California’s Work Sharing Program and Partial Unemployment

Employers in the time of COVID-19 have been forced to learn how to balance the financial costs of keeping the business afloat, while also trying to retain quality employees. At times, it feels like one wrong step and the whole business will crash down, with no net to break the fall. Fortunately, there are ways for employers to walk the narrow tightrope without crashing, reducing payroll costs while also retaining employees and employee loyalty. It is our hope that this Memo gives employers some needed information on two potential alternatives to layoffs- California’s Work Sharing Program and Partial Unemployment.

As we discuss in more detail below, the Work Sharing Program is undoubtedly the better of the two from an employee’s standpoint as it results in a higher Unemployment Insurance (“UI”) benefit payment to the employee; however, the program can be administratively burdensome and may not be the best choice for the employer. Due to the increase in COVID-19 claims, the Partial Unemployment Program is currently operating just like normal unemployment, meaning that there is no extra administrative work for the employer- if an employee’s hours/wages are reduced, the employee simply has to file a claim with California’s Employment Development Department (“EDD”). While this option is undoubtedly better for the employer, it may result in stress for the employee (EDD is overwhelmed and UI payments have been delayed). Employers should also consider whether exempt employees will be included in the wage/hour reductions as exempt employees likely will not qualify for Partial Unemployment benefits and the employer may want to consider changing exempt employees’ status to non-exempt (hourly) before making wage/hour reductions.

Costs of “Lost” Employees

Whether your business is still doing well, already had to lay off employees, or is currently considering layoffs, one thing is clear- employers are more aware now than ever of all of the costs to keep their businesses running. One of the largest costs for most employers is undoubtedly payroll, so it is no surprise that payroll is often the first place that employers look when considering places to cut costs. While laying off employees might seem like a quick fix, layoffs can lead to real “costs” down the road.

Employers may not consider all of the costs of losing an employee as it can be hard to quantify those costs. Estimates place the cost of replacing an individual employee from one-half to two times the employee’s annual salary (or more). When an employer has to replace a lost employee, it experiences costs including hiring, onboarding, training, ramp time to peak productivity, higher business error rates, loss of special skills and relationships with customers, and general culture impacts.

Good employees are appreciating assets that produce more and more value to the company over time, which helps explain why losing them is so costly. While many employers must lay off employees due to the impacts of COVID-19 closures, there will come a time when business ramps up again. Once that happens, the employers who were able to retain valuable employees will be in the best position to jump back into business. For those employers who end up having to lay off employees, the difference in whether an employee returns or not could very well hinge on how the employer handled employee retention decisions, including whether or not the employer took measures to keep its employees on staff, such as wage reductions, and the level of communication with employees.

Preserving Employee Loyalty: Alternatives to Layoffs

So what can an employer do when it needs to reduce payroll but does not want to risk losing good employees? Communication is key. Make a plan and consider informing employees of the options that you are reviewing to reduce payroll costs. Make sure to explain the reason(s) why action is needed and place emphasis on the “positives” such as, “By reducing hours across all of Department A, we project that we will be able to avoid the need to lay off 20 individuals in the Department.” Asking employees for anonymous feedback on their preference is a great way to get them personally involved. When employees feel like they had a hand in making the decision, they are less likely to push back once that decision is put into effect.

Work Sharing Program

California’s Work Sharing Program, established in 1978, provides UI benefits to employees whose wages and hours have been reduced. In order for an employer to qualify for the Work Sharing Program, it must reduce wages and hours for employees compromising at least 10% of the employer’s regular workforce (or a unit of the workforce). The reduction must apply to at least two employees. In addition, the wages and hours must be reduced by at least 10% but not more than 60%.

In order for an employee to be eligible, the employee must (1) be regularly employed by an employer whose Work Sharing application has been approved by the EDD, (2) be part of the employer’s permanent regular workforce, (3) have qualifying wages in the base period used to establish a regular California Unemployment Insurance claim, (4) have reduced hours and wages that are at least 10% but not more than 60%, and (5) have completed a normal workweek (with no hour or wage restrictions) before participating in Work Sharing. Leased, intermittent, seasonal, or temporary service employees cannot participate in the Work Sharing program.

