As Illinois employers ponder their futures amid the COVID-19 crisis, many are trying to determine whether some form of reducing employees’ hours is the solution. Many have inquired whether their employees can make up the difference in pay through unemployment compensation (UC) benefits through the Illinois Unemployment Insurance Act, and now with enhanced benefits through the federal Coronavirus Aid, Relief and Economic Security (CARES) Act. The answer to this question is, as with so many legal questions, it depends.

Many employers are doing everything they can to keep their employees employed, potentially with all their benefits, but with the closure or partial closure of businesses (some by governmental orders) and a general reduction in work, they simply cannot afford to keep everyone fully employed. Employers are contemplating many scenarios to try and stay afloat short of outright termination, such as reducing hours to part time each day, or working every other day, or even one week on and one week off. The question becomes whether this is good for the employee and for the employer. Further complicating the resolution of this question is the way in which the different scenarios impact the amount of an employee’s ultimate compensation, when state unemployment compensation and payments under the CARES act are considered. The analysis of how these payments will impact each other has developed as payments are actually being made and federal and state agencies interpret the requirements. Accordingly, we have revised this Alert since our original publication to take into consideration these additional developments, which may provide further clarification for employers.

Payment for Reduced Hours

The Illinois Unemployment Insurance Act (the Act) generally provides for benefits when employees become unemployed through no fault of their own. Importantly, the Act also allows for payment to employees whose hours have been reduced, in some circumstances. Currently, individuals who are unemployed are provided with a “weekly benefit amount” (WBA) of 47% of their average weekly wages, as calculated by looking at the highest two quarters of earnings in the Base Period. The Base Period is the first four calendar quarters in the last five complete calendar quarters that the individual worked prior to their benefit year, which is the quarter in which they became unemployed. Then, the two highest quarters are divided by 26 weeks, and reduced down to 47%. Individuals can receive this amount if they are entirely unemployed, up to a maximum of $484 per week (for individuals with no dependent spouse of children), or up to $667 with certain dependents.

Whether the employee whose hours are reduced will be entitled to regular Illinois unemployment compensation is subject to a somewhat confusing mathematical formula. (Detailed examples are provided below to try and simplify the math.) Section 402 of the Act provides that individuals are provided with their WBA, minus the “part of wages (if any) payable to him with respect to such week which is in excess of 50% of his weekly benefit amount…” Translated to numbers, if the individual earns less than 50% of his/her WBA, he/she will receive his/her full WBA that week, in addition to the actual wages earned. Put another way, if the employee is receiving approximately 23.5% or less of his/her average weekly earnings (because 50% of 47% of average weekly earnings is 23.5% of average weekly earnings), that employee will receive his/her full WBA that week.

On the other hand, if the individual is earning more than 50% of his/her WBA, he/she may or may not receive a reduced WBA, depending on how much the individual actually earns in a week. The following scenarios (1 through 7) do not take into consideration any additional federal benefits under the CARES Act; the CARES Act scenarios (8 through 11) are found in that section. In addition, note that there are many other factors that may reduce an individual’s WBA, including a payout of vacation pay, receipt of workers’ compensation benefits, receipt of a pension, etc. These scenarios assume no reductions; however, reductions may be relevant. For this, and other reasons, it is recommended that employers do not tell employees that they are or are not eligible for UI benefits, or advise on what the amount may be. Instead, employers should merely advise employees to apply for benefits, as employers do not ultimately control any of the additional factors to be considered. These scenarios are for illustrative purposes only to assist employers in understanding the confusing formulae.

  • Scenario 1: Employee earns an average of $1000 per week. WBA would be $470 (47% of $1000) in a week in which no work is performed.
    • If employee is reduced to two days per week (or the equivalent part-time work of 16 hours), and is thus earning $400 that week, the formula is:
       
      • 50% of WBA = $235
      • $400 is more than 50% of WBA
      • $400 - $235 = $165
      • $470 WBA - $165 reduction = WBA of $305
      • Therefore, WBA that week is $305, plus earnings of $400 = $705 received
         
  • Scenario 2: Employee earns an average of $1000 per week. WBA would be $470 (47% of $1000) in a week in which no work is performed.
    • If employee is reduced to half hours during the week, and is thus earning $500 that week, the formula is:
       
      • 50% of WBA = $235
      • $500 is more than 50% of WBA
      • $500 - $235 = $265
      • $470 WBA - $265 reduction = WBA of $205
      • Therefore, WBA that week is $205, plus earnings of $500 = $705 received
      • Therefore, the employee receives the same $705 whether working 16 or 20 hours in a 40-hour week as seen in Scenario 1.
         
