Salary Reduction

Is a Salary Reduction Even Legal?

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Definition:

In a salary reduction, an employer lowers the amount of pay that you receive as payment for the job you perform. 

Employers have many reasons for why they might reduce your pay. These are the two most common reasons why an employer might do a salary reduction.

  • An economic downturn has affected the company's sales, profitability, or ability to succeed as a business. The company needs to save money but the employer has decided that he cannot operate without the current number of employees.

    Thus, an employee layoff, employee furloughs, or any solution that will affect his ability to serve customers and create product are not viable choices for the business.

    In a salary reduction situation, employees are generally not happy with the pay cut. But, depending on the economic circumstances, they may appreciate keeping their jobs.

    When a company pursues a salary reduction course of action, however, employees expect the pay cuts to affect all employees - especially when they're told the cuts are across the board.

    In a client company a few years ago, the CEO explained at a company meeting that to avoid filing for bankruptcy, he was asking all employees to take a pay cut. People grumbled, but most were committed to their company and their jobs. Everyone went back to work.

    Then, a gossipy employee in accounting informed her friends that the across the board did not mean everyone. Executives’ pay was exempted from the cut. As you can imagine, everyone in the company heard the gossip within 24 hours.

    They requested a meeting with the CEO. He made matters worse. He informed all of his employees that he had exempted the executives’ pay because he couldn’t afford to lose them. I did not attend that meeting, but heard about it for months. I’m not sure employee morale ever recovered.

    The moral of the story is that your employees will work with you willingly to retain their jobs – and in hopes that the reduction is short term by non-exempt employee. Salary reduction for exempt employees is more complicated. See more about doing legal pay cuts.
  • A second reason that an employer may offer a salary reduction is when your job changes substantially, either by choice or by demotion. The employer may have decided that your work is not meeting standards but she thinks you have a lot to contribute – in a different job. You may have decided that you want a job with less responsibility while you take care of a sick, elderly parent, or raise children.

    For employee morale and a harmonious workplace, employers need to maintain a modicum of salary fairness among people who hold the same job. If you made more, you’re likely to find yourself with a pay cut.

    Once again, the employer must communicate this to you in advance of lowering your pay so that you have the opportunity to decide on your course of action. A pay cut also frequently occurs when an employee decides to leave a current management role to go back into a job as an individual contributor.

    A salary reduction, whether imposed, or due to the choices you are making is not a pleasant event. Anything that affects your economic viability is scary. In the event of an involuntary salary reduction, make sure you ask your employer what you need to do to earn the higher salary again. When you’re feeling defeated, it’s encouraging to have your eye on the next goal.

    Also Known As: pay cut