Work Sharing essentially works like this:

Sample Employee normally works a five-day workweek and is paid $500

Employer signs up for Work Sharing program and then reduces Sample Employee’s workweek to four days (weekly wages would be $400)

This is a 20% reduction in wages and hours. The Work Sharing benefits for Sample Employee are 20% of the Unemployment Insurance benefits that Sample Employee would receive if he was totally unemployed

If Sample Employee’s weekly Unemployment Insurance benefit amount is $300, Sample Employee qualifies for $60 in Work Sharing benefits

Sample Employee’s weekly wages are now $460, which is only a loss of $40 per week ($400 from Employer + $60 from Unemployment = $460)

Employer saves $100 per week in payroll costs for this one employee. Employer is charged for Work Sharing Unemployment Insurance benefits in the same manner as for regular Unemployment Insurance benefits

Pros and Cons of Work Sharing Program
The biggest “con” for the Work Sharing Program is that the administrative requirements can be burdensome if many employees are involved. Employers that wish to participate must first apply, then certify each week that affected employees are working reduced hours. Applications and submissions must be physically mailed to the Employment Development Department Work Sharing Program.

The biggest “pro” is that employees likely will receive more compensation under the Work Sharing Program and, as a result, may not feel the need to seek out other employment. In addition, employees who might not have qualified to receive benefits under Partial Unemployment will likely qualify under Work Sharing.

What About Exempt Employees?
Exempt employees appear to be eligible for Work Sharing; however, the employer must ensure that it does not drop salary below the minimum requirement for an exempt employee. In California, an exempt employee must be paid a salary of no less than twice (2x) the California minimum wage based on a 40-hour workweek. As of January 1, 2020, the minimum annual salary is $54,080 for employers with 26 or more employees and $49,920 for employers with 25 or fewer employees. This will increase on January 1, 2021.

If at all possible, an employer should consult legal counsel before deciding to reduce hours and wages for exempt employees. While a 2009 Department of Labor Standards Enforcement opinion letter appears to permit a bona fide reduction in both hours and salary for exempt employees, it does not mention EDD Work Sharing. Like so many things coming up as a result of COVID, California courts have not addressed this issue yet so there may be litigation risk in this area.

A better tactic may be to consider changing exempt employees to non-exempt employees. Even if a position qualifies for exempt status, an employer in California can classify it as non-exempt. Employees in California are generally “at-will.” This means an employer may change the terms and conditions of employment (to the extent permitted by law) with or without notice or cause, unless a contract, collective bargaining agreement, or terms of employment state otherwise.

Employers who are considering changing an exempt employee to non-exempt status should have legal counsel review the employment contract(s) to ensure that any changes do not violate contract terms. Employers should also consider whether this change will impact the way the employee receives other benefits and consider updating benefits policies (i.e. are your exempt employees given a different amount of vacation than non-exempt employees). Remember to clearly communicate changes, including why and how they are being made, to employees. Finally, make sure that any employee who is being changed from exempt to non-exempt status is aware of the way that changes how they work. Employers should explain, in writing, any requirements for meal and rest breaks, overtime work, recording hours, and anything else that a formerly exempt employee may not be used to considering.

Partial Unemployment Program

The Partial Unemployment Program is also a way for employers to reduce hours and allow the employees to continue working while receiving UI benefits. Pre-pandemic, the main appeal of the Partial Unemployment Program was that, unlike regular UI, it did not require employees to look for work as a condition of receiving benefits. Thus, employers could reduce hours, retain employees, and not have to worry about those employees looking for work elsewhere.

