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Are They Right For You?

As the COVID-19 pandemic continues to wreak havoc on the global economy, United States employers are continuing to examine ways to reduce costs while at the same time both limiting the financial impact on employees and preserving their ability to ramp back up when circumstances allow. State short time compensation programs, also known as work share programs, provide one avenue for cost savings that may be appropriate for some employers.

Where available, these programs provide pro-rated unemployment compensation benefits to groups of workers whose hours are reduced by their employer on a temporary basis in lieu of layoffs. In addition, the recently passed Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) provides a federally-funded $600 per week unemployment compensation supplement to those who participate in such programs through July 31, 2020.

This Alert provides additional details about state short time compensation programs and answers frequently asked questions about the pros and cons of participation.

Where are short time compensation programs available?

Currently, the following 27 jurisdictions have short time compensation programs in place: Arizona, Arkansas, California, Connecticut, District of Columbia, Florida, Iowa, Kansas, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nebraska, New Hampshire, New Jersey, New York, Ohio, Oregon, Pennsylvania, Rhode Island, Texas, Vermont, Washington and Wisconsin. The CARES Act provided federal funding for other states to enact short time compensation programs, so additional states may do so in the near term.

How do short time compensation programs work?

The specific terms vary by state, but generally speaking, short time compensation programs are available to employers who engage in hours and pay reductions (between 10% and 60% of normal weekly hours worked, with the exact permissible ranges varying by state) for defined groups of employees in lieu of layoffs. To be eligible, employers must apply with the state agency and obtain approval for the plan. The reduced hours and pay must be in lieu of layoffs that would otherwise occur, and employers may not lay off employees covered by the program while it is in place. Finally, employers must maintain health, retirement and other fringe benefits for employees in the program.

What unemployment compensation benefits do employees get?

Generally speaking, short time compensation programs allow employees who experience weekly hours and pay reductions to receive a corresponding percentage of the weekly unemployment compensation benefits that would be available to them in the event of a layoff. For example, if an employee’s weekly hours were reduced 20%, the employee would receive 20% of the weekly unemployment compensation benefit she would receive in the event of a layoff.

Moreover, under the CARES Act, any employee who receives unemployment compensation under a short time compensation program is also entitled to an additional $600 per week through July 31, 2020.

That sounds pretty good. Can you give me an example?

Let’s assume you have an employee in New York who earns $40,000 per year, for a weekly pay rate of $769.23 ($40,000/52), whose hours and pay are reduced by 20% as part of a short time compensation program. The employee will now take home $615.38 (80% of $769.23) in pay. Assuming the employee would qualify for the maximum weekly unemployment compensation benefit if laid off, which is $504 under New York law, she would be eligible for $100.80 in unemployment benefits (20% of $504). The combined amount of salary ($615.38) and unemployment benefits ($100.80) would be $716.18. But note, under the CARES Act this employee would also be eligible for $600 per week in federal benefits through July 31, 2020, such that the sum of her salary and all unemployment compensation would be $1,316.18 ($716.18 + $600) for that period of time.

The maximum weekly benefits vary by state, ranging from $240 in Arizona to $823 in Massachusetts ($1,234 with dependents).

What is the difference between unemployment compensation benefits available under short time compensation programs and those available for hours reductions even the absence of such a program?

In most states, even absent a short time compensation program, an employee whose hours are reduced may be eligible for unemployment compensation benefits. However, those benefits are typically offset by earnings such that they are not as robust as the benefits available under short time compensation programs, and those benefits phase out when an employee’s remaining earnings are too high.

For example, let’s look again at a New York employee earning $40,000 per year whose hours and pay are reduced 20% (from five eight-hour workdays to four). In order to be eligible for unemployment compensation benefits in the absence of a short time compensation program, a New York employee must work less than 4 days per week and earn $504 or less. Without a short time compensation program in place, this employee will not be entitled to any unemployment compensation benefits (both because she works too many days and earns too much). As a result, the employee also would not qualify for the federal $600 CARES Act unemployment compensation supplement.

Are short time compensation programs available to exempt employees?

Yes. Both exempt and nonexempt employees whose hours are reduced are eligible to participate in short time compensation programs. It is important to ensure that the remaining salary for any exempt employees who participate in such programs satisfies the federal and applicable state salary basis test. In addition, although the Department of Labor guidance generally permits employers to reduce hours for exempt employers temporarily without jeopardizing their exempt status (as long as it is not done routinely), it is important to work with counsel to understand any risks to the exempt status that participation may pose under state law.

What other benefits do short time compensation programs provide?

In addition to allowing employers to reduce payroll costs while minimizing the financial impact on employees, short time compensation programs allow employers to maintain an engaged, motivated workforce. When financial circumstances improve, the employer will have a full staff of trained, experienced workers, avoiding the costs of hiring, onboarding and training new employees.

How long does it take to get state approval for short time compensation programs?

The time for approval varies by state. Most states will approve or deny an application within 15-30 days, with New Jersey committing to doing so only within 60 days.

What are the downsides for employers?

While short time compensation programs provide a number of benefits, they do come with restrictions. As noted above, to be eligible to participate, an employer must agree not to engage in layoffs and to maintain health, retirement and fringe benefits for employees for the duration of the program. In some states, such as Pennsylvania and New York, employers who establish a short time compensation program must reduce the hours of all employees in the affected unit by the same percentage. Perhaps more importantly, short time compensation programs come with administrative burdens. Employers must submit plans for approval by providing the following information to the relevant state agency: (a) the number of employees in the “affected unit”; (b) the percentage of the hours reduction; (c) a description of how employees will be notified of the plan in advance; (d) an estimate of the number of layoffs that would need to occur in the absence of the short time compensation plan; and (e) a certification that affected employees may participate in training to enhance their job skills during the program. In addition, in some states, employers must submit weekly reports during the program. Employers with employees in more than one state will need to submit multiple applications, and because state participation requirements vary, the programs may need to be tailored to each jurisdiction.