General Rule

Although reducing an employee’s wage is never ideal, at times it is necessary. The Federal Labor Standards Act states, "The Act does not preclude an employer from lowering an employee’s hourly rate, provided the rate paid is at least the minimum wage, or from reducing the number of hours the employee is scheduled to work." As a general rule, an employer can lower any employee’s wage if: 

1.     There is no collective bargaining agreement or contract; and

2.     It does not fall below minimum wage.

Risks and Pitfalls

Like any change in employment status, there are risks and pitfalls to lowering an employee’s rate of pay. Some common risks and pitfalls are:

  1. This could invalidate an exempt status. By lowering an employee’s annual salary, you could be putting your staff member below the mandated salary threshold, invalidating them as an exempt employee. This means you could fall out of compliance, and are now subject to overtime, meal and rest breaks, and minimum wage requirements. If you have made this type of change in the past before knowing these regulations, you are also liable for back payment of wages and possible penalties. Ensure that if a reduction does place someone below the minimum exempt salary threshold, you are reclassifying your staff as non-exempt and adhering to the legal requirements associated with this change.
  2. Potential discrimination, retaliation and/or constructive discharge claims. Without objective and tangible guidelines, your staff could feel singled out or picked on, leading to discrimination claims—this should be the policy for all employees in similar situations and must be extensively documented to avoid potential discrimination, retaliation and/or constructive discharge claims. For example, if an employee recently reported a workplace violation about workplace practices, they could make the argument that they were the victim of retaliation. Moreover, reducing wages as a means of disciplinary action increases the risk of your staff making claims that the change in wage was a way to coerce your staff to voluntarily quit, leading to constructive discharge claims, or even act as a contributor to a hostile work environment if there are ongoing issues.
  3. Poor morale, diminished work performance and hostile work environments. Although within your rights, when you break the employment agreement your staff may become disgruntled. This could lead to progressively poor performance and hostile work environments—this is especially true when individual staff members feel they were singled out.
  4. Your staff may be eligible for unemployment insurance. The unemployment insurance program is to aid hardships on displaced workers—this includes your current workforce. The awardment of compensation to offset a lower wage is at the discretion of the Employment Development Department (EDD).

If you feel your Practice may be at risk, or you may need some assistance with maintaining compliance, reach out to HR for Health by calling 877.779.4747 Option 1 or email [email protected] today!

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