Reducing an employee’s pay is no minor thing. A pay cut can be anything from illegal, financially troubling, emotionally unsettling, to devastating. Before cutting an employee’s pay, employers should consider the effects. Sometimes the repercussions aren’t worth it.
Timesheets.com has a free pay raise/cut calculator you can use when the time comes.
When a Pay Cut Is Acceptable
In some situations, employees accept the change, like when everyone in the company or department is getting a pay cut for the benefit of the business. In other cases, employees welcome it, like when they want less responsibility. Sometimes, a pay cut is intended to get employees to quit. There may be better ways to go about this, but at least in this case the effects align with the intentions.
When a Pay Cut Really Cuts
Most of the time, employees don’t see a pay cut in the same light as their employers. Thoughts usually circle back to, “This isn’t fair” and, “Is this even legal”.
In a recession or any time a company struggles to survive, a pay is a valid strategy that keeps the business afloat. Loyal employees may be sympathetic and willing to hang on through a hard time– that is of course if upper management is also taking a pay cut. If the reason is to line the pockets of upper management, though, employees won’t take kindly to the company hardship.
Reasons employees don’t appreciate
- Corrections to what might have been a poor choice in original salary
- Complaints by other employees about one employee’s rate
- The realization that the employee is overpaid for the location or job description
- Cash flow problems, if upper management doesn’t also take a pay cut
Mortgage and other bills
When employees buy homes, lenders base their loans on their income. Employees also buy cars, sign up for classes, school, and all the other things that cost money. Most people budget themselves based on how much money they earn. If you cut their pay, they may face new monetary hardships.
Emotional effect of a pay cut
A pay cut speaks a thousand words and those words usually hurt. Unless your objective is to get an employee to quit, be aware that a pay cut may prompt a job hunt. Even if it’s not true, employees usually see the pay cut as a demotion or take it as a hint that they are not appreciated. In either case, they will leave at the first opportunity. If you really value the employee and want them to stay, you might be better off just swallowing those few extra bucks per week and instead tell the employee that you cannot offer a raise this year. While that’s never fun either, it’s not as hard a blow as a pay cut.
When a Pay Cut Is Not Legal
Most of the time it is legal to reduce an employee’s pay but there are some instances in which it isn’t.
- Surprise – A surprise pay cut is illegal. Employers must pay employees the agreed-upon rate. If employers wish to change that rate, they can do so but first employees must agree to it. If they choose not to agree to it, they can discontinue service with the company. However, employers cannot tell employees that the paycheck they already worked was earned at a lesser rate of pay.
- Retroactive – Employers also don’t have the right to tell employees that their pay rate is changing and that the rate is retroactive some number of days. The pay rate can only change for any time after informing the employee.
- Retaliation – If an employee complains about sexual harassment or other inappropriate office behavior, the employer cannot lower her pay rate in retaliation. It is not the right way to deal with this situation and retaliation is against the law.
- Discrimination – Pay rates cannot lower based on race or gender. For example, if the company is struggling, the employer cannot legally cut the rates of all female employees to improve cash flow.
- Breach of Contract – When employers have a contract with employees, they have a duty to pay them a certain rate for a certain amount of time. Once this time period is up, the employer can notify the employee of the pay cut and renegotiate the contract.
Additionally, regarding employee classifications, hourly employees must always make at least minimum wage, even after a pay cut. Exempt employees’ rates of pay cannot fluctuate. In other words, you couldn’t ask your exempt employees to take a pay cut during the slow months. If you needed to do this, you would have to switch the employee from salary to hourly.
Also, under current Department of Labor rules, salaried employees must make at least $684 per week. If you reduce an employee’s wages, they may fall under the required threshold and you would have to change them to “hourly” status. Before you reduce their wages, ensure that you think through all the possibilities and calculate accordingly. If you aren’t compliant with the law, you may face penalties.
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