Armanino Blog

Salary Cuts in Lieu of Layoffs: What Business Leaders Should Know

by Jenn McCabe
March 24, 2020

If you’re keen to keep people employed and/or your staff busy, then you’re probably looking for other ways to cut your payroll costs. Many of the calls we get are about how to execute a wage reduction.

First, let’s address the tone you should take, in order to ensure this is delivered in a way that is not demoralizing. As a leader, you should make two statements as often as you can possibly say them, and as truthfully as you can say them.

“We are doing this to save jobs” is one. The other is: “The leadership of this company made the deepest cuts at the top first. This is not just happening to you. We are all in this together.” The tone from the top is critical.

Here’s what else to keep in mind if you are considering wage/salary cuts.

Hourly (non-exempt) workers

This is tough. These people are often the ones most impacted by a salary reduction. It might be more humane and more prudent to reduce hours worked, or put stern restrictions on overtime, than to cut their hourly rate.

  • Pay these people for every hour they work.
  • Be darn sure a rollback doesn’t mean you’re paying them less than minimum wage.
  • They’re still eligible for overtime, even if you drop their hourly rate.
  • This population can also apply for unemployment for the hours they are not on payroll each week, but this usually doesn’t work well in a practical sense.

Salaried (exempt) workers

For salaried staff, you have a list of things to decide ahead of time. Within moments of announcing pay cuts, your staff will bombard you with questions. Expect it, and prepare your answers. Here are some options:

  1. How long will this last?
    1. I don’t know. We’re doing our best to keep everyone employed at this moment, and that’s the goal. You’ll be the first to know when I know differently.
    2. Until [date], at which time we will bump everyone back up because our [client /product] comes back on line.
    3. Until business picks up again. Let’s all work together to show clients we are ready to go. Fire up, team!
    4. Until [date], at which time we’ll reassess. We will give you at least [one? two?] weeks’ notice before making any further changes. We’re doing our best to keep everyone employed at this moment, and that’s the goal.
  2. Will I get a bonus to make me whole at some point?
    1. No, this is saving jobs, and we need to anticipate that it’ll take us quite some time to figure this out.
    2. Yes, on or before [date], we’ll be issuing a bonus. This is just a temporary measure until funding comes through.
    3. Maybe, but please don’t count on it. It would be great if we could, and we’ll try.
  3. If you cut my pay 50%, does that mean I work 50% less?
    1. No, you’re exempt, which means you’re paid for a body of work. You aren’t paid hourly.
    2. No, this rollback has nothing to do with your workload. Your workload may change, but it might not.
    3. Yes, we are cutting your pay by 20% and shortening the work week by one day.
    4. Sort of. Your work week may be shorter because we have so much less work, but we are not tying this to specific hours.
  4. What about my other benefits?
    1. The company will continue to provide all fringe benefits at this time. Note that while your health benefits will be the same amount, because your salary is less, your retirement matching will be less if you chose a percent of your gross wage.
    2. The company will not continue to provide benefits, because we’re focused on providing salary.
    3. The company will provide the usual 401k matching, but we will discontinue our health plan.
    4. You will continue to accrue paid time off per hour that you work (for a reduced workweek, people accrue less), as required by law.

NOTE: Fringe benefit continuation or discontinuation can be tricky.

Dangers to avoid

A shortened work week could negatively impact client service, or your clients’ expectations. You may need people rolling their one day off a week rather than shutting down one day a week.

When the workweek is reduced, it is inevitable that staff will ask for extra pay if they work on a closure day. For exempt staff, the answer to this is no. Similarly, offering “comp time” could be discriminatory in certain jurisdictions or circumstances.

If you do tie this to hourly work, you get in a giant mess of reclassifying salaried workers to hourly workers.

Have questions or need some help? Don’t hesitate to reach out to our experts. For more information on keeping your business running during disruption, visit our COVID 19 Resource Center.

March 24, 2020

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Jenn McCabe - Partner, Outsource HR - El Segundo CA | Armanino
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