In today’s business landscape, some employers are faced with difficult decisions relating to how to keep the business running and keep their workforce. Employers may be considering decreasing employees’ pay instead of reducing their workforce through a layoff. While decreasing an employee’s pay is permissible, there are some considerations that an employer should carefully think through before implementing a reduction in pay.
Legal Considerations
Pay decreases are permissible as long as they are prospective, meaning the change will go into effect in the future or compensate for work that has not yet been done. You cannot retroactively implement a pay decrease. Additionally, you must inform the employee that their pay will be decreased in advance.
In Colorado, the Equal Pay for Equal Work Act (“EPEWA”) must be considered before making any changes to pay. This act prohibits employers from discriminating against employees on the basis of sex, or on the basis of sex in combination with another protected class, by paying an employee of one sex less than an employee of a different sex for substantially similar work. Therefore, if an employer is considering a pay decrease for some of its employees, the employer should ensure that such decreases do not result in violations of EPEWA.
Employers should also be careful when decreasing pay for exempt employees. Prospective reductions to exempt employees’ pay is allowed during a business or economic slowdown if the change is bona fide. However, in order to maintain the exemption, the employee must still be paid a salary above the applicable salary threshold as described in this whitepaper. If the employee’s salary falls below the applicable salary threshold, the employee loses the exemption and must be treated as non-exempt; in this scenario, review this whitepaper..
An employer should consider all the circumstances relating to its employees prior to any decreases in pay, including whether an employee has participated in any protected activity or protected leave. Reducing the employee’s pay could be seen as retaliatory when done in conjunction with or shortly after participation in protected activities. Employers Council can help navigate these situations if they arise.
Practical Considerations
While decreasing an employee’s pay may be legal, there are other considerations that an employer should consider before making the decision to reduce pay. For instance, reducing pay often lowers employee morale. Low employee morale can lead to a host of other issues. These issues may include loss of motivation, engagement, and job satisfaction that often results in decreased efficiency and lower quality of work. Such issues can also contribute to increased employee turnover.
Also, when an employer recruits for a position affected by a decrease in pay, the employer may have difficulty finding a qualified candidate to hire at the lower rate of pay. Increasing the pay for a new hire could lead to EPEWA issues; review our EPEWA whitepaper for considerations.
The decision to decrease an employee’s pay should not be made lightly. Employers Council is here to help if your organization is contemplating reducing pay for your employees. Please reach out to us for guidance.