Pay Cut Laws: Cutting Hours at Work Without Causing a Lawsuit

Date: September 16, 2017

 Resources to better manage your employees via SHRM

As an alternative to permanent layoffs, or to trim costs without eliminating jobs, employers may want to consider cutting hours at work or reducing wages. Below are some frequently asked questions employers have.

1) May an employer reduce the wage or hours of a nonexempt employee?

Yes. If a non-exempt employee is paid on an hourly basis, an employer may lower the employee’s hourly rate of pay so long as the rate paid does not dip below the applicable federal, state, or local minimum wage, whichever is highest. If you pay a non-exempt employee a salary, you may adjust the employee’s salary or hours so long as his or her effective hourly rate does not fall below the federal, state, or local minimum wage, whichever is highest.

2) May an employer reduce the predetermined salary amount or hours of a salaried exempt employee?

Yes. According to guidance issued by the U.S. Department of Labor, an employer may make a prospective reduction in pay for a salaried exempt employee during a business or economic slowdown, provided the change is not used to evade salary basis requirements and the employee still receives at least $455 per week. The salary reduction must reflect long-term business needs rather than a short-term salary deduction. If state law requires a higher minimum salary for exempt employees, you cannot reduce an exempt employee’s salary below that minimum. 

When reducing an exempt employee’s salary, you may also reduce the hours the employee is expected to work. But employers should ensure that the reduction is carefully framed and use “salary basis” language so it does not appear as though the employee is being paid on an hourly basis.

3) Does an employer have to provide notice to an employee before cutting hours or compensation?

Generally, yes. Most state wage payment and collection laws require employers to provide employees with reasonable advance notice for any change in the employee’s pay rate, salary, or covered salary hours. Since these laws typically do not specify the amount of notice required, employers should provide as much advance notice as is practical before the change goes into effect. 

4) If an employee is represented by a union, does the employer have to negotiate with the union for cuts in the employee’s compensation or hours?

Yes. Reductions in an employee’s compensation or hours generally must be negotiated with the union that represents the employee, unless the collective bargaining agreement gives the employer the right to make such reductions. 

5) How should an employer determine which employees will receive a cut in hours or pay?

Carefully. An across-the-board wage cut which applies to all employees presents the lowest legal risk because an employee will have a difficult time arguing that the employer treated them differently based on a protected characteristic, such as race or sex. If you choose to apply pay or hour reductions to certain positions or to employees in particular jobs, you must use objective criteria in selecting the positions and jobs. The criteria should be well-defined, documented, and applied consistently to show that the employer’s decisions are nondiscriminatory.

6) May an employee receive unemployment compensation for a reduction in his or her wage or hours?

Maybe. A reduction in compensation, whether or not accompanied by a reduction in hours, may render an employee eligible for unemployment compensation under applicable state laws. Employers should contact an employment law attorney for more information. 

Manage Your Employees

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This information does not constitute legal advice, and you should consider consulting an attorney about any laws and regulations that are applicable in your state, locality or particular type of business.



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