Things to Consider Before You Begin Making Reductions in Pay

Business owner making pay cuts

Reductions in pay  are always a difficult decision to make. They may play a major role in keeping a business afloat or adjusting to new job requirements. Whatever the reasons are, it's up to the business owner to ensure 100% compliance with the Fair Labor Standards Act.

The COVID-19 pandemic forced many companies to implement pay reductions to continue working and avoid layoffs. Even though many states are already recovering, it will take a while for some businesses to get back in shape.

When cutting employees' salaries, it's vital to remember your legal obligations, consider each employee's situation, and try to explore all possible alternatives.

Communicate Reductions in Pay  in Advance

The employer must notify the employee about making reductions in pay in advance. Both parties need to come to an agreement about the salary amount. If the employee doesn't agree, they have a right to quit.

The notification time depends on state law. For example, in North Carolina, employers must notify their staff at least 24 hours before any pay reduction while in Missouri the notification period is 30 days. In other states, like California, the term isn't specified.

It's illegal to reduce an employee's pay retroactively. Even if an employee decides to quit after hearing about the reduction in pay, their salary should be paid as agreed upon before the notice.

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Besides the lack of notification, other factors that can make reductions in pay illegal are:

  • Retaliation — making a pay reduction in response to an employee's behavior (such as complaining about sexual harassment).
  • Discrimination — making pay reductions  based on race or gender (cutting the pay of all female employees while keeping rates for males the same).

For hourly workers, it's illegal to reduce rates to an amount lower than minimum wage.

Consider Employee Relations

Reductions in pay  always affect employees' morale. However, in some situations, especially during economic downturns, many workers would rather take a pay reduction  than be laid off. That's why many business owners prefer to cut wages instead of losing their top talent entirely.

Nevertheless, reductions in pay can be highly demoralizing. Any reduction in wages forces employees to adjust their lifestyles. Your staff may lose the ability to fulfill certain financial obligations, like loan payments. As a result, reductions in pay could lead to:

  • Distrust — employees could feel cheated and be afraid of further cuts.
  • Turnover — some employees would rather leave than accept a reduction in pay.  
  • Lower productivitylow morale often leads to lower productivity, thus affecting the company's success.

When you assess employee relations, you may gain insight into how to handle pay reductions  and whether or not they are better than layoffs.

Will My Employees Be Eligible for Unemployment if Their Pay is Reduced?

If you cut working hours significantly, your employees could be eligible for unemployment benefits. The opportunity to receive such benefits as well as their amount varies from state to state. To be eligible for unemployment benefits:

  • Hours or wages need to be cut through no fault of the employee.
  • An employee must be willing to work full time and search for such work. During the COVID-19 pandemic, some states like California, have waived the work search requirements for unemployed workers. 
  • An employee is able and available to work.
  • An employee worked a minimum number of hours and received minimum wage amount prior to the pay/hour cut.

While workers are seeking unemployment insurance, employers are responsible for filing partial unemployment insurance claims and weekly Low Earnings Reports. For example, before the pandemic, in California, employers had to issue Notice of Reduced Earnings for employees to participate in the Partials program.

Issuing reports and notices is time-consuming and tedious. By working with a PEO (Professional Employer Organization), you will gain a trusted partner to help automate your unemployment benefits giving you more time to focus on your core business needs. 

Look for Other Avenues

While making reductions in pay may seem like the only way to survive during a crisis, other cost-saving alternatives may be more beneficial, including:

Many of these alternatives require extra involvement from the HR department. By partnering with a PEO, you can ensure a smooth transition while managing changes in the workplace.

Taking a Smart Approach to Reductions in Pay  

While reductions in pay are difficult to accept by both employers and employees, they may be necessary to help your company stay afloat. If you decide to make reductions in pay, it's vital to comply with the law while considering your employee relations.

Working with a PEO can help you implement pay reductions, identify cost savings opportunities, and ensure full HR compliance. By collaborating with experts on complex aspects of this process, you can free yourself up to focus on successfully navigating your company through economic downturns until you are back up and running at full speed. 

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