Times have been tough, everyone knows that. Fortunately they seem to be improving for some companies, but unfortunately not for all companies. Some smaller companies have had to “bite the bullet” and reduce the salaries of their exempt level employees. Doing so is an alternative to common corporate payroll and wage expense reductions like  furlough, layoffs, and reduced work hours.  That raises the question of whether or not that alters the exemption status of those employees. The good news is that it does not, as long as it is done correctly.

How to Reduce the Salary of Exempt Level Employees

 

Provisions to Follow When Reducing Exempt Employee Pay

There are three major provisions that must be followed for the exemption from being paid overtime to remain in place.

First, the employee must continue to be paid on a salary basis.

Secondly the salary level must be at minimum $455 per week ($23,660 per year.) If the exempt level employee’s pay  drops below this then the exemption from overtime is gone and the employee is automatically nonexempt.

Thirdly, the reduction has to reflect the long term business need of the business. It cannot be a day-to-day or week-to-week or other short-term arrangement. As the USDOL says “…deductions from predetermined pay occasioned by day-to-day or week-to-week determinations of the operating requirements of the business constitute impermissible deductions from the predetermined salary and would result in loss of the exemption. The difference is that the first instance involves a prospective reduction in the predetermined pay to reflect the long term business needs, rather than a short-term, day-to-day or week-to-week deduction from the fixed salary for absences from scheduled work occasioned by the employer or its business operations.”

Employers Can Reduce Employee Salary with a Voluntary Pay Reduction

There is a provision which allows exempt employees to voluntarily reduce their pay. “If the employer seeks volunteers to take time off due to insufficient work, and the exempt employee volunteers to take the day(s) off for personal reasons, other than sickness or disability, salary deductions may be made for one or more full days of missed work.   The employee’s decision must be completely voluntary.” So in situations where short-term solutions are needed this may be an option.

There are a couple of other key points to understand in this situation. These include:

– A salary is a predetermined amount constituting all or part of the employee’s compensation, which is not subject to reduction because of variations in the quality or quantity of the work performed.

– An employer must pay an exempt employee the full predetermined salary amount “free and clear” for any week in which the employee performs any work without regard to the number of days or hours worked.   However, there is no requirement that the predetermined salary be paid if the employee performs no work for an entire workweek.   Deductions may not be made from the employee’s predetermined salary for absences occasioned by the employer or by the operating requirements of the business.   If the employee is ready, willing, and able to work, deductions may not be made for time when work is not available.

How to Reduce Company Costs Like Employee Salaries and Payroll

So keep these points clear as you navigate what may be some difficult times for you as you consider employee cost-cutting measures like salary reduction and payroll at your organization. Let’s hope that the rising economy floats all boats and you do not have to deal with these issues.

Michael (Mike) D. Haberman, SPHR is a consultant, writer, speaker, teacher and co-founder of Omega HR Solutions, Inc.  He has been in the field of HR for 30 years as both practitioner and consultant. He specializes in compliance issues for his small business clients. He is the author of the blog HR Observations which can be found at www.omegahrsolutions.com and he has been writing blog posts on a full spectrum of HR topics for almost seven years. He is an active user of Twitter and can be found at @mikehaberman or @HRComplianceGuy. He has been an instructor in HR for 14 years and has helped many people achieve their PHR or SPHR during that time.