With the economy sitting at a standstill and revenue streams drying up, companies are looking for ways to reduce costs. And some are cutting salaries and benefits to help make ends meet.
“There is no workplace in the US not affected by everything that is happening,” said Vanessa Matsis-McCready, assistant general counsel and director of human resources at Engage PEO. “Businesses are trying to figure out how to keep the doors open, and sometimes the best way to do that is to make pay reductions.”
Labor costs typically consume the biggest part of the budget, so pay reductions can help employers avoid layoffs.
“In 2008, businesses were more aggressive with layoffs,” said Russ Adler, labor and employment attorney in New York City, referring to the last recession. “We are seeing more creative attempts to address the issues. Furlough and pay reductions you didn’t see as much in prior downturns. It’s still scary for employees, but it’s better to have 80% of income than a layoff.”
What you need to know
The majority of workers in the US are “at will” employees – meaning they can be fired or have their hours or pay reduced – at any time for any reason that isn’t illegal or discriminatory.
Workers under contract would likely be protected from a pay reduction, unless the contract includes language that allows for a cut.
Pay cuts should happen broadly, like by position or across a department. There can also be different tiers of reductions. For instance, executives would take a 20% reduction, managers a 15% cut and everyone else 10%.
Recently, ESPN asked commentators to take a 15% pay cut because of the financial impact of the coronavirus, La-Z-Boy announced a salary cut of 50% for senior management and 25% for salaried workers until further notice. Tesla also reduced pay for US workers.
Pay reductions cannot be retroactive – they can only affect future pay checks. While there is no federal law that requires employers give notice of a pay cut, some states require a heads up. For instance, New York requires a notice of at least seven days in advance of a pay change.
Employers should aim to give as much notice as possible. “A good rule of thumb would be one or two pay periods of advance notice for the reduction in wages,” said Matsis-McCready.
Workers who lose hours or get a reduction in pay might be eligible for unemployment benefits in some states.
For non-exempt workers, which usually means they’re hourly employees, a reduced paycheck can not dip below either local or federal minimum wage laws – whichever is higher.
Pay for most exempt employees, who tend to be salaried, can not drop below $684 a week (or the state’s required threshold, if it’s higher) without being moved to non-exempt status.
What you can do
No one wants to hear that their salary has been cut. And the news isn’t fun for employers to deliver, either.
“Employers aren’t doing this because they want to, but they have no choice,” said Adler.
There is no guarantee workers will return to their original salaries – even if the company sets that as a goal.
“Prudent employers are putting in cautionary language,” said Adler. “These are not contractual agreements.”
He recommended trying to get as much information as possible when you get the news: Ask which departments, positions and employees were affected, the new rate and expected length of the reduced salary. You should also confirm if there are any other changes to your employment, like benefits or the ability to use paid time off.
You can try to negotiate for other things – but tread lightly.
“You don’t want to be tone-deaf in the request you make,” said Matsis-McCready. She added that inquiring about a more flexible schedule or potential training when the economy improves could be acceptable.
Other cuts that could be coming
Brace yourself: Pay reductions could be just the first round of cost-cutting measures.
Some companies have also reduced retirement benefits. La-Z-Boy, for example, also froze the company’s 401(k) match when it implemented pay cuts.
Employers can also stop paying out unused paid time off at termination if there’s a written policy change and its done in accordance with the law, said Matsis-McCready.
She added that expenses, like conferences and tuition reimbursement plans, could also be put on hold if the economy stays halted.
Changes to health care coverage likely wouldn’t come until open enrollment season. “It’s not unheard of to see a higher cost deductible or a different offering when you go to re-enroll this year. You will also probably see changes to wellness programs.”