Attention Employers: Implementing Salary Reductions? First, Think it Through

It was all over the national news. On his first day of taking office, President Obama froze the salaries of his top White Office staffers—that is for those making more than $100,000. “Families are tightening their belts, and so should Washington,” said Obama.

Most employees understand times are tough for businesses right now.
As nearly everyone struggles to make their way through this challenging recession, U.S. employers are also struggling to look and plan ahead. When some employees hear that pay raises are off the table this year—effectively freezing employee pay—most are not surprised by the news. Given these dire times, some of us are not surprised by hearing talk of salary or pay reductions.

In order to cut costs, salary reductions are not usually an employer’s first choice.
I am certain that cutting employee salaries or wages is a very difficult decision for employers to make. It is a decision they do not take lightly, and it is not normally the first decision made when evaluating cost-cutting measures. Most business leaders look at a lot of other alternatives including layoffs, furloughs, etc. However, we are seeing that some companies are considering salary or wage reductions as an alternative to layoffs. As it is, many employers have accepted that this recession may last awhile and slashing headcount may be unproductive in the short and long-term.

If you are considering pay or salary reductions, instead of pursuing layoffs or other cost-cutting actions, you may want to keep in mind the following considerations:

1. First, be sure and think it through. Remember to check both federal and state laws that apply to wage and hour regulations. Keep in mind related regulatory factors such as state-mandated minimum wage laws (if applicable to your business). You will also want to stay in compliance with all federal laws and regulations.
2. Make sure you are aware of the laws governing how much workers must be paid, including federal and state minimum wage rates. It is unlawful to reduce employee wages below the minimum that is federally or state mandated. States can set their own minimum wage requirements and many of them do. So, in addition to complying with the federal minimum wage requirement, you must also comply with state minimum wage requirements of the state or states, if applicable, that you have employees on the payroll. For more information, contact those respective states’ labor departments. For more information about the federal minimum wage, visit the U.S. Department of Labor Web site at http://www.dol.gov/dol/topic/wages/minimumwage.htm 
3. Many states require that employees be given advance notification if their wages or salaries will be reduced. For more information, contact your state labor department. In all cases, you want to do the responsible thing and notify affected employees regardless of state and federal requirements. 
4. Watch for potential violations of the Fair Labor Standards Act (FLSA). When employees are classified as exempt under the FLSA’s salary basis test, employers are prohibited from docking the pay of exempt employees except in very limited circumstances. Reducing salaries or pay of employees with an exempt classification status could jeopardize that status. Currently the minimum salary for an exempt classified employee is $23,660. In order for an employee to be classified as exempt, his or her salary cannot go below the current federal minimum for exempt classification. 
5. Salary and pay reductions can affect benefits; for instance, benefits such as employees’ 401(k) contributions. Or another example: If an employee’s life insurance coverage is based on his or her salary, a salary reduction could affect this coverage. 
6. Communication is critically important. How will you let employees know of impending salary reductions? Will you let them know in a group meeting or in a one-on-one setting? If you communicate the information on an individual basis, you want to make sure that everyone hears the same information. 
7. Develop a communication plan that is based on a strategy. For example, if your decisions are based on the state of the economy, you should elaborate in your communications to your employees. You may want to say something such as: “These are tough times for everyone, and everyone probably has been hearing on the news about companies slashing costs through layoffs, salary and wage freezes and other similar measures,” etc.  

In any case, employers should always be honest and upfront with employees, as much as possible. If revenues are declining, you should let them know what is happening and how it’s affecting business decisions. If you have had a round of layoffs, you should acknowledge the process and let them know what you expect might happen in the future. You should not make any false promises and, whenever possible, avoid surprise actions.

In a future HRTools.com Insight, I will expand on this topic and provide additional general information. Ultimately, employers should understand that implementing salary reductions is a complicated issue that can encompass federal and state employment law concerns. Therefore, employers are encouraged to seek legal counsel.

Are you considering pay or salary reductions, as an alternative to pursuing layoffs? If so, you may want to review this checklist.