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Jan13

Reduction in salary employees

I need to write a letter to inform all salaried employees that we will cut everyone to a 4 day a work week. They will only work 8 hours a day, so we will only pay them for 32 hours. They can choose their day off as long as we don’t have key people taking the same day off. We truly need to reduce our payroll but keep the business open 5 days a week. Are we setting up ourselves for any potenial lawsuits. How do I write the letter?

Okay, lets put on the brakes here. If these are salaried exempt employees, you certainly can reduce their work week to 4 days instead of 5 days. But, you will still be legally responsible for paying the employees their entire weekly (5 day) salary, under the FLSA or federal Fair Labor Standards Act. Any attempt to tie the number of hours worked to their compensation, will make these employees non-exempt. You will instantly be obligated to pay them time-and-a-half for any overtime worked in the past 3 years, and any overtime worked in the future.

Under the FLSA, when an exempt employee is ready, willing and able to work, and no work is available, you must pay that employee. That is the situation here, if you go to 4 days per week. The employee must be paid for working 5 days per week.

If these are exempt employees, almost the only ways to reduce your payroll costs are: a) Lay off one or more exempt employees and/or b) reduce the hours worked by hourly employees, requiring exempt employees to take up the slack.

Assuming that these are salaried non-exempt or hourly employees, these would be our suggestions: For non-exempt or hourly employees it is perfectly legal to reduce the employees workweek to 8 hours, 4 days per week and pay them for only 32 hours per week. We have a few suggestions about how you can best handle this. Being an employer sometimes means taking the bull by the horns and telling people something they do not want to hear. This is one of those situations.

You may want to issue a memo rather than write a letter — to many people a letter implies two-way communication. It implies that you are making a suggestion. You are not. You are implementing a new company policy. As an employer, you have the right to do so without input from employees.

You might want to word it like this: Due to financial considerations, XYZ Corp [your company name] will implement a standard four day, 32 hour work week, beginning on [date.] Each employee is expected to work four 8-hours shifts. Employees who work more than 32 hours per week are subject to discipline, up to and including termination.

Our suggestion is that you determine which weekday each employee will take off each week, based on business needs. Unless you are absolutely positive your employees can resolve this amiably themselves, with adequate management coverage on each day, you do not want to leave this up to chance. (The employees have no motivation to make this work. They may think that if it does not work, you will go back to paying everyone for 40 hours each week.) You should also request that employees furnish you with a written schedule of who will work on which day.

The only part of your post that is problematic is “we will only pay them for 32 hours.” Well, no. You can discipline or terminate an employee who works more than 32 hours without permission. But under the law, you must pay hourly or non-exempt workers for every hour they work. If Amy works 34 hours one week, even without permission, you must pay her for them. You can discipline her or even terminate her for working excess hours without approval, but she must be paid for the hours she actually worked under various state laws, and the federal FLSA.

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This entry was posted on Tuesday, January 13th, 2009 at 9:25 am and is filed under
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21 Responses to “Reduction in salary employees”

  1. CA Worker Says:

    In the state of CA I was told that a company can reduce the standard work day of an exempt employee from 5 days a week to 4 days a week and only if their salary goes under 33,280 that they would be now considered a non-exempt employee. Is it all in the way the message is given to an exempt employee. Do you not tie the reduction of the work day into hours work? You basically state that the standard work week will be 4 days instead of 5 days. Please help me understand this.
    Please do not post my name
    Thank you

  2. Caitlin Says:

    Hi CA Worker! An employer in California or any state can reduce an exempt employees salary, as long as that change is permanent and is not directly related to a reduction in hours. In other words, the employer cannot say “I’m paying you less this month, because you are working fewer hours this month.” However, the employer can say, “All salaried employees will have a 20% decrease in salary permanently.” Any indication that the change is temporary or based on the number of hours worked, can change the employees exempt status to non-exempt.
    Ideally, this permanent salary reduction would remain in effect for at least 3 months and would involve a number of exempt employees, or all exempt employees, not just one or two.
    Reducing hours at the same time is a grey area. In some areas, the courts have found that the employer can change the number of hours when implementing a permanent salary reduction for exempt employees. In other areas, the federal courts have found that any change in the number of hours will result in the employees becomming non-exempt. So employers need to either be familiar with the court decisions in their area, or not change the number of hours.
    There is also a minimum salary requirement to be an exempt employee, in many states and under federal law. HTH, and thanks for reading the blogs!~ Caitlin

  3. Worker in Michigan Says:

    On April 10, 2009, I was informed by the owners of the company that I work for that, effective immediately, they were going to reduce both my salary and the hours worked by 20% due to economic difficulties. They claimed that since I had not taken any pay cut because of the change in our insurance benefits (I opted out of taking the company’s health insurance and was paid a $50 waiver per paycheck), that it was my turn to make a sacrifice. I have worked for this company for over 17 years and there is only 1 person with seniority over me. I have been salaried since the first day of my employment. My employers specifically told me that the one employee who has seniority over me would have to take a pay cut because she was going to now have to pay insurance for her family (She actually opted to drop coverage on her family because she could not afford the decrease in pay). I was also told that instead of making an across the board cut, that they looked at individual circumstances. There was one other long-term employee was forced to take a 50% cut and one employee (employed for 1 year) who volunteered to take a 5% pay cut. No other employees were forced to make this type of change in hours and salary. We did lay-off 5 people in the middle of January. Do I have any legal options under the FSLA?

