As an employer, there may come a time when you want to reduce an employee’s pay. Perhaps it’s for performance-related reasons: The employee hasn’t been doing their job as well as you hoped or hasn’t met certain production metrics and quotas, so you want to pay them less if they’re going to keep their job. Your decision may also be due to financial issues within the business. If revenue has declined, reducing wages might be the only way to keep the business afloat.
That said, if you inform your employees that you’re going to be cutting their pay, they may not feel it’s fair. Some may even tell you it’s illegal or accuse you of committing wage theft. Are you allowed to cut their pay?
You can only change future compensation
You can cut an employee’s pay, but it’s important to know how to do it. Typically, you can only reduce future compensation for hours the employee has not yet worked. If they have already logged any hours for your business, you must pay them at the previous rate they agreed to before doing the job.
For example, your payment system may be set up with a lag or delay, meaning employees are essentially being paid for work they completed two weeks ago. If you inform an employee that you are cutting their pay, it won’t affect them for the next two paychecks. They still deserve their original compensation for the work they have performed, but you can legally inform them that future hours will be paid at a lower rate. This gives them a chance to seek a new job or leave their position if they don’t want to work at the reduced level of compensation.
Of course, you must always meet State and Federal minimum wage requirements. Also, check to make sure you do not have a written contract in place that commits you to a certain wage level.
For exempt employees, a minimum salary is established by law; reducing compensation below that minimum would mean the employee does not meet the requirements to be classified as exempt. The employee would then be entitled to overtime compensation and meal/rest periods. Also, the general rule is that exempt employees work full time. Reducing an exempt employee to 4 days per week does not mean you can reduce their salary by 20% and maintain their exempt status.
Finally, be careful about the process you use to decide who will have reduced compensation. Will it be across the board? If not, you will need to be able to justify why certain employees were selected for a pay reduction. Discrimination and retaliation claims could arise if you do not have a clear business justification for the compensation decisions.
In short, desperate times may call for desperate measures…..but be smart about the process.
