Texas Labor Law on Pay Cuts

Employers sometimes seek to reduce employees' wages as a way to trim payroll and increase the profit margin, or in extreme cases as a way to avoid layoffs. Employers might want to implement wage cuts across the board or only in the cases of individual employees or positions. In Texas, employment wage laws dictate the ways in which employers may take such actions.

Employers have authority to decide employees' compensation. Once an employee accepts the wage agreement, whether in writing or orally, the employer must abide by that agreement until providing notice of intent to change the terms. Employers may reduce wages, according to the Texas Workforce Commission, but never retroactively. In other words, they must notify employees of a wage reduction before the employee performs any work with the reduction in effect.

Employees may never reduce employees' hourly wages below the state minimum wage, which was $7.25 per hour — equal to the federal minimum wage — in 2011. Employees also are bound by the terms of a collective bargaining agreement if one exists. These agreements, between employers and labor unions, establish wages as a contractual term, and employers may not unilaterally change the terms of the contract. The union would have to agree to the reduction as part of negotiations. State law prohibits public employees from engaging in collective bargaining.

Typically, employees may not quit their jobs and be eligible for unemployment benefits. But Texas laws recognize exceptions in some cases, including situations in which employees have received substantial pay cuts. According to the Texas Workforce Commission, a wage reduction of at least 20 percent generally gives an employee good cause to quit. The 20 percent mark is a guideline, not a strict rule. The employee almost always has good cause in the case of a retroactive wage reduction, and furthermore may seek restitution under the Texas Payday Law.

Under federal labor laws that apply in Texas, employers have exemptions from overtime pay requirements for employees that make more than a certain amount per year in the form of a salary. To maintain this exemption, employers generally may not reduce a salaried employee's pay on the basis of the quality or quantity of the employee's work. The U.S. Department of Labor allows employers to cut an employee's predetermined salary as part of a broader response to a slowdown in business — but not as part of a day-to-day or week-to-week assessment of the company's financial situation. Employers who do not follow this guideline will lose their exemption from overtime pay requirements for the employee.