  • Scenario 3: (Same as Scenario 2 but with different pay rate): Employee earns an average of $600 per week ($15/hr for 40 hours/week). WBA would be $282 (47% of $600) in a week in which no work is performed.
    • If employee is reduced to half hours during the week, and is thus earning $300 that week, the formula is:
       
      • 50% of WBA = $141
      • $300 is more than 50% of WBA
      • $300 - $141 = $159
      • $282 WBA - $159 reduction = WBA of $123
      • Therefore, WBA that week is $123, plus earnings of $300 = $423 received
         
  • Scenario 4: Employee earns an average of $600 per week ($15/hr for 40 hours/week). WBA would be $282 (47% of $600) in a week in which no work is performed.
    • If employee is reduced to 20% of hours during the week, and is thus earning $120 that week, the formula is:
       
      • 50% of WBA = $141
      • $120 is less than 50% of WBA
      • Therefore, no reduction of WBA
      • WBA that week is $282, plus earnings of $120 = $402 received
      • (The approximate cutoff of the percentage of earnings an employee can receive in a week and not have any reduction of WBA is 23.5%)
      • Therefore, the employee working 20 hours and the employee working 8 hours (assuming a 40-hour week) will receive nearly the same total amount ($423 v. $402)
         
  • Scenario 5: Employee earns an average of $1000 per week. WBA would be $470 (47% of $1000) in a week in which no work is performed.
    • If employee’s hours are reduced to 75% of usual hours during the week, and is thus earning $750 that week, the formula:
       
      • 50% of WBA = $235
      • $750 - $235 = $515
      • $515 > $470 WBA and therefore, employee is not eligible for any UC that week (and is not considered unemployed that week).
      • Therefore, earnings that week are $750, for working approximately 30 hours (assuming a 40-hour work week).
      • If employee is working 70% of hours (approx. 28 hours), then $700 – 235 = $465. $470 - $465 = $5 in WBA for this employee. (This will prove to be a very important $5 because it will allow employee to be eligible for additional payment under the CARES Act.)

The following scenarios and calculations are for an employer who reduces hours in full week increments by having employees work one week on, then one week off.

  • Scenario 6: Employee earns $1000 per week, with a WBA of $470. If employee works one week, he/she earns $1000, and if he/she does not work at all the following week, he/she will receive $470 in unemployment, for a total of $1470 over two weeks. Compare this to Scenario 2, in which the reduction in hours each week by 50% yields the employee only $1410 over two weeks (i.e. slightly less).
     
  • Scenario 7: Employee earns $600 per week, with a WBA of $282. If employee works one week, he/she earns $600, and if he/she does not work at all the following week, he/she will receive $282 in unemployment, for a total of $882 over two weeks. Compare this to Scenario 3, in which a reduction in hours per week by 50% yields the employee only $846 over two weeks.

Therefore, under regular Illinois unemployment law, it would seem that the better situation for the employee would be to reduce hours in full week increments rather than partial reductions each week. With the CARES Act, however, as will be shown below, this is not the case.

Federal CARES Act and $600 Federal Pandemic Unemployment Compensation

Under the CARES Act, the federal government will provide up to $600 per week in additional Federal Pandemic Unemployment Compensation for those receiving unemployment compensation. Illinois has already started to make these $600 payments to Illinois workers. The CARES Act also extends unemployment benefits to 39 weeks from the existing 26 weeks under Illinois law. This $600 payment is provided even if the employee was not making that much at the time s/he lost his/her job, or if combined with regular Illinois UC ends up receiving more than his/her prior wages. There is also no reduction in the $600 payments for employees who are still working, albeit reduced hours. As long as an employee is receiving any regular UC during a benefit week, he/she will qualify for the $600 payment. This may cause many employees to prefer to not return to work, or prefer to be fully unemployed. In Illinois, however, in order for laid off employees to be considered “actively seeking work,” they have to be prepared to return to their job as soon as their employer is reopened. This would seemingly mean that if they turn down the work because they prefer the UC rather than working, they should no longer be eligible for UC benefits. The employer would have to report to the IDES this change in status.

