Most employees look forward to that time of year when they anticipate a pay raise, but they probably never imagined that their pay could go down. However, it can and does happen more frequently than most people think – especially in recent times due to the coronavirus pandemic. There are situations when it is legal for an employer to reduce their employees wage rate, but there are also situations where it is not legal for them to do it.
When is an employer allowed to cut your pay?
While we wish that no one would ever be put in a situation where they would have to lower an employee’s pay, the harsh reality is that sometimes business owners are forced to reduce pay to ensure they stay in business. If a business finds itself in the position of having cash flow problems, they may opt to lower an employee’s pay rather than shutting down the company altogether. Of course, most people would prefer to get paid at a lower rate than to face layoffs, but the situation is not ideal for the employer or employee.
A salary reduction can significantly reduce employee morale in addition to their finances. If a company does find they need to lower their pay, it would be in the best interest of all involved if management gets the same percentage pay cut as well to maintain transparency and fairness
What about salaried employees?
Salaried employees are no exception when it comes to a potential pay cut. While full-time employees must be paid the agreed-upon salary for work that they have already done, they are still subject to a salary decrease. However, an employer needs to inform a salaried employee in advance, and the employee must agree to the lower salary rate.
Unfortunately, an employee can’t just say, “No thanks” to the reduced salary rate so many often end up quitting because they can’t agree on a new salary rate. A boss can’t require you to work at a pay rate you didn’t agree to, but you can’t force them to pay you at a rate they don’t agree with.
In some scenarios, an employment contract or a collective bargaining agreement may include a compensation clause, meaning an employer cutting wages would be a breach of contract. Even then, it’s possible the very same contract might include a variation clause allowing your employer to present a new employment contract that reflects the lowered wages. Union contracts are usually more protected when it comes to pay cuts (in addition to overtime pay and furloughs).
And Hourly Employees?
Hourly, non-exempt employees have a different set of rules entirely. After a pay cut, these employees may be entitled to partial unemployment benefits, depending on their state.
That said, your employer can legally reduce your employee hours from full-time to part-time and lower, and can cut your pay as much as they want – as long as they never violate the Fair Labor Standards Act (FLSA) by dropping below the minimum wage (either federal or state, the threshold being whichever is lowest). Also, if you work overtime during your pay period, you are still entitled to time and a half.
What about job changes?
Another time that it is appropriate for an employer to cut an employee pay is when there is a new job change or position change. While most people associate changing a job with a promotion and an increase of pay, there are instances where an individual could be demoted. If a demotion occurs and the previous rate of pay is above what most people are making in the new position, then a pay cut is warranted.
What about a pay reduction notification?
There is no federal law requiring employers to notify their team after making changes to an employee’s salary, but there are many state laws that require it.
n those states your employer is required to inform you that they will be cutting your pay before you work even a single hour at the new rates. While it varies from state to state, some states allow an employer to merely say, “Starting tomorrow you are going to earn $10 an hour rather than $14.” Other states may require your employer to notify you in writing of the pay reduction.
Luckily all states have one rule in common, and that is your boss can’t cut your paycheck because they are angry you have decided to leave or they need some extra money for the business.
When is it illegal for an employer to cut your pay?
There are quite a few situations where it is considered illegal for an employer to cut pay. It is essential to know about these situations so that action can be taken if necessary.
- No notification was given about pay cut. Employers are required to provide some form of notification before a pay cut. Again, this varies state to state.
- When you have a contract in place. This situation is more common when it comes to dealing with unions, which clearly define the pay rate for each job. An employer cannot lower the pay of an employee whose pay rate is set by a contract.
- If the pay cut drops your salary below minimum wage. Dropping below the minimum wage is always illegal even if an employee agrees to it.
- Discriminatory pay cut. An example of a discriminatory pay cut would be if all men got a pay cut, but no women. Alternatively, if anyone over the age of 40 got a pay cut, but no one younger than 40. Both are considered illegal.
- Pay cut in response to protected activity. If an employee complains that their employer is sexually harassing them and then their pay is cut as a response, that is considered retaliation and is illegal.
What should you do if your employer cut your pay illegally?
If you are in a situation where you find out the pay cut you received was illegal after you quit a job, you can file a complaint with your State Department of Labor. While this isn’t a guarantee that they can help you, they can at least follow up and look into the situation.
If you are still employed and your pay was cut a legally, it is best to try to work out the problem before immediately getting the government involved. One of the first steps you should take is to clarify with payroll whether the pay was cut intentionally or by mistake. Mistakes do happen, and if that is the case, then your payroll department can quickly fix the error.
If after speaking with your payroll department you determine that your pay is correct you should talk with your boss to find out why your pay was cut. Remind them that it is illegal to lower your pay without some form of notification. If speaking to your boss doesn’t help, the next best step would be to go to your HR department to see if they can assist.. If after talking to HR and exploring all of your other options with no agreeable outcome, then it is time to call your State Department of Labor.
The materials available at this web site are for informational purposes only and not for the purpose of providing legal advice. You should contact your employment lawyer to obtain advice concerning the legality of any particular issue or problem. Use of and access to this website or any of the e-mail links contained within the site does not create an attorney-client relationship between us and the user or browser.