Salary Reduction Reasons

Is a Salary Reduction Even Legal for an Employee?

••• Don Bayley/E+/Getty Images

In a salary reduction, an employer lowers the amount of pay that you receive as payment for the job you perform. Seems unfair? Sometimes your employer needs to reduce your paycheck for a variety of reasons.

Two Most Common Reasons for a Salary Reduction

Employers have many reasons why they might need to reduce your pay. These are the two most common reasons why an employer might do a salary reduction.

Your Organization Is Experiencing Economic Challenges

An organization that is experiencing economic challenges may ask you to take a salary reduction.

An economic downturn has affected the company's sales, profitability, or its ability to succeed as a business. The company needs to save money but the employer has decided that he cannot operate without the current number of employees.

Thus, an employee layoff, employee furloughs, or any solution that will affect his ability to serve customers and create the product are not viable choices for the business. In a salary reduction situation, employees are generally not happy with the pay cut. But, depending on the economic circumstances, they may appreciate keeping their jobs.

When a company pursues a salary reduction course of action, however, employees expect the pay cuts to affect all employees—especially when they're told the cuts are across the board.

In a small manufacturing company a few years ago, the CEO explained at a company meeting that to avoid filing for bankruptcy, he was asking all employees to take a 10% pay cut. People grumbled, but most were committed to their company and their jobs. Everyone went back to work. and while they didn't like the idea of a pay reduction they believed they were all in it together. They thought that for their company (and jobs) to remain viable, they needed to take the pay reduction.

Then, a gossipy employee in accounting informed her friends that the across the board cut did not, in fact, mean everyone. Executives’ pay was exempted from the cut. As you can imagine, as with any bad news, everyone in the company heard the gossip within 24 hours.

They requested a meeting with the CEO. He made matters worse. He informed all of his employees that he had exempted the executives’ pay because he couldn’t afford to lose them. Employee morale never recovered.

The moral of the story is that your employees will work with you willingly to retain their jobs—and in hopes that the reduction in pay is short term for a non-exempt employee. Salary reduction for exempt employees is more complicated. See more about doing legal pay cuts.

Your Job or Position Changes Substantially

A second reason that an employer may offer a salary reduction is when your job changes substantially, either by choice or by a demotion.

The employer may have decided that your work is not meeting standards but she thinks you have a lot to contribute—in a different job. You may have decided that you want a job with less responsibility while you take care of a sick, elderly parent, or raise your children.

For employee morale and a harmonious workplace, employers need to maintain a modicum of salary fairness among people who hold the same job. If you made more, you’re likely to find yourself with a pay cut.

Once again, the employer must communicate this to you in advance of lowering your pay so that you have the opportunity to decide on your course of action. A pay cut also frequently occurs when an employee decides to leave a current management role to go back into a job as an individual contributor.

Salary Reduction by Personal Choice

In a third scenario, say that you are job searching. You receive several job offers that are a pay reduction from what you believe you are qualified to make. That is, your job offer rate of pay is not comparable to what others in the job market with your skills and experience are making.

You can make the personal decision to accept the job offer even if it does not meet your expectations. But, this is a choice that you make on your own for whatever reasons you use to justify your decision.

A salary reduction, whether imposed or due to the choices you are making is not a pleasant event. Anything that affects your economic viability and your future is scary.

In the event of an involuntary salary reduction, make sure that you ask your employer what you need to do to earn a higher salary again. When you’re feeling defeated, it’s encouraging to have your eye on the next goal.