Due to the large increase in UI claims from COVID-19, the EDD is currently not requiring employees who are either partially or totally unemployed to seek work. As such, employers can simply reduce hours and encourage their employees to file for Partial Unemployment (no admin work needed). In the event that the EDD reinstates the “look for work” requirement to receive UI benefits, employers who want to participate in the Partial Unemployment Program must issue the EDD’s “Notice of Reduced Earnings” to employees before they can participate.

To qualify for Unemployment Insurance (“UI”) benefits, an employee must have earned enough wages during the base period to establish a claim, and be:

• Totally or partially unemployed;
• Unemployed through no fault of his/her own;
• Physically able to work;
• Available for work; and
• Ready and willing to accept work immediately

An employee may be eligible for Partial Unemployment Insurance benefits if they meet the requirements above and:

• The employee works less than their normal full time hours because of lack of work;
• The employee experiences a reduction in wages due to the decrease in work; and
• The employee’s gross earnings, after deducting the first $25 or 25 percent of the total earnings (whichever is greater), are less than the employee’s weekly unemployment insurance benefit amount

Partial Unemployment essentially works like this:

• Sample Employee normally works a five-day workweek and is paid $520 (40 hours a week at $13/hr)
• Employer reduces Sample Employee’s workweek to 24 hours (weekly wages would be $312)
• Sample Employee’s normal weekly benefit amount for UI is $260. To determine whether Sample Employee is qualified to receive Partial UI benefits, we need to subtract $25 or 25% of the current weekly wages (whichever is greater). 25% of $312 is $78. Because $78 is greater than $25, we calculate as follows: $312 – $78 = $234
• Since $234 is less than $260 (Sample Employee’s normal weekly UI benefit amount), Sample Employee is entitled to receive Partial Unemployment
• Sample Employee is entitled to receive Partial Unemployment in the amount of $26 (UI weekly benefit amount of $260 – the $234 calculated above = $26)
• Sample Employee’s weekly wages are now $338, which is a loss of $182 per week ($312 from Employer + $26 from Partial Unemployment = $338)
• As a comparison, this same employee under Work Sharing would receive $416 per week. Reducing employee’s hours from 40 to 24/week results in a 40% reduction. Under Work Sharing, employee receives 40% of the $260 weekly UI benefit amount- $104. ($312 from Employer + $104 from Work Sharing = $416) This results in an employee loss of only $104/week as compared to $182/week under Partial UI

Pros and Cons of Partial Unemployment Program

The biggest “con” for Partial Unemployment is that exempt employees likely will not qualify as the minimum salary to be exempt is too high for UI. Also, since currently employees have to seek out Partial UI in the same manner as the millions of other people seeking out regular UI, it is likely that they will also experience stress from EDD’s backlog and resulting delay in paying claim benefits.

The biggest “pro” for Partial Unemployment is that employers do not have to deal with the administrative requirements of Work Sharing Program.

CARES Act- Employees May be Entitled to an Extra $600/Week (Ends 7/31/20)

Under the CARES Act, qualified employees who would otherwise receive UI benefits under state law may be eligible for an extra $600 weekly payment if they are totally unemployed, partially unemployed, or unable to work due to the COVID-19 pandemic. This $600 weekly benefit amount may be available to employees collecting Partial UI benefits, as well as employees who are receiving assistance under Work Sharing. Note, this extra $600 a week payment ends on July 31, 2020, so employers that decide to reduce hours and wages should encourage employees to file for these benefits immediately.

Work Share vs Partial Unemployment

As demonstrated above, the amount of UI benefit payout to the employee will be higher under Work Sharing. This makes Work Sharing the “obvious choice” from an employee’s perspective; however, the Work Sharing program may prove too “costly” to employers if it takes up a lot of time to handle the ongoing administrative requirements. Employers should carefully weigh the costs and benefits of both programs and, if possible, consult legal counsel for advice on which choice is best and what steps need to be taken before implementing the wage and hour reductions.

Melissa Summers-Day prepared this client update. Thank you, Melissa. For more information contact Dawn with any questions at dcoulson@eppscoulson.com.