• Employers must comply with specific requirements to alter wage agreements or benefits.
• Salary reductions can be made if an employee switches from full-time to part-time hours, or if the employer anticipates less work available for a period of time.

An employer can change an employee’s wages at any time, regardless of a prior agreement, without the employee’s authorization. However, there are certain requirements that an employer must meet to make changes in wage agreements or wage benefits. (Wage benefits include, but are not limited to, vacation pay, paid time off (PTO), sick leave, and holiday pay.)

• First, notify employees in writing before any wage reduction will take effect. In most states, the notice period may be as little as 24 hours, or even less, as long as the employee receives notice before working any hours at the lower rate. However, state laws may require longer notice. For example, South Carolina requires seven days’ notice of a reduction, Missouri requires 30 days’ notice of a reduction (MRS 290.100), and West Virginia requires one full pay period of notice before a reduction takes effect. Most employers give notice at least one pay period in advance, though some give more.
• Second, an employer cannot make changes in pay or wage benefits that will result in the retroactive reduction of wages or wage benefits already earned. In other words, the reduction in wages should not take away pay or wage benefits already earned up to the time of notification. Any reduction in pay or wage benefits should be prospective from the time of notification. For instance, employees should not lose vacation time already earned, unless this is permitted under state law. An employer may, however, retroactively increase an employee’s pay or wage benefits without notification.
• Third, an employer cannot reduce an employee’s pay below minimum wage. However, the employer can reduce an employee’s pay down to minimum wage with proper notification. An employer can also take away all future wage benefits. For example, taking away earned vacation hours may not be permissible, but all vacation accrual could be stopped.

In some cases, employers may have to add to an employee’s weekly compensation. For example, many tipped employees are paid less than minimum wage, but their tips should be sufficient to achieve minimum wage (or more) when added to hourly pay. If an employee’s total compensation (wages plus tips) is less than minimum wage for all hours worked in a particular week, the employer will need to provide additional compensation to reach minimum wage. The formula is the total compensation divided by the hours worked.

Similarly, an employee who is paid only commissions might not earn sufficient income to reach minimum wage. Often, the employee will be allowed to draw on future commission earnings. However, if the employee is later terminated and did not earn commissions sufficient to cover the draws, the employer may not recover these draws if doing so would reduce the employee’s income to less than minimum wage.

Salary adjustments

Although salary deductions are restricted, employers can make a reduction in salary. The U.S. Department of Labor (DOL) has a Field Operations Handbook that addresses this:

“A reduction in salary to not less than the applicable minimum salary because of a reduction in the normally scheduled [workweek] is permissible and will not defeat the exemption, provided that the reduction in salary is a bona fide reduction which is not designed to circumvent the salary basis requirement.”

For example, if an employee will be moved from full-time (five days per week) to part-time (four days per week), the employer could reduce the salary by 20 percent to account for reduced expectations. This assumes the new salary will still meet the minimum amount required to qualify for the exemption.

Similarly, an employer might expect a reduction in work for a period of several months, and might reduce everyone’s working time, along with a commensurate reduction in salaries. This would be acceptable, but such changes should be in place for a substantial period of time (a minimum of eight weeks is a best practice).

However, employers cannot establish a different “schedule” of hours at the start of each pay period (and designate a “salary” for that pay period) because this would violate the salary basis requirement. Making regular salary changes should be avoided. A few changes per year should not create problems, but making adjustments every few weeks may imply that the employee is paid by the amount of work performed rather than on a salary basis.