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Can we cut employee pay to reduce costs?

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in Compensation and Benefits,Human Resources

Q. We are considering layoffs but would like to avoid them. Can we cut employees’ pay because of tough economic times?

Generally, yes. Assuming these employees are “at will”—meaning they have no definite term of employment—you generally can change their pay going forward. If you decide to cut pay, inform each employee of the date of the change and remember to pay him or her under the old compensation plan until that date. For any employee who has a contract, it is more complicated and depends on the contract at issue.

With any reduction in pay you should:

  • Consider cutting pay across the board (or at least uniformly) for certain job classifications. This will help to avoid discrimination claims.
  • Remember that if you cut too much pay, the employee may qualify for unemployment.
  • Review your policies before making a decision.

Probably most important are morale issues. Any reduction in employee pay will not be welcome news, although in these times many employees would prefer a pay cut if they believe it will prevent layoffs.

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