Understand the Law Before Dropping or Reducing Employee Benefits

Small businesses facing poor or uncertain financial circumstances may be forced to consider drastic employment decisions including layoffs and benefit reductions. If your business faces such decisions, it important to understand your legal rights and obligations concerning employment law.

Layoffs, Furloughs, and Reducing Employee Hours


If your business is considering layoffs, review the Worker Adjustment and Retraining Notification Act (WARN), which requires employers with 100 or more employees (generally not counting those who have worked less than six months in the last 12 months and those who work an average of less than 20 hours a week) to provide at least 60 calendar days advance written notice of layoffs at single site of employment. Though the federal law may not apply to your small business, many states have enacted similar legislation to apply to businesses with less than 100 employees.

Furloughs and Hour Reductions

The rules on for reducing employee hours or imposing a furlough depend on whether an employee is considered exempt (salaried) or nonexempt (hourly).

As an employer, you are legally allowed to reduce the work schedule of hourly employees or impose a furlough to temporarily stop work. However, if you reduce your employee hours but not their workload, they may not be able to finish their tasks on time. If they need to work extra hours to accomplish their work, you must compensate them for that time.

Reducing the hours of salaried employees (employees who receive the same amount of pay each week is more complicated. Since salaried employees receive the same pay each week, regardless of how many hours they work, cutting hours but maintaining salaries will not save your business money. If you reduce the hours of salaried employees and as a result pay them less, their exempt status could be reconsidered as hourly. If that is the case, then they would now be eligible to receive overtime pay. Many employers choose to avoid this option as it could lead to higher and unexpected labor costs.

A furlough of salaried employees would not jeopardize their exempt status because exempt employees are not entitled to compensation for any week in which no work is performed. If you begin furloughs for extended periods of time, you may be required to comply with federal or state WARN laws.

Pay Cuts

Generally, employers have the right to institute pay cuts for hourly employees, as long as the wage meets minimum wage standards. In some states, you may be required to provide advance written notice to employees. Check with your state department of labor for the laws in your area.

If you cut the pay of an exempt employee to the point where they are receiving less that $455 per week, they could be considered an hourly employee as explained above. However, if you need to cut pay as a result of an economic downturn, you may be exempt from the overtime rules if the cut is maintained each month as the new salary (and does not increase or decrease each week) and if it is in response to your business' long-term needs. If you choose to go this route, speak with your state department of labor to ensure that you are in compliance.

Another alternative is to reduce exempt employee pay without dictating the hours they work. The downside, of course, is that without a corresponding reduction in schedule, exempt employees may become demoralized by the appearance of working the same amount for less pay.

Changing Benefits:

Unlike mandatory benefits like worker's compensation and social security taxes, employers are not required to provide fringe benefits such as paid time off, severance pay, retirement plans, and holiday pay. Oftentimes, businesses choose to offer these perks as recruitment incentives.

Generally, while employers can change or eliminate paid time off (PTO) policies, they cannot take away PTO hours if they have been accrued. Employees will be entitled to their PTO leave, or you will have to pay them for the unused time. Note that the same rules may not apply to unused sick leave.

If you currently offer retiree health benefits, nothing in federal law prevents you from cutting or eliminating those benefits unless you have made a specific promise to maintain the benefits, according to the Department of Labor.


If you need to change any fringe benefits, wages, or hours, research your state's employment laws to ensure you are in compliance. Remember to apply benefit packages consistently to your employees to prevent discrimination claims.

For more information, contact an attorney and/or accountant for legal and financial assistance.

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