  4. Caitlin Says:

    Hi Worker in Michigan! If we understand correctly, the employer is selectively imposing pay cuts of up to 50% on employees based on their personal circumstances (i.e., do they support a family, are they using the company’s health insurance, etc.) Obviously, that is not fair and a poor business practice. Ideally, the employer would impose pay cuts on everyone, or use objective work criteria. Although the employer is probably trying to be compassionate, they are basically setting themselves up to judge employee’s lifestyles. And, the employer cannot know all the relevant facts about each employee’s circumstances.
    So obviously this is a bad idea. But it is not necessarily illegal. Under federal law, it would be illegal if the employer was basing these salary decisions on the employees sex, race, color, religion, pregnancy, disability, or age (between 40 and 70). It is illegal to discriminate against employees based on those factors. In addition, Michigan law outlaws discrimination based on weight, height, marital status, or arrest record.It is legal to discriminate against employees based on other factors (although it is very unprofessional to do so.)
    Suppose John and Mary both have the same job. The employer decides to give Mary a pay cut, because both she and her husband work. They decide to leave John at his current salary, because he is the “family breadwinner.” This would likely be illegal discrimination based on sex. If John were Chinese and Mary were African American, that might very well be discrimination based on race or color.
    Ideally, business decisions such as this would be based on clear-cut, objective criteria and would be documented in detail. There is no requirement that the employers base these decisions on seniority.
    If you believe that you are the target of illegal discrimination, contrac the EEOC at http://www.eeoc.gov or the state of Michigan at http://www.michigan.gov/mdcr.
    You can also try to file a complaint about having your wages and hours reduced as an exempt employee, although as long as the reduction is permanent, it is probably lawful. HTH, and thanks for reading the blogs!~ Caitlin

  5. Worker in Michigan Says:

    Thanks Caitlin for that information. Now I need to clarify, when I was told about this change in my salary, I was told that it was temporary. So by my employers saying that it is temporary, it changes me to a non-exempt status and I may go after them for any time that I have worked in excess of my regularly scheduled hours. Is this correct and is there any other option that I may have here?

  6. Caitlin Says:

    Hi again, worker! Yes,under the federal FLSA regulations, when an employer temporarily reduces the employees work hours and wages, the employee is no longer exempt. It certainly creates the appearance that the employee never was exempt, and is being paid based on the quantity or quality of work.In many cases, the employee can then file a claim with the U.S. (or state) department of labor and is entitled to overtime pay for the past 3 years.

    Read more about this at: http://www.dol.gov/esa/whd/regs/compliance/fairpay/fs17g_salary.pdf

  7. Marcia Mason Says:

    Is it illegal to reduce the hourly wage of a non-exempt employee but not reduce his/her hours worked? I need to do this but need the business to stay open 5 days a week. Thank you!

  8. Caitlin Says:

    Hi Marcia! It is legal for an employer to reduce the wage of an hourly employee as long as that wage is still above the minimum wage. There is no requirement that the employer reduce the number of hours the employee must work. However, the employer still has to pay overtime if the nonexempt employee works more than 40 hours per week. The best practice is to inform the employee one full pay period in advance of the change, in writing. HTH, and thanks for reading the blogs!~ Caitlin

  9. Will Gaydos Says:

    How are the laws interpreted in Virginia?
    Can an employer tell an salary exempt worker that they will cut their hours and pay by 25%?
    And then due to business conditions set expectations for full time attendance?

    Will

  10. Caitlin Says:

    Hi Will! Each state has different employment laws, but the law governing salaried exempt employees is federal, specifically the FLSA or Fair Labor Standards Act. That law permits the employer to reduce the exempt employees salary without any reduction in hours or days worked, as long as the salary is still at least $455 per weeks. That law does not permit the employer to pay an exempt worker more for weeks in which the employee works more. HTH, and thanks for reading the blogs!~ Caitlin

  11. Darlene Says:

    I work in California, and our entire company is undergoing a reogranization (corp is based in Colorado) nationwide. If my job description changes (tasks are reduced), and I am considered an exempt salaried employee, can my employer reduce my salary pay?

  12. Caitlin Says:

    Hi Darlene! Yes. In fact, the employer can reduce your salary without any changes in job duties or hours, as long as you are informed before the work is performed.

