Exempt Employees Salary Reduction Regulations

One of the hottest HR topics right now is salary reductions for exempt employees. Many employers are faced with a choice of laying off employees, or using other tactics to reduce payroll.


When employers reduce exempt employees’ salaries, they must take certain precautions to avoid breaking the law.


One option to reduce payroll is to reduce hours for hourly employees. By having every hourly employee work 36 hours per week rather than 40 hours per week, an employer can reduce his or her payroll expenses by 10%. (In many cases, however, the cost of benefits remains constant.)


However, that solution won’t work for salaried exempt employees. Under the federal Fair Labor Standards Act Fair Labor Standards Act, or FLSA, employers must pay an exempt employee his or her full weekly wage, regardless of how many or how few hours the employee works per week. If the exempt employee works 60 hours per week, he or she is not entitled to overtime. However, if the exempt employee works 20 or 30 hours per week, he or she must still be paid the full weekly salary.


This raises a question for employers. Is there any legal way to reduce an exempt employee’s salary?  The answer is “yes.” Under certain circumstances, an exempt employee’s salary can be reduced, according to the U.S. Department of Labor.


In order for the exempt employee’s salary reduction to be defensible, it should be:


  • Permanent
  • Applied to an entire group or class of employees
  • Not directly tied to a reduction in hours 

If an employer temporarily reduces an exempt employee’s salary when business is slow, this can change the exempt status of everyone in that job. For this reason, the employer should always present the salary reduction to employees as permanent. There should be no promise or suggestion that the salary reduction is only temporary. The salary reduction needs to remain in effect for a minimum of 3 months.


Applying the salary reduction to only one or a few exempt employees can also change their exempt status. Ideally, the company would reduce salaries for exempt employees by the same percentage, across the board. If that is not possible, everyone with the same job should have a similar salary reduction.


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.  In some cases, the courts have ruled that when both salaries and hours are reduced, it changes the employees’ exempt status. In the worst possible scenario, employers have been required to pay the workers overtime for the past 3 years.


However, according to the SHRM, or Society for Human Resource Management, in some cases the courts have found that when a reduction 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.  


Some states including California have different exempt employee laws.



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302 Thoughts on “Exempt Employees Salary Reduction Regulations”

wayne ahrens

March 26, 2015 at 10:10 am

i was an employee of over 8 years in mn at a house building construction job then the company fired me one day and gave me no good reason for termination except that I had a blatened disrespect for authority and I had never been written up or warned about anything since I started working. And now they want to rehire me back at my old position which was utility so I had to do anything that needed to be done but now they want to pay me $14/hr when I was making $17/hr like the other 8 guys in the utility position. My question is if it’s legal to fire me and hire me back in the same class for $3/hr less ? If not what actions can I take so I don’t lose my unemployment wages if I turn them down. Cause that would terminate my unemployment wages.


March 26, 2015 at 11:56 am

I am salary and work 50 hours a week and before taxes my check is 1000 biweekly. Can i claim exempt on my w-4?

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