Exempt Employees Salary Reduction Regulations

The topic of salary reductions for exempt employees has become one of the latest, hottest HR topics. Many employers are faced with this problem. The employers must take certain precautions before they reduce exempt employees’ salaries in order to avoid breaking the law.

There is no question that reducing hours for hourly employees is one option to reduce payroll. For example, reducing weekly hours from 40 hours per week to 36 hours per week can reduce his or her payroll expenses by ten percent; however, that solution won’t work for salaried exempt employees. According to the federal Fair Labor Standards Act (FLSA), an exempt employee must be paid full weekly wage, no matter how many or how few hours the employee works per week. Whether the exempt employee works 20 or 30 hours per week, 60 hours per week, he or she will still be paid the full weekly salary.

In order to justify the exempt employee’s salary reduction, it should be:
l Permanent
l Applied to an entire group or class of employees
l Not directly tied to a reduction in hours

Reducing an exempt employee’s salary when business is slow can change the exempt status of everyone in that job. For this reason, the employer should permanently present the salary reduction to employees. The salary reduction needs to remain in effect for a minimum of three months.

Reducing hours for exempt employees when salary is reduced is a grey area. The safest course of action is for the employer not to reduce the number of hours when salary is reduced. However, according to Society for Human Resource Management (SHRM) when a reduction both in salary and hours for an entire class of exempt employees is part of a change in business tactics, the employees retain their exempt status.