Employers may consider reducing employees' regular work hours and pay to lower costs and avoid layoffs during difficult times. Another situation in which employers may wonder whether they can make reductions in hours and pay is when employees violate workplace rules or fail to meet productivity standards.
Whatever the reason, a reduction in hours and/or pay can affect wage and hour law compliance, eligibility for unemployment and benefits, employee morale, and more. That’s why it's important to discuss such measures with legal counsel before implementing them. Here are some examples of factors to consider.
Reductions in pay/hours as a cost-saving measure
Wage & hour law considerations
Non-exempt employees
Under the Fair Labor Standards Act (FLSA), employers must pay non-exempt employees at least the minimum wage for each hour worked and overtime when they work more than 40 hours in a workweek. Some states require overtime pay in additional circumstances. Absent an agreement or contract, employers may generally reduce non-exempt employees' pay and hours provided the employee is paid at least the minimum wage per hour and overtime when due, and the change is made prior to the work being completed.
Exempt employees
Employees who meet certain salary and duties requirements may be classified as exempt from the FLSA's minimum wage and overtime requirements. Generally, exempt employees must receive a pre-determined, guaranteed salary of at least $844 per week, as of July 1, 2024, under federal law (some states require a higher salary). There is another planned increase effective January 1, 2025, at which time exempt employees must receive a pre-determined, guaranteed salary of at least $1,128 per week under federal law (some states require a higher salary). With a few limited exceptions, exempt employees must be paid their full salary each week they perform any work, regardless of the number of hours or days worked. Depending on the exemption and circumstances, a reduction in pay could result in a loss of the employee's exempt status.
Under the FLSA, employers are prohibited from reducing an exempt employee's salary based on short-term, day-to-day, or week-to-week operating requirements. However, employers may change exempt employees' salaries prospectively to reflect long-term business needs, provided such adjustments are not related to the quantity or quality of work performed and the employee still receives at least $844 per week on a salary basis (based on the minimum salary requirements that took effect on July 1, 2024). For instance, an employer could reduce all exempt employees' salaries by five percent for the upcoming fiscal year because of budgetary constraints (provided the reduced salary still meets minimum requirements). By contrast, an employer could jeopardize an employee's exempt status by making a short-term deduction for reductions in scheduled work.
Nondiscrimination considerations
Nondiscrimination laws prohibit discrimination on the basis of age, race, color, sex, national origin, religion, genetic information, disability, and other protected characteristics. All pay practices and pay decisions must be job-related and applied fairly and consistently. It's a best practice to document the reasons for a reduction in pay and/or hours.
Benefits
Unemployment benefits
Employees who have their hours and/or pay reduced may be eligible for partial unemployment benefits. Keep in mind that employees who quit as a result of a significant reduction in hours/pay may also be eligible for unemployment benefits. Check your state law for details.
Health benefits
The Affordable Care Act (ACA) requires employers with 50 or more full-time and Full-Time Equivalent (FTE) employees to offer health coverage to full-time employees (those who work on average 30 or more hours per week) and their dependents. The ACA also prohibits employers from discriminating and retaliating against employees for receiving a health insurance premium subsidy. A reduction in hours in response to an employee claiming a subsidy under the ACA could be considered retaliation.
Paid time off
If an employee accrues paid time off as a full-time employee but subsequently changes to part-time, you may be required to either pay the employee for any unused vacation time or allow the employee to use the accrued vacation time as a part-time employee. Additionally, federal and many state and local laws require employers to provide paid leave to employees. In many cases, both full-time and part-time employees are eligible for such leave and part-time employees may be entitled to use any leave they accrued while a full-time employee. Check the leave laws for details.
Advance notice
A reduction in hours and/or pay can have a significant impact on employees. Some states and local laws have specific rules for how much notice an employer must provide before reducing an employee's hours or pay. Be sure to follow applicable timelines and provide as much advance notice as possible. Employers may also have certain notice obligations under the federal Worker Adjustment and Retraining Notification Act (WARN) or similar state laws (Mini-WARN). Make sure you comply with applicable rules.
Communicating with employees
When business slowdowns necessitate a reduction in hours and pay, communicate with employees about the change as early as possible and acknowledge the impact the cuts will have on employees. Be straightforward about the reasons for the reduction and what the changes mean for each employee. If your state requires, provide affected employees with information about unemployment insurance and an updated notice about their hours and pay.
Reductions in pay/hours as a disciplinary measure
Federal wage & hour law considerations
Non-exempt employees
Under the Fair Labor Standards Act (FLSA), employers must pay non-exempt employees at least the minimum wage for each hour worked and overtime when they work more than 40 hours in a workweek. Some states require overtime pay in additional circumstances.
Under federal law, employers may generally reduce non-exempt employees' hours and pay for disciplinary reasons provided the employee is still paid at least the minimum wage for any hours worked and it doesn’t cut into any overtime due.
Exempt employees
Under federal rules, employers may generally make deductions from exempt employees’ salaries for unpaid disciplinary suspensions of one or more full days imposed in good faith for serious misconduct, such as sexual harassment, workplace violence, drug or alcohol use, or for violations of state or federal laws. This provision refers to serious misconduct, not performance or attendance issues. Additionally, the suspension must be imposed pursuant to a written policy applicable to all employees.
Under federal law, deductions from an exempt employee’s salary are also generally permitted for penalties imposed in good faith for infractions of safety rules of major significance. Safety rules of major significance include those related to the prevention of serious danger in the workplace or to other employees, such as rules prohibiting smoking in explosive plants, oil refineries or coal mines.
Before reducing pay or hours as a disciplinary measure, consider consulting legal counsel.
Other considerations
Many states limit deductions further than federal law does for non-exempt and/or exempt employees. Check your state law for details. Also remember that, under federal law and many state laws, employers are generally required to obtain an employee's consent before making deductions not required by law. The agreement must specify the particular items for which deductions will be made and how the amount of the deduction will be determined.
Suspensions pending the outcome of an investigation
Employers should consult legal counsel before suspending an employee with or without pay pending the outcome of an investigation into misconduct. For example, if you routinely suspend accused employees without pay before the investigation is complete, it could call into question the impartiality of your investigation and lead to further claims of discrimination.
While you may need to separate the accused employee from the accuser pending the outcome of the investigation, you can likely accomplish this without suspending the accused employee. You could, with their consent, transfer one of the parties to another department or schedule them for different shifts.
If you choose to separate the employees, make sure the move doesn't burden the employee who complained of harassment, since this may look like you're retaliating against them for filing a complaint.
If you think a paid suspension of the accused is warranted, you should consult legal counsel first to discuss the risks.
Conclusion
When reducing hours and or pay, be sure to handle the situation carefully and equitably, and comply with applicable federal, state and local laws.