Can the Employer Legally Cut an Employee's Pay?

The Employer Has Legal Requirements Surrounding Employee Pay Practices

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Reader Question:

I was working as a dental hygienist in a dental office. I was getting paid $28 an hour. I found another job that is full time and giving me all my hours so I let my boss know that I found another job.

So when I went to pick up my last pay stub she had changed my hourly rate to minimum wage $8 an hour. I worked 47 hours, so basically, I worked for free. I never signed anything and my last two pay stubs have my hourly rate on them.

HR Response:

Everyone expects regular pay raises but never imagines that their pay might go down. But, it can happen. Sometimes it's legal for an employer to reduce an employee's pay and sometimes it's not. For this person,  in this situation, it was illegal. Why? Because the pay reduction was a surprise.

Forward, Not Backward

This is the most important rule in salary reductions. You must be paid the agreed upon salary for work you've already done. Bosses can absolutely lower salaries just like they can raise salaries. But, what they can't do is lower your salary without telling you in advance and (this is key) you agree to it.

Does this mean that if your boss says, “I'm cutting your pay” that you can just say, “No thanks—I'll continue at the higher rate of pay”? Not quite, but what you can do—is quit. A boss can't require you to work at a rate of pay you didn't agree to, but you also can’t force him to pay you a rate that he doesn't agree to pay.

But, once the work is done, he has to pay you the last agreed upon rate.

What's Required for Pay Reduction Notifications?

Your boss has to tell you that she's cutting your pay before you work a single hour at the new rate. Some states just require that your boss says, “Starting tomorrow, you will earn $8 an hour instead of $28.” Other states require that your boss notifies you in writing of the pay reduction.

In every state, your boss can't do what the letter writer's boss did—just cut your paycheck because she's angry you resigned. It's not legal or ethical, for that matter.

When Should a Boss Have the Right to Lower Your Pay?

Ideally, the answer to this question is never, but business realities sometimes demand that your employer lower your pay. If the business is having cash flow problems, for example, sometimes the choice is either to shut the company down or cut employees' pay. Obviously, most people would prefer to get paid at a lower rate than to lose their jobs over a few dollars a week.

However, any pay cut is likely to devastate staff—both emotionally and financially. Suddenly, you have less money to pay the mortgage, buy food, and pay off student loans. Emotionally, your boss has just announced that he doesn't value you at the same rate he valued you yesterday. It's a blow to the gut.

So, if a company needs to lower pay for financial reasons, it's critical that the boss gets the same pay cut. If the CEO takes a cut at the same time as everyone else, it's still financially challenging, but not as emotionally devastating.

A pay cut that is universally applied to all employees, after all, is not about you, it's about everyone.

If a boss cuts the staff's pay and keeps his current salary? That makes the staff unhappy and will result in a lot of people beginning a search for new jobs.

(In one medium sized manufacturer, hourly employees were informed that everyone was taking a 10% pay cut. Imagine the morale issues that arose when they learned that the senior leaders were exempt from the pay cut. This was doubly devastating because the hourly employees believed the company was in trouble because of the decisions made by senior leaders—not because of the work of the hourly employees.) Don't do this. You won't recover.

The other time when it's appropriate to cut an employee's pay is when there is a substantial job change. You always think about promotions as pay going up. But, sometimes, people are demoted. When a demotion occurs, and the previous salary is considerably above what other people in the new position are making, a pay cut can make sense.

When the demotion is voluntary—for example, you accept a lower position because you want less stress or a completely different set of tasks—then you'll accept a pay cut pretty easily. When it's involuntary? When the boss says you will make less money doing this different job in another department, then the pay cut becomes unpleasant.

When Is It Illegal for the Boss to Lower Your Pay?

  • When there is no prior notification about the pay cut. Pay cuts can't be a retroactive surprise.
  • When the pay cut is a response to some protected activity. For instance, if you complain that your boss is sexually harassing you, and then your pay is cut, that is called retaliation and it is illegal.
  • When the pay cut is discriminatory. If all men get a pay cut, but no women, that's illegal. If all Asians receive a pay cut, but no one else, that's illegal. If everyone over 40 receives a pay cut, but no one younger, that's illegal.
  • When the pay cut drops your salary below the minimum wage. The Federal minimum wage is set at a particular dollar amount, but a lot of states and cities have higher minimums. Dropping below that minimum wage is always illegal—even if you agree to it.
  • When you have a contract that says otherwise. This is especially common in union situations, which clearly spell out the pay rate for each job. You cannot lower the pay of a person whose pay rate is set by a contract without renegotiating the contract. 
  • When a pay cut for an exempt employee is temporary. It seems strange to say that a temporary cut would be illegal while a permanent one wouldn't, but one of the requirements for exempt employees is that their pay remains the same, regardless of the number of hours they work. If you just cut their pay for a month or two, you could lose the salary exemption—which means that the employee is eligible for overtime pay.

What Should You Do if Your Pay Was Cut Illegally?

If like in the reader’s case above, you find out about the pay cut after you've already quit, you can file a complaint with your State Department of Labor. They'll listen to you and, hopefully, take care of it for you.

If you're still employed, it's often best to try to work the problem out internally before pulling out the government guns. So, first, clarify with payroll whether it's a mistake. Sometimes payroll mistakes happen and it's best to assume that's the case first. Payroll can pretty easily rectify your paycheck—although it might take a couple days.

If payroll says that your pay is correct, go to your boss and ask what is going on. Tell your boss that it's illegal to lower your pay without prior notification and that you'd hate for the company to get in trouble. Your boss may be unaware that your pay has seemingly been cut, and that statement alone should induce fear.

If that doesn't work, escalate the issue. Go to Human Resources and your boss's boss. If that doesn't work, and you've explored all of your internal options, it's time to call your State Department of Labor. 

Disclaimer: Please note that the information provided, while authoritative, is not guaranteed for accuracy and legality. The site is read by a world-wide audience and employment laws and regulations vary from state to state and country to country. Please seek legal assistance, or assistance from State, Federal, or International governmental resources, to make certain your legal interpretation and decisions are correct for your location. This information is for guidance, ideas, and assistance.