In HR Dive's Mailbag series, we answer HR professionals' questions about all things work. Have a question? Send it to [email protected]
Q: Can we temporarily cut workers' pay to deal with the economic downturn?
A: Yes, "you can cut pay, but you have to be careful," according to Kathleen Caminiti, a partner at Fisher Phillips and co-chair of the firm's wage and hour and pay equity practice groups.
There are a few issues for employers to consider before cutting pay, and before returning it to pre-pandemic levels. Additionally, compensation adjustments provide a good opportunity for HR to review compliance with federal employment laws, Caminiti told HR Dive.
Reducing compensation
Before making any changes, it's imperative to look at applicable state and local laws, Caminiti said. Many states have pay rate notice requirements. New York, for example, requires that employers provide specific wage information when an employee is hired and whenever there's a change in pay, according to a fact sheet from the state's labor department. And those laws can have significant noncompliance penalties, Caminiti noted.
In fact, it's a good practice in general to put compensation information in writing for everyone, she said. Employees being called back after a furlough should know exactly what they'll be receiving upon return. Be clear and thoughtful in communications, she advised.
There are additional considerations if an employer is cutting the pay of an employee exempt from the Fair Labor Standards Act's (FLSA) minimum wage and overtime mandates. If a reduction drops an employee's salary below any applicable minimum salary thresholds, they'll be entitled to those protections. And if an exempt employee is picking up any extra duties — perhaps a manager is now doing the work of his or her furloughed direct reports — "they may no longer be exempt under the relevant duties test," Caminiti cautioned.
Returning pay to pre-pandemic levels
Generally, pay raises are less fraught, but it's important to note that some state and local laws require notice of any change, not only reductions.
Additionally, retroactive increases or makeup payments can be complicated, Caminiti said; employers must ensure there are no unintended overtime consequences for nonexempt employees. To avoid that pitfall, she recommended employers refrain from tying special payments back to hours worked. Call it a "hero bonus" if you want, but don't frame it as a "make whole" payment for work paid at a lower rate, she suggested. It should be clearly discretionary, too; an employer wouldn't want to have promised a retroactive payment.
And when increasing pay for an exempt employee, note that the FLSA requires a fixed weekly payment, "so you can't be changing the salary up and down," Caminiti said. A reduced salary should be maintained for a while — perhaps a quarter, she suggested — to demonstrate that it is, in fact, an established, weekly salary. Fluctuations, especially if tied to hours worked, may be misconstrued as a wage rate. And when you do return an employee to his or her previous salary, be clear that the increase is a long-range adjustment back to reflect economic circumstances, she suggested, and be sensitive to the fact that these changes can affect retirement plans and other benefits that are tied to compensation.
While you're at it...
Any time an employer embarks on compensation adjustments, it's a good idea to review related issues.
For one, such changes provide an opportunity to ensure employees are properly classified under the FLSA and other wage and hour laws. It's also a good time to look at pay equity issues, Caminiti noted.
As a practical matter, employees aren't particularly likely to question pay raises. But when an employer cuts pay, an individual may be more likely to hope to justify a higher rate, she said. And that desire can sometimes lead to questions about classification and discrimination.
That's where a classification audit or an equity analysis can help. Such efforts can highlight previously unidentified disparities. And if you need to make adjustments in those areas, "communications that are clear and succinct are the best," Caminiti said, but because of the complexity of the issues, it also may be advisable to run your communications past a wage and hour practitioner.
