How to Handle Salary Reduction for Employees

Reducing an employee’s salary is not an easy decision to make. Unfortunately, salary reduction might be necessary. If an employee is not succeeding in their position, it may be time for a pay cut.

A salary reduction is much more than just changing your payroll. There are laws you need to follow when reducing an employee’s salary. Learn more about salary reductions, reduction laws, and how to effectively communicate salary reductions to employees.

What is salary reduction?

A salary reduction, or pay cut, is when an employer lowers an employee’s salary amount for various reasons.

Reasons for a salary reduction

You may reduce an employee’s salary because of a decrease in sales or poor employee performance.

Many businesses find themselves struggling financially at some point. You may not be able to afford to pay an employee at a higher salary rate if sales and profits have decreased.

To save money, you may implement a pay reduction, rather than laying off necessary employees. Employees are generally not pleased about pay cuts, but may decide to keep their positions.

A salary decrease because of financial issues may not always be permanent. You can always revert employees to their previous salaries if profits increase.

The most common reason for a salary reduction is when an employee is demoted at work. Demotion typically occurs when an employee demonstrates poor performance, or lack of skills, or when a position is eliminated. You can give fewer responsibilities or demote the employee to another position entirely.

Although these are commons reasons why you may reduce pay, you sometimes don’t need a reason to reduce an employee’s salary. For example, you may not need a reason to reduce an employee’s salary if employees are hired at will and don’t have a formal employee contract.

Salary reduction laws

There are several pay reduction laws you must follow as an employer.

You can give a salary reduction legally unless the following occurs:

  • No prior notification of the pay cut
  • The pay cut is discriminatory
  • There’s a contract stating otherwise
  • The pay cut is below minimum wage

A salary reduction can’t occur unless you notify the employee of the pay cut first. Inform employees of any salary reductions before changing their pay rate. If an employer cuts pay without notifying an employee, it can be considered a breach of contract, depending on if there’s a contract involved.

Businesses can’t target employees for salary reductions by age, race, gender, or religion. If an employer does, it’s discriminatory and not a legitimate reason for a salary reduction. Be sure to comply with equal employment opportunity laws if you reduce wages.

Employees with individual contracts or agreements (e.g., union contracts) are normally protected from salary or wage reductions. It is illegal if an employer cuts pay for a contracted employee if the contract explicitly states the salary can’t be reduced to a lower amount.

Employers can’t reduce wages to an amount lower than the state’s minimum wage. Check with your state for your minimum wage rate before reducing salaries.

Want to learn more about workplace laws?

Download our free guide for the scoop on workplace laws like the Fair Labor Standards Act, Equal Pay Act, and more.

Salary reduction letter

To notify employees about upcoming salary changes, consider making your own salary reduction letter.

Include the date, employee’s name, reason for the salary reduction, and the effective date on your salary cut letter. You may also want to include a section for the employee to sign to show they understand the reason for the reduction.

Personally deliver the letter to the employee and discuss the reason for the salary reduction. Make sure to follow all pay reduction laws before informing your employee.

Need a simple way to keep track of employee wages? Use Patriot’s online payroll software to easily make changes to your payroll. And if you opt for our Full Service payroll, we will take care of withholding and depositing taxes for you. Start your free trial today!

This article has been updated from its original publication date of December 10, 2018.

This is not intended as legal advice; for more information, please click here.

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