Employee pay increases are cherished because they provide employees financial stability, bestow recognition for their achievements, and motivate them to perform better. 

When an employee receives a bump in pay, the act is generally met with gratitude and appreciation. Wage increases catalyze socioeconomic stability and bolster mental health, rewarding employers with driven, motivated, and positive employees in return. 

However, during adverse times, reducing an employee’s pay can have the opposite effect on morale. Unhappy employees may become less productive, challenging to collaborate with, and prone to issues. Without proper procedures, such actions could even result in litigation. 

In this OnTheClock article, we’ll examine the broad impacts of a pay decrease, address potential legal challenges, and discuss how reducing an employee’s pay can adversely affect company culture, and more. 

Can an Employer Actually Reduce an Employee’s Salary?

Yes, it’s entirely legal for an employer to implement a pay cut. In the U.S., most employment contracts are at-will, allowing both the employer and employee to terminate the relationship at any time, for any reason. This means employers have the discretion to issue both pay raises and pay cuts as they see fit. 

According to a 2023 ZipRecruiter report, 48% of 2,000 U.S. companies surveyed said they had lowered pay for certain roles.

Federal Laws Dictating Wage Reductions

Generally, federal law does not regulate pay cuts. However, there are various considerations and protections in place to safeguard employees’ rights. 

The Fair Labor Standards Act (FLSA) dictates the rules around reducing an employee’s pay. It ensures all nonexempt employees earn a wage that meets or exceeds the federal minimum wage and overtime pay at one-and-one-half times their regular rate. 

Let’s delve deeper into a few intangibles that further influence the impact of an employer-issued pay decrease. 

Minimum Wage: The federal minimum wage is currently set at $7.25 per hour. However, this amount may vary by state, and employees must receive the higher of the two wages. The FLSA is a law that focuses on ensuring minimum age, overtime pay, recordkeeping, and youth employment standards are met across the public and private sectors. Regarding pay decreases, the act ensures employees’ wages do not fall below the minimum wage. 

Contractual Agreements: If an employee has signed a labor contract or collective bargaining agreement, his or her salary may be protected from a reduction. 

Discrimination: An employee’s salary cannot be decreased because of his or her race, gender, or age. Those with disabilities shall not be discriminated against either. 

Proper Notice: Just as employees are often required to give two weeks' notice before leaving a job, employers must also provide notice and communicate the reasons for a pay reduction. It’s essential to outline these timelines and expectations clearly in the company handbook to avoid misunderstandings.  

Circumstances that May Prompt a Pay Decrease

When employers decrease an employee’s pay, the move is typically prompted by a significant event. These may include: 

Financial Difficulties: Due to poor economic conditions, faulty decision-making, or a plethora of other factors, businesses may face financial hardships. When a business’s revenues dip, it may cause the corner office to reduce employees’ pay to manage costs and keep the business operational. 

Poor Performance: If an employee is not meeting standards, a manager may choose to lower his or her compensation. Poor attendance is another reason an employer may consider reducing an employee’s wages. It’s important that employers follow any standards and procedures per the company’s handbook and clearly communicate why the reduction is occurring before implementing the cut. 

Employment Contracts: While a collective bargaining agreement can serve as a catalyst for wage increases, it may also be the cause of a salary reduction based on economic conditions, contract negotiations, or other circumstances. 

Acts of God: If a natural disaster strikes, i.e., a hurricane, tornado, flood, etc., it may cause a delay in production. If a company is unable to generate revenue, it may have to reduce employees’ salaries to compensate for its losses. Also, events like the COVID-19 pandemic may limit an organization’s bottom line, i.e., a restaurant is forced to shut its doors due to a government order, causing employees to take a pay cut. 

To Remain in Business: An employer may cut wages to keep itself afloat. Many employees would likely prefer to keep their jobs at a lesser rate than lose their jobs entirely. 

Exceptions to Pay Reduction Rules

As mentioned before, while employers have the right to reduce an employee’s pay anytime they want, there are some exceptions in place. A few examples are included below. 

Contractual Agreements: Once an employee is contracted, and the work is completed, an employer is required to compensate the employee at the agreed-upon rate. Managers can elect to reduce an employee’s pay in the same manner they may choose to increase it. However, what they can’t do is reduce the compensation after the work has been completed. Thus, any reduction in pay cannot be done retroactively; it must be implemented on a from-this-point-forward basis

Exempt Employees: Exempt employees, who are generally paid on a salaried basis rather than hourly, may not qualify for specific wage and hour provisions. However, there are specific rules regarding salary reductions for exempt employees. If an employer makes a reduction from an exempt employee’s salary, he or she may no longer be considered exempt and may be entitled to overtime pay. 

Minimum Wage/Overtime Pay: As mentioned previously, an employee’s pay cannot be reduced below the federal minimum wage or overtime thresholds. 

Public Sector Employees: Public sector employees may have to abide by specific rules and regulations that limit salary reductions. For example, if an employee misses work due to a furlough, he or she may still receive a salary. 

The Stressors that Follow a Pay Decrease

A reduction in pay can negatively impact employees in many ways, bringing forth various emotions, including stress, anxiety, anger, and even sadness.

A wage decrease has a direct impact on an employee’s mental health. A 2-24 meta-analysis conducted by the National Institute of Health found that income decreases can worsen mental health, while increases can improve it. The study found that income decreases from any source were associated with a 0.21 SD worsening of mental health measures, while income increases that lifted people out of poverty were associated with a 0.13 SD improvement. 

