Can You Cut an Employee’s Pay and Not Get Sued?

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Anytime you want to cut an employee’s pay, you run the risk of getting sued. It’s just that simple. This is especially true if the employee is in a protected class. Anyone can try to file a lawsuit for any reason. Let’s just get that out there.

That said, the reason and circumstances surrounding a cut in pay are key.

In the U. S., employers can cut pay as long as the employee isn’t covered by a collective bargaining agreement or some other agreement, like an employment contract. The cut also cannot reduce the pay to a level that’s less than the minimum wage. If the position is  exempt from the overtime laws, (Fair Labor Standards Act), then you must keep the salary above the minimum to maintain exempt status. Just know that there is the new minimum salary level of $47,476 that goes into effect December 1, 2016, and that if the person is to stay exempt, that test must still be met.

Note: the employee may be eligible for unemployment compensation for the pay that’s lost.

How Much Notice Must I Give?

In Florida, where I am, there are no laws that address when or how you may cut an employee’s pay or whether an employer must provide notice prior to the reduction. That said, the reduction can only apply to hours worked after the status change. (i.e. Salaried workers would be paid the new rate the following full workweek, as you cannot separate out hours without giving up exempt status). It’s up to you–in Florida– if you want to give notice and how far in advance you want to do so.

To check your state wage payment laws, check with your state Department of Labor or look up your state on The Lunt Group’s Employment Law Handbook.

When is it Illegal to Cut Pay?

  • When you don’t give notice (in some states). Pay cuts can’t be retroactive (in all states).
  • When you cut pay in response to protected activity. e.g. An employee files a sexual harassment complaint, and then you cut the employee’s pay as a result. (Title VII retaliation). An employee complains about working conditions or wages on social media, and you cut pay as a result. (NLRA retaliation–NLRA covers non-union employees, too).
  • When you only cut pay for specific classes. e.g. It’s discriminatory to cut all Asians’ pay, but no one else, or pay for everyone over 40, but no one else, etc.
  • When the cut drops pay below minimum wage, even if the employee agrees to the cut. Where federal and state minimums differ, the higher rate applies.
  • When there is a contracted amount or there is an employment contract. Most common in union situations where each job’s rate is clearly spelled out.
  • When the exempt employee pay cut is temporary. One requirement for exempt employees is that their pay rate remains the same, regardless of hours worked. A temporary cut is illegal, e.g. cut for a few weeks or months, but a permanent cut is legal.
Circumstances Matter

Circumstances are important when choosing to cut pay. If a business is foundering, then it’s critical that the CEO take the same pay cut as everyone else. To do otherwise would further decrease morale and set people off to find work elsewhere. Taking the cut would still be financially shocking, just not as emotionally devastating, because the pain would seem to be equally spread.

There are times, though, when an employee experiences a substantial job change–down, not up.  Demotions in jobs may also equate to demotions in pay. It all depends upon your wage/salary bands and  your position descriptions.

Say you have several different offices of different sizes, each managed by a branch manager. While the core management duties of each manager are the same, e.g. manage people, hire and fire, evaluate, etc., the size of each branch is different. Corresponding responsibilities would also be different. One manager may have 20 employees, while another has only three. The branch manager of the largest branch sits participates in meetings with the president and other department managers to make significant decisions for the enterprise, while the others do not. If each branch manager is working under the same position description and is paid within the same salary band as the others, demoting one and cutting pay could get tricky, especially if the one being demoted is in a protected class. There’s room for legal action.

The fix is to update position descriptions for each branch and denote them as level one, two, three, whatever. Next, you would update you salary bands to correspond with how each branch prices out. Broadcast the update throughout the enterprise and specifically communicate with each branch manager as to the new job titles and salary bands. Once you’ve done this, you’re better set in moving forward with the demotion as long as you have your documentation in order. (The updates should be done for all positions, especially if they haven’t been done in a while).

Once you have your ducks in a row, you should feel more comfortable proceeding with the demotion and pay cut.

As always, whenever you are unsure about the steps to take in tricky employment situations, a labor attorney can always help you make the right decisions to keep you out of court.

Information provided on this site is not legal in nature. All reviews and opinions are submitted and based upon extensive research, experience in the human resources and labor relations fields, and are not, in any way, legal opinions.
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Can You Cut an Employee’s Pay and Not Get Sued?

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