Labor expenses typically consume the largest budget segment, so many employers are deciding if they should reduce their workforce, enact pay reductions, or both. According to The Wall Street Journal, 184 chief executives from S&P Composite 1500 companies already announced pay reductions at the end of April. These announcements seemed to have peaked last month, but analysts warn businesses are likely to see a second wave.
So far, certain individuals seem more likely to be affected by salary cuts than others.
Who’s at Risk During Widespread Pay Cuts?
Which Jobs Are at Risk?
Most companies will issue pay reductions broadly according to department or position. They won’t consider the employer’s performance or personal needs because this could expose them to discrimination lawsuits. Even if your manager knows you can’t afford to receive a pay cut, they can’t treat you differently than your peers.
It’s common for companies to instate a graduated pay cut, which means individuals at the top lose the highest percentage of their salary. For example, the CEO might volunteer a 50% cut, while a regional manager takes a 25% cut and an independent contributor receives a 10% deduction. Sometimes companies offer exceptions to the lowest-paid tier or instate minimum salary requirements.
In general, however, rank-and-file employees have the most at stake during widespread pay cuts. For many senior-level executives, salary accounts for only a portion of their net income; stock and bonus payments can generate most of their net pay. They might also have more bargaining leverage than recent hires or people in junior roles.
According to The Conference Board’s research on Russell 3000 disclosures, the following industries issued about 60% of base salary cuts to date and are the hardest hit:
- Specialty retail
- Industrial sector, including airlines and aerospace
Divides Based on Class, Race, and Gender
Employment laws protect workers against discrimination, but data from the Pew Research Center shows certain demographics are more likely to receive pay deductions. Survey data from April shows about 43% of U.S. adults say they or someone in their household has lost income due to the COVID-19 outbreak (up 10% since March). About 52% of lower-income workers reported pay reductions, whereas about 42% of middle-income households had reductions, and only 32% of the highest earners were affected.
The study also reveals a racial divide among survey respondents. About 61% of respondents who identify as Hispanic had their pay reduced; 44% of Black respondents reported lost income; and 38% of employees who are white received cuts.
This information was collected by household, so the results don’t demonstrate the impact gender has on pay reductions caused by COVID-19. But managing partner Heidi Reavis of Reavis Page Jump LLP says in an interview with Bloomberg Law she expects “employment decisions in the COVID-19 era to exacerbate pre-existing pay disparities and wage gaps.” She explains, “We’re starting out this marathon with weights already on our legs.”
Historical data from the 2008 recession seems to support this prediction, as women were more likely to receive pay cuts during that time.
How do employees succeed in a challenging market? By developing career agility.
What Can You Do if Your Employer Lowers Your Salary?
If you don’t have a union bargaining agreement or employment contract, you’ve most likely been “hired at will,” which means you can receive a salary cut at your employer’s discretion. However, there are a few regulations that protect workers.
What Are Your Legal Protections?
- Pay reductions cannot be retroactive.
- Some states (but not all) require employers to give notice before reducing your pay. Employees in New York, for example, need to receive at least 7 days’ notice.
- Some states allow employees to file for unemployment if their hours or rate have been reduced.
- Employers must continue to pay at least minimum wage to their employees.
- Pay cuts should be applied across departments, positions, or employment levels. If you think you’ve been discriminated against, the pay cut could be illegal and you should speak with an employment lawyer. Protected classes include sex, race, age, disability, color, creed, national origin, religion, and genetic information (added in 2008).
Pay cuts, furloughs, and mass layoffs are inevitable during an economic crisis of this magnitude. In most situations, you won’t be able to do anything to avoid a reduction after it’s announced. But there are some steps you can take to mitigate the damage and learn more about your situation.
Tips for How to Respond to a Salary Cut if You’re Employed “At Will”
- Ask which departments and positions have been affected.
- Determine what the new rate will be and how long the company plans to keep this rate.
- Check if there are any other changes to your employment contract—for example, if benefits stay the same or if you have the same amount of PTO.
- Ask what you need to do to get your old salary back.
- Offer to defer a portion of your salary.
- Try to negotiate compensation methods that don’t involve your salary. For example, you could try to focus on additional training or flexible hours.
- Ask if the salary cut affects the nature of your position or your responsibilities.
If you have a contract in place, on the other hand, you could have more room for negotiating terms—you might even refuse to accept the pay cut.
Tips for How to Negotiate Terms if You Have an Employment Contract
- Ask if colleagues in your peer group and those stationed above you have been asked to accept an equivalent cut.
- Volunteer a smaller portion of your salary.
- Ask for an automatic reinstatement on an agreed-upon date.
- Negotiate other terms of your contract, like stock deferments, post-termination restrictions, pension contributions, PTO, hours, and other items. If the employer agrees to any of these changes, make sure they are formalized in your contract.
- Most people with an employment contract can refuse to accept the cut. If you do so, the employer could respond by making your position redundant and eliminating it, although they might owe you a statutory redundancy payment as a result. For employees who’ve worked with the company for longer than two years, the employer must also prove through fair process the role was redundant, which could take several weeks.
- If you know you don’t want to stay with the organization, it might make sense to use this as an opportunity to terminate your contract early.
All employees should prepare for the possibility of other changes to their employment contract, which could include discontinuing tuition reimbursement programs, 401(k) matching, and other office perks. When the insurance enrollment period arrives, company-sponsored plans in 2021 could include reduced coverage or cost employees more.
Light at the End of the Tunnel
“In 2008, businesses were more aggressive with layoffs,” said Russ Adler, labor and employment attorney in New York City, in a recent interview with CNN Business. “We are seeing more creative attempts to address the issues. Furlough and pay reductions you didn’t see as much in prior downturns. It’s still scary for employees, but it’s better to have 80% of income than a layoff.”
Most people are willing to take the pay reduction if it means they can keep their job, but they’ll expect the situation to change eventually. Remember that even though times are difficult right now, you’ll have opportunities for improvement in the future.
Follow the latest developments in the job market on the Ivy Exec Career Advice column