Pay Reduction Statutes: What You Should Know
Legal Framework Governing Pay Decreases
When it comes to pay decreases, the legal rules are slightly different. Unless the employee gave prior written consent to the pay decrease, it may be illegal for the employer to unilaterally decrease an employee’s pay. "Unilateral" means a one-sided change to a legal relationship—here, the contractual relationship between the employer and employee.
Federal law on this issue requires that an employer maintain a minimum wage and pay the employee for hours worked. If the employee works hours in excess of 40, the employer must pay overtime. Federal contracting laws impose similar wage and time requirements to government contractors. If the employer violates federal minimum wage , overtime, or contracting laws, the employee can sue for backpay—i.e., unpaid wages—and liquidated damages (essentially a two times multiplier of the unpaid wages).
At least nineteen states have laws that prohibit employers from cutting employee wages without prior consent. Many others require employers to give prior notice of a pay cut. Pay-decrease laws exist at the state level to protect employees from unilateral changes to their wages. These laws often specify that an employer must give written notice of the pay decrease (e.g., at the time the pay decrease is announced), obtain prior consent in writing to the pay decrease, or allow the employee to terminate his or her employment following a pay decrease.
When Is It Legal For Employers To Reduce Pay?
While the pay rate for an employee is often set in their employee handbook, as long as the company gives notice to its employees that the pay rate may be lowered, an employer can lawfully reduce compensation. In fact, there are situations when doing so is legally required:
- Job Loss – In certain types of financial and bankruptcy actions, employers might be able to avoid severance pay, which is a type of compensation, by offering part-time employment at a reduced rate of compensation. For example, if an employer is forced to downsize its workforce, it must be lawfully prepared to give affected employees the choice of accepting lower compensation or severance.
- Misclassification of Employees – If an employer misclassifies employees as independent contractors, thus failing to pay them minimum wage or overtime pay, then it is legally required to inform employees of their mistake and to raise employees’ pay to the legally mandated minimum level.
- Wage Garnishments – If an employer is court-ordered to collect a particular amount of money from an employee’s paycheck, then it must reduce the employee’s pay to collect the legally mandated amount.
Employee Rights If Your Employer Reduces Pay
If your employer is not satisfying employment contracts and collective bargaining agreements, the law generally requires that they inform you in advance of any pay reduction and obtain your consent. For instance, if your employer tries to reduce your pay with the argument that it is allowed under certain contracts, employment contracts and CBA’s typically require employers to provide notice and an opportunity for employees to opt-out of a pay or wage reduction if employees do not consent to the new pay scheme. If your employer does reduce your pay or choose to cut you off from participating in overtime anyway, the law protects your right to pursue legal action. In sum, the law provides that an employee is generally entitled to payment for work actually performed and a wage reduction for work actually performed is generally considered "illegal" unless all contractual and notice considerations are satisfied.
The California Labor Code will generally be construed to provide employees with the highest level of protection possible. This means if your employer has not satisfied all provisions of the California Labor Code, then their pay reduction may not be enforceable, and you are generally entitled to file a lawsuit to recover any wages lost pursuant to the illegal reduction. Depending on the applicable contracts, your employer may also be required to pay you back for all overtime you could have earned as well, so you will want to determine whether there are additional contractual provisions which entitle you to any further wages beyond the reduction.
What Happens If A Pay Reduction Is Illegal
Reducing an employee’s pay per hour is legal under federal and state laws as long as it does not create a situation in which the employee makes less than minimum wage on average. In order to ensure compliance, employers are advised to keep accurate payroll records and receipts of notification of the reduction in pay to document the changes. This not only protects the employer from legal action but also protects employees from sudden occupational changes, such as losing medical benefits or financial independence.
If reducing a worker’s hourly pay creates a situation where the hourly wage drops below minimum wage, this is potentially illegal. The minimum wage hourly rate is federally mandated at $7.25 per hour. Any decrease in pay should leave the employee with a wage of at least the applicable state or federal minimum wage. If not, this presents a violation of federal minimum wage standards and can have legal implications for the employer. In such situations, the Fair Labor Standards Act (FLSA) provides that a worker can file an unpaid backwage complaint with the U.S. Department of Labor so they can seek back pay with liquidated damages. A lawsuit is another option , although it is commonly viewed as risky, and workers are advised to try filing a complaint before taking further action.
An illegal decrease in pay is one in which the new hourly rate is below state or federal minimum wage. Because the law requires an employer to pay nonexempt employees overtime for any overtime hours worked, a reduction in pay can violate wage laws in some situations. Workers who received lower remuneration sometimes allege that the hourly rate was lower than lawful minimum wage amounts, and these rates were often further reduced when the employees worked overtime. Employers who decrease pay sometimes fail to maintain accurate recordkeeping of the new rate and new salary amounts, causing further confusion for employees. Because of the potential for significant confusion about pay rates, employees who notify their employer to stop the reduction and then receive another pay check with reduced amounts are often advised by employment lawyers to file wage complaints before filing a lawsuit.
What To Do If Your Pay Is Reduced
If you experience a pay decrease, the first thing you should do is ask your employer or HR for an explanation. Mistakes occur at all companies, and it is better to be sure your pay is, in fact, decreasing than to assume it is. If your employer informs you that your pay will be decreasing due to circumstances related to your job, such as poor performance or a violation of company policy, it would be helpful if you have evidence to the contrary. For example, if you have proof your performance was satisfactory and that your employer would reasonably know of this, then discuss the issue with Human Resources. If you belong to a union, have a course of action to address your situation.
If your employer will not discuss the decrease in pay or you are not a member of a union, then it may be necessary to contact an experienced employment lawyer for legal assistance.
Examples Of Pay Reduction Cases
Whether an employer can legally reduce an employee’s compensation can depend on a case-by-case basis. Nevertheless, there are numerous precedents for pay reduction that may be helpful for any persons in similar situations.
In the Seventh Circuit’s decision in Sutherland v. O’Malley, 100 F.3d 1445 (7th Cir. 1996), a grocery business reduced a worker’s wages after she returned to work following a maternity leave. The worker brought a lawsuit against her employer for gender discrimination and her case was initially dismissed. The Seventh Circuit Court of Appeals, however, overturned the ruling and found that the suspension of the worker’s pay was gender discrimination, as the company decided to keep the wages of male workers the same when similarly situated, and the woman’s pay was plaintiff was reduced because she was a woman. The reduction of the worker’s pay effectively punished her for taking time off to have a child, which violated the pregnancy discrimination laws. The Pregnancy Discrimination Act added protections against pregnancy discrimination to Title VII.
In a more recent California case , a CEO reduced his own pay by 20% at the same time that he imposed financial cuts on his employee’s salaries of 7.5%. Such an action has been criticized by A.J. Antoon of the HR Blockage Blog, who noted that federal law favors maintaining employees’ 40 hour work week, and a pay reduction might be insufficient in helping a business survive. Antoon noted that although a company is not legally required to pay its workers beyond 40 hours per week, it is mandatory to offer them at least minimum wage and pay them for all hours worked – both in regular and overtime. Essentially, so long as they are being paid minimum wage, employees are not entitled to higher pay. This means that if their hours are cut, their wages will also decrease. The author of the HR Blockage post wrote about how by reducing his own salary, the CEO sets the example that the company is still willing to invest in its employees and carry some of the burden of recession, even if minor.
Other examples of pay reductions in the past there have been employment accident payouts. In one of these situations in the State of Maryland, back wages were reduced when an injured employee’s pay was calculated from his lowest paying job during his work history. The amount was reduced, but legally compensated.