Faced with a dramatically altered economic landscape and a scramble to preserve cash, many companies have implemented across the board pay cuts. Assuming there is no contract or collective bargaining agreement preventing cuts, there’s generally no legal prohibition against them. However, the cuts could bring unintended consequences by making formerly exempt workers eligible for overtime pay.
Under the federal Fair Labor Standards Act, most white-collar exemptions apply only to employees earning at least $684 per week ($35,568 annually). And some states, like California and Alaska, have even higher threshold salaries. If the company’s payroll reductions result in weekly earnings below $684, the impacted employee will be entitled to time and a half for hours worked in excess of 40 per workweek, regardless of the employee’s job duties or job title. (Similarly, hourly workers still must be paid at least the prevailing minimum wage.)
To be clear, the minimum salary threshold is only the first step in an exemption analysis. In addition to satisfying the salary requirement, the company must empower the employee with certain job duties in order to satisfy the exemption and avoid the overtime requirement. Said differently, the fact that an employee earns $684 or more per week is not, of itself, determinative of whether he or she is overtime exempt.
Desperate times call for desperate measures. But not needlessly reckless measures. If you plan to introduce pay cuts, do a careful analysis to make sure you don’t create additional financial obligations that eat into your intended savings. If you have questions about managing employee salaries, contact us at email@example.com or (246) 477-6300.
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