Pay Reduction Programs May Pose Problems for Employers, by Jerry Bloch

Many employers are looking for ways to cut expenses. Some employers are considering reducing pay with a corresponding reduction in the work schedule.


This can be problematical, as an article in the Los Angeles Daily Journal on April 10, 2009 by Lonny Zilberman and Lisa A. Hill points out.


Exempt employees must be paid a salary of at least $33,280, which is two times the minimum wage for a 40 hour week. If an exempt employee’s salary is reduced below that amount, that employee will become non-exempt, entitled to all of the protections afforded such employees (overtime, meals and rest breaks, etc.).

The same result may follow a reduction in the salaries of exempt employees even if the reduced salary is above the $33,280 minimum salary. The risk of a change in status to non-exempt is heightened if the reduction in pay is directly related to a reduction in time or number of days worked.

This is based on a federal regulation (29 CFR §541.118(a)(1)), which states that an employee will not be considered to be on a salary basis [and thus exempt] … if deductions from his predetermined compensation are made for absences occasioned by the employer or by the operating requirements of the business. Accordingly, if the employee is ready, willing and able to work, deductions may not be made for time when work is not available.”

If, for instance, an employer were to cut pay by 20% and simultaneously provide the employees with one day off per week, there would be a heightened risk that the employees would be considered non-exempt.

The less risky approach would be to cut pay for exempt employees without any corresponding formal reduction in the work schedule. The employees should be left to decide for themselves the schedule they need to work to get their jobs done, which may be less than a full time. Any abuses can be dealt with on a case by case basis.

The risk is also heightened if employees are told that the reduction is temporary. Employees should not be told that the reduction will be in effect for a limited period of time.

These issues may make it more difficult to gain the employees’ acceptance to reduction-in-pay programs but there could be problems down the road if they are not properly addressed.

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