Below are additional scenarios taking into consideration the $600 CARES Act benefit:

  • Scenario 8: Employee earns $1000 per week, with WBA of $470. If weekly hours are reduced to point where employee is earning only $400 (i.e. about 16 hours), then employee would receive $305 from “regular” Illinois UC (Scenario 1), plus $400 wages, plus additional $600, for total of $1305, or $2610 for two weeks.
     
  • Scenario 9: Employee earns $1000 per week and is fully unemployed, such that he/she would receive $470 in Illinois UC unemployment benefits plus $600 under CARES Act, for total of $1070/week, or $2140 for two weeks.
     
  • Scenario 10: Employee earns $1000 per week and is scheduled to work one week on and one week off. He/she would earn $1000 in Week 1, then in Week 2, receive $470 in “regular” Illinois UC benefits, plus $600 under the CARES Act, for a total of $2070 for two weeks.

Therefore, in each of these Scenarios, the employee is receiving more money than he/she was earning when working full time, which would have been $2000 over two weeks. In fact, the employee working the most hours (Scenario 10) would receive the least overall (albeit still more than his prior average wage). This extra payment is even more pronounced the lower the employee’s wages. For example, an employee who was only earning $400 per week prior to full unemployment will now receive $188 in Illinois UC, plus $600 under the CARES Act, for a total of $788, nearly double his/her regular wages.

Compare these scenarios to the following:

  • Scenario 11: Employee earns $1000 per week and has hours cut to point of earning $750/week (Scenario 5) (or anything more than about 70.5% of prior weekly earnings), then the employee is not considered unemployed or underemployed and is not eligible for regular UC, and thus also is not eligible for the $600 under the CARES Act, and only receives $1500 for two weeks of work.

Thus, in Scenario 11, the employee who is still earning about 75% of their prior wages will receive about a third less than those fully unemployed (Scenario 9), and nearly half as much as someone working 16 hours/week – Scenario 8). Whether or not this was the intended result by the legislation, and whether or not it is fair to employers, this is the law that employers have to work with at this time. Employers will need to consider what is best for their business, as well as what is best for their employees, and this information should help employers understand how Illinois law and the CARES Act work when making these difficult staffing decisions.

Other Important Considerations

When determining whether to reduce hours, days, or weeks in order to keep employees employed instead of a full termination, there are several other issues and pitfalls to consider.

  • Employers should check with their medical insurance carriers to make sure that employees are still eligible for health insurance even with the reduced hours. If employees are required to utilize COBRA, and/or if the employer agrees to cover employees’ insurance payments, employers should consider requiring a written agreement providing for the reimbursement of those payments from future paychecks once the employee is back to full-time work. The agreement should also provide that if the employee does not return to full time work (whether voluntarily or involuntarily), the employee must reimburse the employer directly. Under the Illinois Wage Payment and Collection Act, the employee must agree in writing to all deductions from paychecks at the time the deduction is made, but a reimbursement schedule for future deductions agreed upon at the time of the agreement can suffice.
     
  • Before reducing the pay of any employee, the Illinois Wage Payment and Collection Act requires that employers give written notice in advance of the reduction (and we recommend obtaining an acknowledgement of receipt either with a signature or electronically if the employee is working at home).
     
  • Employees whose pay or hours are significantly reduced may be allowed to voluntarily quit and still claim “good cause” due to this “substantial change” and still qualify for unemployment compensation. Thus, it is possible that if the employer significantly cuts hours in an effort to keep the employee employed, the employee might still choose to quit and be entitled to regular and enhanced unemployment benefits. It is unknown at this time how the IDES will handle this situation.
     
  • Employers should consult with their attorney for advice pertaining to the Fair Labor Standards Act, the Illinois Wage Payment and Collection Act, and the Illinois Minimum Wage Law prior to cutting the hours or salaries of FLSA-exempt employees.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.