A Pay Cut is a decrease in an employee’s compensation. It could be a reduction in salary, benefits or more. It is not limited to monetary compensation and can happen for a variety of reasons. For example, a company might be trying to avoid layoffs and/or save money during a financially disturbing period, with the intention of returning sales to normal once the period is over. Read more to know how pay cuts may vary and how they could affect you.
What is a Pay Cut?
A pay cut is a reduction in an employee’s salary. Pay cuts are often made to reduce layoffs while saving the company money during a difficult economic period. A pay cut may be temporary or permanent, and may or may not come with a reduction in responsibilities. Some pay cuts also affect an employee’s raises, bonuses, and benefits.
Can a company cut your pay or hours?
Your employee does not need a reason to cut your pay or reduce the hours you are scheduled to work. Employers can in most cases cut your pay or reduce your hours since many employees are “hired at will”. Employment at will means that when workers don’t have a formal employment contract or are covered by a bargaining agreement they can be terminated, demoted, and have hours reduced or pay less at the company’s discretion.
When can a company reduce pay?
Salary being a major expenditure for any company, during a financial crisis they usually opt for means like a pay cut or job cut for cost reduction. A pay cut is a more preferred option as the company while reducing the expenditure can retain its valuable employees. A pay cut is also preferred by companies to avoid payment of retrenchment compensation in the event of a job cut. Such salary cuts may be through a direct reduction in wage/salary of employees or reducing the salary in accordance with the reduction in working hours or working days.
But are such salary cuts or reductions in payment on account of reduced working hours or workdays, legally tenable?
In India, the Industrial Disputes Act, 1947 governs such arbitrary reductions in salaries/wages of employees. Section 9A read with Schedule IV attached to the Act provides that any such reduction in salary/wages or work time or days will amount to change in conditions of service. As per the Act, no such change can be effected without furnishing concerned workers with 21 days’ notice prior to such change.
Even if such notice is provided the employees likely to be affected do have an option to refuse to accept such changes. They can raise an industrial dispute challenging such a change in the condition of service. However, a better alternative here could be convincing the employees to accept such change after appraising them regarding the financial crisis in the organization. Any such reduction in salary and working hours should be effected only after working out a mutually beneficial agreement between employers and employees.
In some cases, an employment contract or terms of employment will say that an employee is paid at the “prevailing National Minimum Wage hourly rate”. Where this is the case, an employer may reduce the employee’s pay in line with the minimum wage rates. In other cases, there may be a provision in the contract that provides for a reduction in pay. Where this is not the case, your employer cannot reduce it without your agreement, as this would change the terms of your contract of employment. Again, you may agree to reduced wages, if, for example, the alternative may be reduced hours or redundancy in the current economic situation.
Who is covered under the Industrial Disputes Act and the Minimum Wages Act?
Section 2(s) of the Industrial Disputes Act, 1947, defines workman as any person (including an apprentice) employed in any industry to do any manual, unskilled, skilled, technical, operational, clerical or supervisory work, for hire or reward, terms of employment are express or implied and include any such person who has been dismissed, discharged or retrenched in connection with, or as a consequence of the dispute. It excludes persons employed in Army/Navy/Air Force/Police and those employed in mainly managerial or administrative, supervisory capacity and drawing wages of more than Rs. 6,500 (amount is subjected to change).
If an employee is neither covered under the Industrial Disputes Act nor the Minimum Wages Act, he may approach the Courts for redressal of his grievance. However, litigation is expensive and it may not be possible for the employee to sustain it in the long run. Also, it may take years before he gets a judgment in his favor and there is no certainty that he would win.
How much can an employer cut your pay?
If you are an employee who isn’t protected by a bargaining agreement or employment contract, there is no set amount that has to be paid. However, employers cannot reduce wages to a level that is lower than the minimum wage criteria in a particular state or country. It is to be noted that some states have higher minimum wage criteria than others.
There are some exceptions to the minimum wage rule, but you cannot be paid less than the minimum wage rate for your classification in your state.
What does it mean to take a pay cut?
Taking a pay cut is a financial risk attached to a job or career change. A pay cut typically results in less pay but might include changes to benefits as well. Benefits may stop, such as employer contributions to a retirement fund. Fewer commissions or bonuses might impact take-home pay along with reduced work hours. The pay cut may have short or long-term financial risks, a consideration to make when deciding to make the cut.
Types of Pay Cut
The most common types are:
1. Salary or hourly pay cuts
This means a reduction in your annual salary or hourly rate. Some employers may also cut the number of hours an employee works in order to comply with minimum wage laws. Some employers furlough employees, meaning they keep them on staff without pay for periods of time.
2. Benefit cuts
Rather than or in addition to reducing salaries, some businesses might elect to downgrade or do away with certain benefits, such as health insurance, which can be expensive to maintain.
3. Bonus and raise cuts
Bonuses are often the first to go. This can be discouraging for people in professions in which bonuses are usually par for the course, like sales, but businesses often see this as a good way of cutting costs while curbing the number of layoffs or furloughs.
4. Reduced hours
In order to maintain employees’ hourly rate of pay, employers might instead reduce the number of hours each employee works. Of course, this will still mean the employee’s paycheck takes a hit since they’ll be earning less money overall.
5. Voluntary pay cut
In some cases, an employee may choose to take a pay cut voluntarily. There are several reasons why someone might choose to do this (we’ll go into greater detail below). Often, it means you have another opportunity to pursue, and a pay cut isn’t necessarily a bad thing.
Tips to handle a Pandemic Pay Cut
The coronavirus pandemic drastically altered both the corporate and small business landscape. Many companies were forced to lay off employees to avoid serious cash flow issues.
But some companies adopted another approach—they slashed compensation to recoup revenue losses and keep their workers employed.
If you were given an unexpected pay cut due to COVID-19, there are actions you can take to stay afloat financially. These tips are also valuable if you go through a temporary or permanent layoff in the future.
Frequently Asked Questions (FAQs)
Can you negotiate a pay cut?
The good news is that even when you take a pay cut, there’s room to negotiate your starting salary just like when you start any other job. You may not be able to negotiate the same salary you were making before, but sometimes a small pay cut is the best way to get where you’re going.
What is Furlough?
A furlough is a temporary leave of absence that can last as long as an employer wishes. Furloughs are usually imposed as a cost-saving measure when an employer does not have the resources to pay its employees but does not want to lay them off.
Why would a company furlough instead of a layoff?
Furloughs can happen in any industry, and in both private and public companies. It is similar to a layoff in that it’s a quick and efficient way to cut costs when necessary. Furloughs, however, are temporary and used to retain staff the company wants to keep but can’t afford to pay.
How do you respond to a pay cut?
Try to push back a decision at least two or three business days, to give you time to check details that may not be clear to you. Request the proposal in written form. You need to know the specifics. – Ask for details on how the change will affect your duties, benefits, customer relations, etc.
How long can a company furlough an employee?
There is no maximum limit on how long you can keep an employee furloughed. But extensive furloughs can reflect poorly on your organization and reduce morale. As a general rule, employers will implement an employee furlough if they expect employees to return to work within a 12-month period or less.