Pay cuts are difficult for employers to justify. Employees facing a cut in income struggle with budgeting for everyday costs and family obligations. However, there are ways to preserve the employer-employee relationship when implementing pay reductions until the company gets back on solid economic footing.
Draft a communication plan. Construct a strategic plan for reducing employee salaries, beginning with employee communication. Provide clear and consistent messages to employees to prevent water-cooler conversations and gossip from fueling workplace speculation.
Schedule regular, all-staff meetings to discuss your organization’s economic position. Keep employees informed. Demonstrate your commitment to maintaining employee trust and confidence by developing effective solutions to reducing incomes that are effective and consistent with applicable labor and employment laws.
Explain why pay cuts are necessary in plain language without sugar-coating the circumstances. Share with employees the kinds of alternatives the company is working on to avoid layoffs. Engage employees in dialogue about pay reductions; consider their comments and input as valuable and glean suggestions from them.
Create an open-door policy for employees who have specific questions about pay reductions. Schedule times for compensation and benefits specialists to discuss ways to modify employee benefit selections that can reduce payroll deductions. Remind workers of available resources, such as the employee assistance program, which can counsel employees about household budget strategies and ways to maintain their standard of living on a reduced income.
Calculate your company’s total compensation and labor costs and the amount you need to reduce your organization’s labor costs for salaried employees. Compare your calculations to compensation and benefits budgets for the current year and subsequent years. Determine how projected salary increases may be reduced to limit the impact on total compensation costs.
Review your employee records and double-check whether salaried employees are accurately classified as exempt and non-exempt workers. Pay careful attention to salaried employees who are non-exempt; these are workers who receive a salary but are nonetheless entitled to overtime pay.
Determine if you are reducing the pay of all salaried workers or if the pay reductions only apply to salaried exempt employees or to salaried non-exempt employees. This is critical in developing a pay reduction policy because overtime pay regulations, as well as federal and state laws pertaining to employee classification, must factor into your pay reduction policies.
Ensure your pay reductions do not adversely affect employee classification for administrative-, executive- and professional-exempt categories for salaried employees. Under the Fair Labor Standards Act's exempt classification tests, salaried workers must meet minimum weekly wage amounts to be considered exempt in certain positions. Weigh the pros and cons of alternatives, such as furloughing or unpaid time off. Consider how these alternatives may seriously impact exempt classification if salaried employees’ time off does not meet certain guidelines, such as improperly furloughing employees for partial days or partial work weeks.
Consult federal and state laws concerning pay reductions. The U.S. Department of Labor enforces the Fair Labor Standards Act, which contains regulations on minimum wage, working hours, overtime pay and employee classification. Some state laws codify measures on employers reducing pay for salaried employees. For example, Texas pay agreements laws contain specific guidelines concerning pay reductions, as these reductions for Texas employees may justify an employee's decision to resign, resulting in eligibility for unemployment compensation.
Explore ways to reduce compensation costs using other measures than reducing employees’ cash compensation. Look at benefits that employees do not use, such as merchandise discount programs or pet insurance coverage. Conduct a brief employee survey about the types of benefits employees feel are most useful versus benefits employees say they could do without if it means reducing their salaries to maintain those benefits.
- Dickenson Peatman & Fogarty; New Options for Employers: Reducing Exempt Employees Salaries and Days of Work Simultaneously; September 2009
- Missouri Department of Labor and Industrial Relations: Reducing/Deducting an Employee's Wages
- Employee Benefit News; Employers Reduce Salary, Not Staff; Kathleen Koster; June 2009
- U.S. Department of Labor: Fair Labor Standards Act Advisor
- Texas Workforce Commission: Pay Agreements
Ruth Mayhew has been writing since the mid-1980s, and she has been an HR subject matter expert since 1995. Her work appears in "The Multi-Generational Workforce in the Health Care Industry," and she has been cited in numerous publications, including journals and textbooks that focus on human resources management practices. She holds a Master of Arts in sociology from the University of Missouri-Kansas City. Ruth resides in the nation's capital, Washington, D.C.