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Can Company Reduce Salaries of Exempt Employees?

My company is in Arizona. As a cost savings measure, we are considering reducing all employee’s salaries 5-10% This would include both hourly and exempt employees. These costs are necessary to avoid layoffs. Our staff attorney does not believe we can reduce the exempt employees salaries without jeapordizing their exemption status. I disagree because we are not treating this on an individual basis and not because they missed working certain days in a work week. We are wanting to do this across the board. Can we reset (reduce) the exempt employees’ salaries without jeapordizing their exemption status?

It is absolutely legal and ethical for your company to permanently reduce the salary of exempt employees across the board. This is a step that many employers are taking during the current economic crisis. It is more humane to cut salaries by 10% than to lay off 10% of your staff, and has the same financial effect.

Your staff attorney would be right if you were saying to exempt employees: You worked fewer hours than usual this week, so we are paying you less than your full weekly salary. That would endanger the employees exempt status, because it seems to tie salary to number of hours worked. Ironically, if you frame the wage reduction as temporary, just until business picks up again, it has the same effect.

However, you are completely within your rights to tell the exempt employees: Due to financial conditions, your salaries have permanently been reduced by 10% without any change in the number of hours that you work. Exempt status does not automatically make employees immune from wage cuts. When the companys financial performance picks up, the salaries may be increased — but do not tie this change to any increase in hours worked.

In order to avoid charges of illegal discrimination, it is important to apply this wage reduction fairly. By implementing it across the board, you are doing so. Some states require that employees be given up to 2 weeks notice that their wages will be reduced. In other states (and under federal law) as long as the employee is informed before the shift starts, it is legal to reduce wages. The assumption is that any employee who decides not to accept the wage cut will quit.

We hate to disagree with your staff attorney and nothing on this site is legal advice, but if the situation is as you present it, we have to disagree with your lawyer on this one.

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This entry was posted on Tuesday, December 23rd, 2008 at 6:02 pm and is filed under
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4 Responses to “Can Company Reduce Salaries of Exempt Employees?”

  1. L. Persson Says:

    Of course, if you reduce the salaries of exempt employees below the mandated minimum [typically $455/week] they can no longer be exempt.

  2. Caitlin Says:

    Hi L! Right you are! Thanks for making an excellent point!! ~ Caitlin

  3. catherine sidler Says:

    Can a non profit company reduse a saleried persons income by 50%? Can they lower their income to $455.00 wkly

  4. hrlady Says:

    If it’s a cost saving measure and its being administered in a fair and equitable manner, yes. Per the FLSA, as long as the employee meets certain guidelines including earning a minimum of $455 per week an employee can be exempt from overtime regulations. Employers must notify employees of reduced wages before their shift and some states even require two weeks advanced notice.

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