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By: Cassee Ger on April 9th, 2020

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What to Review When Making COVID-19 Pay Decisions

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Like many organizations around the country, leaders are having to make some tough pay decisions that will impact their employees as a result of the coronavirus and the new regulations.  Making these decisions are hard and while the administration of changing pay might seem easy, there are several things to consider. In this article, we'll discuss a variety of considerations to think about, including legal issues, when changing or reducing the pay of employees.   

Reducing Employee Salaries or Hours

As organizations look for ways to reduce cost, salary reductions or reducing the number of hours worked can be a consideration. If businesses choose to reduce the salaries of their employees, there are a few factors to be aware of prior to implementing.

Thinking About Reducing Salaries? Review These 6 Considerations First

  1. The Paycheck Protection Program- Created by the Coronavirus Aid, Relief and Economic Security (CARES) Act, the Paycheck Protection Program provides loans to small businesses impacted by COVID-19 and some, if not all, of the loan may be forgiven if certain conditions are met. Reducing employee’s salaries may impact the ability for such loans to be forgiven. To learn more, read about the Paycheck Protection Program, please visit this SBA site.
  2. FLSA Exemptions - Organizations may reduce salaried employees’ pay and they can maintain their exempt status as long as their pay does not fall below the FLSA threshold of $684 per week (equivalent to $35,568 annually), assuming they still meet the other provisions of the FLSA exemption test. For additional reading, here is an overview of the FLSA exemption tests. For non-exempt employees, organizations must maintain the Federal, State, or Local minimum wage rate. Exempt employees with reduced schedules are not automatically non-exempt.
  3. Misclassification of Employees - For exempt employees, the FLSA mandates that they must be paid the same salaried amount per pay period. It is legal to reduce the amount of salary per pay period, but employers who ask employees to work less time and reduce the salary based on the reduced hours worked, run the risk of violating the FLSA by “deducting” the employee's salary. In this case, the FLSA doesn’t allow for deductions in an exempt employee’s salary. It is imperative to ensure salary reductions are correctly implemented to avoid unintentionally converting an exempt employee, and anyone in the same job group into a nonexempt employee, and thus making them eligible for overtime and risking FLSA violations.
  4. Disparate Impact - If your organization is making cuts to certain groups versus organization-wide salary cuts, leaders run the risk of causing unintentional disparate impact to protected classes of employees. Generally, salary reductions will not raise any issues of discrimination, unless it affects a disproportionate number of employees in a protected class. In which case, although unintentional, it can cause disparate impact. Disparate impact occurs when policies or practices that appear to be neutral result in a disproportionate impact on a protected class or group of employees.
  5. Notification Requirements - Some states require notification prior to reducing a person’s salary. For example, in Maryland one full pay period advance notice is required before reducing an employee’s pay. Many states are relaxing these rules as a result of the COVID-19 response, so it is recommended that you check your specific state labor regulations. Here is a template available for quick download as a starting point for your salary reduction letter.
  6. Benefits- Reducing employee hours may impact their eligibility for benefits. Most carriers are relaxing the hours requirement for eligibility. For example, some carriers have reduced the minimum hours to 17.5 per week and others have waived it to zero hours, as long as the premium is being paid. The hours requirement is specific to each health care carrier and state-specific regulations, so it is recommended organizations work directly with their health care broker or carrier on the exact requirements. A reduction in hours temporarily for exempt or non-exempt employees is not automatically considered a change in status or loss of benefits. Lastly, PTO, Sick, and/or Vacation can be used incrementally to pay benefit premiums.

Organization-wide pay reductions are completely legal, and so is the reduction of hours, and both approaches have several legal considerations, as well as a significant impact to the affected employee. Modifying or reducing salaries is not as clear cut as most would think.  Prior to doing any salary reductions, leaders should consider what resources are available to their organization, and any Federal or State regulations that must be followed to avoid any legal ramifications.