COVID-19: Think Twice Before Cutting Employees’ Pay

If you are a small business that’s struggling, you may be considering reducing employees’ pay. There are some caveats you should be aware of, which vary by employee classification.

think-twice-before-cutting-employees-pay
Before employers cut workers’ pay, they need to know if their employees are nonexempt, exempt, or H1-B or E-3 visa holders — and contemplate other important factors

According to the Society for Human Resource Management, “50% of small businesses can’t afford to pay employees for a full month under quarantine.” Consequently, the United States Congress passed the Families First Coronavirus Response Act, mandating paid leave for eligible employees impacted by COVID-19.

Nevertheless, many small businesses are still struggling financially, having to take out loans or resort to drastic measures like slashing employees’ pay. But before you cut your employees’ wages, consider the legalities.

Can employers reduce employees’ pay?

Generally, yes — but there are some caveats, which vary by employee classification.

Nonexempt employees

“50% of small businesses can’t afford to pay employees for a full month under quarantine.”

Under the Fair Labor Standards Act, you can decrease nonexempt employees’ pay, provided the reduced amount is no less than the federal or state minimum hourly wage, whichever is greater.

If a nonexempt employee shows up for work as scheduled but is sent home early for COVID-19 reasons, the FLSA does not require you to pay them for hours not worked. You also do not have to pay them for any hours they would have worked had the pandemic not occurred.

However, some states mandate employers to provide reporting time pay to nonexempt employees who show up for work as scheduled but are sent home early instead. Depending on state law, the employer might not have to give reporting time pay if a state of emergency ordered (or recommended) business closure.

The state may have specific instructions for reducing nonexempt employees’ pay. For example, in California, pay reductions can be made only against hours worked after the pay change, not against hours worked prior.

Exempt employees

Per the FLSA, exempt employees must receive their full pay for any workweek in which they do any work. This amount cannot be less than $684 per week (under the FLSA), or, if applicable, the state-mandated amount. In other words, you can lower an exempt employee’s pay, as long the reduced amount is at least $684 per week or the applicable state-required amount — whichever is higher.

Note that you should disburse exempt compensation via the appropriate payment basis.

Acceptable Payment Form(s) Per FLSA Exempt Category:

wdt_ID Type of Exemption Salary Basis Fee Basis Hourly Basis
1 Executive X
2 Highly Compensated X X
3 Administrative X X
4 Professional X X
5 Computer Employee X X X

Unlike nonexempt employees, exempt employees are not paid according to hours worked, so they should always get their full agreed-upon pay, unless there’s a legally-allowed deduction — such as the employee performing no work for the entire workweek.

If you’re undergoing a business slowdown due to COVID-19, you can cut your exempt employees’ pay to no less than the required FLSA minimum ($684/week) or the applicable state minimum. But if you cannot afford to pay your exempt employees at least the minimum requirement, you can reclassify them as nonexempt and pay them hourly instead.

Make sure the reclassification is being done for a legitimate business purpose that reflects your long-term needs, rather than as a recurring short-term fix — which could trigger the Department of Labor’s suspicions. (Frequently switching employees from exempt to nonexempt or vice versa could seem as though you’re trying to circumvent certain aspects of the FLSA.)

Make sure the reclassification is being done for a legitimate business purpose that reflects your long-term needs, rather than as a recurring short-term fix — which could trigger the Department of Labor’s suspicions.

H-1B and E-3 visa program employees

Employers generally cannot lower the salary of an H-1B or E-3 visa holder to less than the amount (or range) stated in the approved DOL labor condition application for that worker. Paying less than the approved amount would likely violate the prevailing wage requirements for those visa categories.

Even if the reduced pay amount is within the prevailing wage requirements, you’ll still need to file the proper forms with the DOL and the U.S. Citizenship and Immigration Services beforehand in order to make the change.

Other factors to contemplate

Discrimination and retaliation

Pay cuts must be done without discrimination and retaliation.

Under federal equal employment opportunity laws, the following classes are protected from employment discrimination:

  • Race
  • Color
  • Religion
  • Sex
  • National origin
  • Age
  • Disability
  • Genetic information

For instance, if COVID-19 is hurting your finances, you cannot decrease your female employees’ wages as a solution — while keeping your male employees’ wages intact. Further, you cannot retaliate against employees, such as by slashing their pay because they filed a discrimination complaint against you.

Some states have their own rules prohibiting employers from cutting employees’ pay as a means of retaliation.

Employment contracts and benefits

Did you establish your employee’s pay by an employment contract or agreement? If so, you cannot reduce their pay without renegotiating the contract/agreement. Think far and wide here, as pay reductions can impact other aspects of employment, including promised severance and employee benefits. For instance, a salary reduction might lower the employee’s severance amount and matching 401(k) contributions.

Employee notification

Out of consideration for your employees, try to give them as much notice as possible before shrinking their pay.

Most states require employers to give employees advance notice of changes in their pay rate, salary, or work hours. For example, employers in North Carolina must notify employees in writing at least 24 hours before making “any changes in its wage agreements that result in the reduction in pay or wage benefits,” according to the N.C. Department of Labor. Some states don’t specify how much advance notice should be given.

Out of consideration for your employees, try to give them as much notice as possible before shrinking their pay.

Unemployment insurance

Reduced pay might make the employee eligible for unemployment benefits. In California, for example, employees whose work hours have been cut through no fault of their own may qualify for partial wage replacement. Also, the CARES Act delivers additional unemployment relief for workers affected by COVID-19.

Though the state is ultimately responsible for determining whether someone qualifies for unemployment benefits, you can at least let employees with reduced pay know about your state’s unemployment program.

As noted by SHRM, the coronavirus pandemic is forcing employers to cut pay. Therefore, you’re not alone in utilizing this survival tactic. Just make sure you understand your legal obligations and potential ramifications.

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