Financial stress is also a significant concern as employees may struggle to make ends meet. Anxiety about job security and the future may intensify, leading to a decrease in focus and productivity. 

Anger and resentment may develop toward the employer, creating a toxic work environment and damaging the employee-employer relationship. Additionally, sadness and a sense of being undervalued can diminish job satisfaction and motivation, potentially leading to higher turnover rates and decreased overall morale within the organization.

The emotional toll may decrease an employee’s loyalty and lead to higher turnover rates for an employer. The loss of experienced workers may lead to a reduction in productivity, further straining the organization’s bottom line. 

Employee Rights Regarding Pay Reduction

Outside of FLSA rights, there is no federal law that regulates wage decreases. Although federal law does not prohibit employers from reducing employee pay, several state laws require specific steps before lowering payment. 

These laws vary by state. For example, the Nevada Revised Statutes require at least seven days of written notice before an employee begins work at a reduced salary. In Michigan, employers must inform employees of any wage change before the changes go into effect or before the employee works any hours at the new wage.

In some states, employers are not required to provide any notice. However, in others, companies must give written notice, especially if the pay cut is 20% or more, as significant reductions may lead to employees leaving for valid reasons.

Employees are often unaware of wage reductions until they see it in their pay, which can be a violation. Additionally, wage cuts as retaliation for engaging in protected activities are unlawful.

This area of employment law can be confusing, and many employees may fear that complaining will cost them their jobs or cause other problems. However, if an employer is violating wage laws, there are legal resources available to hold them accountable.

Notification of Pay Cuts

As previously mentioned, employers must notify employees of pay decreases before the employee works at the new rate, but such requirements vary by state. Some states require employers to notify employees verbally, while others require written notice. Some states also specify how much time must pass after the notice is given. We’ve highlighted 10 states’ rules in the table below. 

What to Do If Your Employer Illegally Cuts Your Pay

If you believe an employer has illegally cut your pay, there are some legal avenues you may want to pursue. These are outlined below. 

File a Complaint with the Wage and Hour Division (WHD): The U.S. Department of Labor's Wage and Hour Division enforces federal wage laws, including the FLSA. If your pay cut violates the FLSA, you can file a complaint with the WHD.

State Labor Department: Each state has its own labor department or equivalent agency that enforces state-specific wage and hour laws. Filing a complaint with your state's labor department can address violations of state wage laws.

Contact an Employment Lawyer: Consulting with an employment lawyer can help you understand your rights and determine the best course of action. A lawyer can help you navigate the legal system, file a lawsuit, and negotiate with your employer.

File a Lawsuit for Breach of Contract: If you have an employment contract that specifies your pay rate, and your employer cuts your pay in violation of that contract, you may have grounds to file a lawsuit for breach of contract.

Report Retaliation to the Equal Employment Opportunity Commission (EEOC): If your pay was cut as retaliation for engaging in protected activities (e.g., filing a complaint about discrimination or participating in an investigation), you can file a retaliation claim with the EEOC.

Union Representation: If you are a member of a union, you can seek assistance from your union representative. The union can provide support; negotiate on your behalf; and, if necessary, take legal action against the employer.

File a Claim for Unpaid Wages: If the pay cut results in unpaid wages that violate minimum wage or overtime laws, you can file a claim for unpaid wages. This can be done through your state's labor department or through a lawsuit.

Seek Assistance from Legal Aid Organizations: If you cannot afford a lawyer, there are legal aid organizations that provide free or low-cost legal assistance to workers. These organizations can help you understand your rights and take legal action if necessary.

Whistleblower Protections: If you report your employer’s unlawful pay practices, you may be protected under federal or state whistleblower protection laws. These laws protect employees from retaliation for reporting violations of law.

Keep Track of Your Wage with Time Tracking Software

Time tracking software, such as OnTheClock, enhances transparency, accuracy, and efficiency in wage tracking, ensuring employees are compensated correctly for their time and work contributions.

OnTheClock can help you keep track of your wages in several ways:

Accurate Time Tracking: OnTheClock provides precise tools for employees to clock in and out, ensuring all hours worked are accurately recorded. This eliminates manual errors and ensures your wages reflect actual hours worked.

Automated Calculations: OnTheClock automatically calculates total hours worked, including regular hours, overtime, and any other custom time categories defined by your employer. This feature simplifies the process of calculating your wages, ensuring accuracy and compliance with labor laws.

Real-Time Monitoring: Managers can monitor employee hours in real-time, which helps ensure employees are getting paid for all hours worked. Real-time tracking also helps managers promptly identify any discrepancies or issues with time entries.

Integration with Payroll Systems: OnTheClock seamlessly integrates with various payroll systems, streamlining the process of transferring recorded hours into the payroll system. This integration ensures that your wages are processed accurately and on time.

Mobile Accessibility: OnTheClock’s mobile app allows employees to clock in and out from anywhere, making it convenient for remote work or fieldwork scenarios. This ensures all work hours, even those completed outside of the office, are accurately tracked and included in your wages.

Customizable Reporting: Managers can generate reports detailing employee hours worked, overtime, and other relevant metrics. These reports can be customized to meet specific business needs or compliance requirements, providing transparency and clarity regarding your wages.

OnTheClock is an exceptional tool for companies aiming to keep track of employee hours as well as many other facets of workforce management. Try the software out today, free for 30 days, and discover the virtues of time tracking! For more information, visit www.ontheclock.com.