How to Implement Salary Cuts

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In many businesses, especially in the service and manufacturing industries, payroll and labor costs are the single-largest budget line item. Unfortunately, almost any organization having paid employees could find itself having to reduce labor costs. Reducing labor costs in an organization, though, sometimes isn't a cut-and-dried process and a number of hazards and considerations exist. In fact, failing to correctly implement a round of salary cuts can open an organization up to the possibility of employee lawsuits.

Employees and Salaries

Most employees receive pay at hourly or salaried rates, though there are actually a number of different employee compensation methods. For good reason, employees also tend to regard their pay as something that should only be increased, not cut or reduced. Employees also rightfully expect that their pay won't be cut without warning, and then only for valid cause. Because employee salary or pay can also involve a contractual relationship, carefully consider just how to cut or reduce it before doing so.

Adhere to Employment Contracts

For organizations, tough market conditions or just an all-around poor economic environment sometimes leads to the need to cut employee salaries. For many organizations, across-the-board reductions in employee pay or reductions in employee hours are usually legal to institute. Many employees, though, are covered by contracts governing pay and those contracts must also be considered before instituting salary reductions. Before cutting the pay of employees working under contractual agreements, ensure reasonable notice is given and that required employee consent is obtained, if necessary.

Institute Salary Cuts Fairly

In labor law, disparate impact is a condition that unfairly falls more on one employee or group of employees than on another employee or group. Cut employee salaries only for good and documented reasons and ensure they aren't related to favoritism or, worse, discrimination in race, gender, sexual orientation, disability or religion. You should always take care to cut salaries in a balanced manner that doesn't lead to lawsuits by aggrieved employees. Generally, across-the-board salary cuts avoid creating disparate impact-related legal issues.

Always Treat Employees Humanely

Salary cuts are never easy for employees to accept and should never be instituted without first fully, openly and honestly explaining their need. Labor consultant Ken Romanoff also recommends cutting employee salaries as a percentage of their pay rather than using a bottom line flat dollar approach. Cutting salaries using flat dollar methods tends to disproportionately impact lower-paid employees. Cutting employee salaries by $100 weekly, for instance, hurts lower-earning employees far more than does reducing all employees' salaries by 10 percent.

Keep Employees Motivated

Cutting salaries frequently stings employees and leads to drops in their motivation. If you're forced to cut employee salaries consider instituting an incentive pay system to offer hope of regaining pay as well as possibly increasing employee motivation. When implementing an incentive pay system for employees ensure they also know exactly what to do to contribute to organization success and earn those incentives. Typically, employee incentive pay systems are tied to organization, team and even individual outcomes and they feature realistic and achievable goals.