    When a reduction in pay is significant, and the employee quits rather than accept it, he or she usually qualifies for unemployment. However, if the employee works even one day under the new arrangement, then he or she has accepted it and no longer qualifies for unemployment if the employee quits. HTH, and thanks for reading the blogs!~Caitlin

  13. Debbie Says:

    Need help.
    We have 75 admins – all salaried.
    We are facing some financial difficulties and the CFO has worked out a plan. If we reduce the admin salaries by 10%; 90 days will bring us back in the black. How can I do this successfully and legally in New York? Please advise. Our Company president wants me to put this in effect 1/3/2011. Thank you very, very much. Deb

  14. Caitlin Says:

    Hi Debbie! We are happy to help. It is lawful to reduce the salary of exempt employees, as long as that reduction is permanent and involves no change in hours. To be considered permanent, the reduction must last at least 3 months, and employees must not be given any indication that the change is temporary. You can say “we hope to increase salaries when business picks up.” You cannot say, “This is only for three months while business is slow.” As long as this reduction applies to an entire class of employees and is for a business reason, it is legal.

    Implementing this solution on Jan. 3 may be a problem. The best practice is to inform employees in writing one full pay period in advance of a salary reduction, and a few states require more notice. New York requires that employees be informed in advance, in writing, of any changes in hours or benefits.

    You did not ask, but we have a concern that these employees may not be exempt administrators under the FLSA. The courts have recently limited the scope of that category, so that while a CFO would probably qualify as an exempt administrator, a secretary would not. An exempt administrator must have very significant independent decision-making powers that affect the business. Simply ordering office supplies or paying suppliers is not enough. It would be unusual for a company to have 75 exempt admins, unless they have 3,000 or more total employees. For this reason, it might make more sense to simply switch these employees to hourly permanently, and reduce the number of hours worked by 10 percent or more for a few months. (This may not work if the employees are working many hours of overtime.) However, that is a separate issue.

    See the articles below for more information. HTH, and thanks for reading the blogs!~ Caitlin
    http://blog.laborlawcenter.com/2009/02/04/exempt-employees-salary-reduction-regulations/
    http://blog.laborlawcenter.com/2010/08/06/exempt-administrator-status-update/

  15. Mike Passino Says:

    Hi
    I was recently informed that a 10% salary reduction was going to be required to get our company through a slow period (we are a contractor in Florida). There was not anything put in writing but most of the managers were told verbally and individually by the President (and part owner) of the company. We were told that this was temporary and our salaries would return to normal when business picks up. My understanding is that this was going to be effective immediately (they told us on a Monday which is the first day of a pay week).

    Was this handled properly? Should I ask or expect anything to be done in writing? Thanks.

  16. Caitlin Says:

    Hi Mike! Some states require that employees be notified in writing of salary reductions, but Florida does not. Others require several weeks notice, but again Florida does not. So this salary reduction is probably legal.

    If you want documentation, you can certainly send the President/owner and email that says, “Bob, just to confirm our conversation today, I understand that …”

    Technically, when an exempt employees salary is reduced, the new rate has to be in effect for 3 months or more. Theoretically, a salary reduction for exempt employees is legal as long as it is permanent (and 3 months is how the FLSA defines permanent.) Otherwise, the employer may be violating the FLSA. HTH, and thanks for reading the blogs!~ Caitlin

  17. chris Says:

    My employer gave me a letter with the subject unproductiveness with express 50% pay cut off my original salary. If I may ask friends, does he have the right to do such without prior notice and agreement between us (though he is the boss)?

  18. hrlady Says:

    Hi Chris,

    Yes, it is legal for your employer to reduce your salary. Depending on what state you live in, your employer may need to provide timely notice. Your employer cannot reduce your salary retroactively but he can going forward.

    On another note, since the reduction is substantial, you may be able to collect a partial unemployment benefits. You should contact your local unemployment office. Please discuss the “unproductiveness” with them as well.

    Lastly, should you begin working under the new terms, with a 50% reduction in salary, you will be considered to have accepted the new terms with the reduction.

    Thank You for reading the HumanResourcesBlog.com.

  19. Gerald Harris Says:

    In Colorado, how much notice must an employer provide before implementing a paycut of 20% for exempt, salaried employees?

  20. Gerald Harris Says:

    My employer in Colorado finds it necessary to reduce compensaton by 20% for salaried, exempt employes due to the economy. There just is not enough work to justify the full pay nor a 40 hour work week. How can we structure a 4-day work week of 32 hours based on the 20% reduction in pay and main a salaried, exempt status? Could we structure 3 weeks working at 40 hours and one week off as a flexible schedule?

  21. hrlady Says:

    The U.S. Department of Labor does not require or stop an employer from lowering an employees hourly rate, provided the rate paid is at least the minimum wage or salary. An employer can also reduce the number of hours the employee is scheduled to work.

    In Colorado, an employer can reduce wages or hours without notice. However, an employer cannot reduce pay for hours already worked.

    How your employer decides to structure the reduced work or pay schedule is up to the employer. An exempt employee will continue to have exempt status provided that the job duties remain the same and the salary does not fall below the required minimum salary for exempt status, which is $455.00 per week.

    Thank You for reading the Humanresourceblog.com

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