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Lowering an Employee's Rate of Pay

Posted on 6/6/2018 by Ali Oromchian, Esq.
General Rule

At times, you may be faced with lowering an employee’s wages. This could be for financial reasons or reassignment of tasks. The Federal Labor Standards Act states, "The Act does not preclude an employer from lowering an employee’s hourly rate, provided the rate paid is at least the minimum wage, or from reducing the number of hours the employee is scheduled to work."

As a general rule, an employer can lower any employee’s wage if:

1. There is no collective bargaining agreement or contract; and
2. It does not fall below minimum wage.

Risks and Pitfalls

Like any change in employment status, there are risks and pitfalls to lowering an employee’s rate of pay. Some common risks and pitfalls are:

1. This could invalidate an exempt status. By lowering an employee’s annual salary, you could be putting your staff member below the mandated salary threshold, invalidating them as an exempt employee. This means you could fall out of compliance, and are now subject to overtime, meal and rest breaks, and minimum wage requirements. If you have made this type of change in the past before knowing these regulations, you are also liable for back wages and possible penalties.

2. Potential discrimination, retaliation and/or constructive discharge claims. Without objective and tangible guidelines, your staff could feel singled out or picked on, leading to discrimination claims. Additionally, if an employee recently reported a workplace violation or voiced concerns about workplace practices, they could make the argument that they were the victim of retaliation. Lastly, your staff could also make the argument that the change in wage was a way to coerce your staff to voluntarily quit, leading to constructive discharge claims, or even act as a contributor to a hostile work environment if there are ongoing issues- making reductions in wages due to performance extremely risky.

3. Poor morale, diminished work performance and hostile work environments. It’s safe to say that any reasonable person would assume that when accepting a position, you have entered into an agreement that the work performed equates to an agreed upon wage. Although within your rights, when you break this agreement your staff may become disgruntled. This could lead to progressively poor performance and hostile work environments—this is especially true when individual staff members feel there was an inequity.

4. Your staff may be eligible for unemployment insurance. Just like you have right to lower an employee’s wages, they have a right to offset their diminished wages. The unemployment insurance program is to aid hardships on displaced workers—this includes your current workforce. The award of compensation to offset a lower wage is at the discretion of the Employment Development Department (EDD).

Tips for Success

1. Always evaluate the effects of reduced wages on exempt employees. Ensure that if a reduction does place someone below the minimum exempt salary threshold, you are reclassifying your staff as non-exempt and adhering to the legal requirements associated with this change.

2. Have clearly defined metrics for reducing an employee’s wages to ensure the reason is not discriminatory. Ideally, the safest and fairest route would be to reduce wages for all staff based on a percentage or set figure across the board. Other options would be to reduce wages from your highest paid staff members, or from higher paid departments. Alternatively, you could offset reduction in wages by offering or increasing benefits, such as floating holidays or increased Vacation days, or reduce the tasks assigned to the staff who are experiencing a reduction in wages.

3. Be wary when making reductions in wages as a means for disciplinary action. Reducing an employee’s wage as a means of disciplinary action will greatly increase your risks for hostile work environments and constructive discharge claims. Your staff should be disciplined on a progressive basis, such as verbal warnings, written violations, and eventually termination. Keep in mind, discipline should always be a means for improvement, and termination is the final stage when facing recurrent poor performance and non-improvement. If you are reducing an employee’s wages for poor performance, this should be the policy for all employees in similar situations and must be extensively documented to avoid potential discrimination, retaliation and/or constructive discharge claims.

Although reducing an employee’s wage is never ideal, at times it is necessary. When these times come, it should always be attributed to restructuring, financial hardships or as a result of a reassignment of tasks. Like all changes in an employment relationship, it is best to consult with HR professionals or an attorney to ensure full compliance.

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