How Low Can You Go? A California Employer's Potential Liability For Salary Reductions

 By David Krol 

David Krol

The economy in California still hasn't fully recovered, and employers may be faced with the tough decision of reducing employee salaries.  There are two risks associated with salary reductions, however. 

First, the salary reduction cannot run afoul of minimum wage laws.  Under California law, employees who are in the professional, technical, clerical, mechanical, or similar occupations and who are exempt from overtime requirements must earn at least twice the minimum wage for  a 40-hour work week.  Cal. Code Regs., tit. 8, § 11040(1).  At the current minimum wage of $8 per hour, the minimum salary for such employees is $640 per week, or $33,280 per year.
 
Second, if the reduction is substantial enough, an employee will be found to have had “good cause” to leave the job so as to render the employer liable for unemployment compensation benefits.  How substantial does the reduction have to be?  According to a precedential decision issued by California's Unemployment Insurance Appeals Board ("CUIAB"), a reduction of over 20%, standing alone, is sufficient to constitute "good cause."   http://www.cuiab.ca.gov/Board/precedentDecisions/docs/pb124.doc 
 
If the reduction is less than 20%, other factors, such as the employee's other job prospects, will be considered to determine whether the employee’s best alternative was to stay on board at the reduced salary.  In one case, an employee was notified of an impending layoff, and was unable to find work elsewhere at a comparable salary.  He was then offered a downgraded position with the company, at an 11% salary reduction.  The CUIAB denied the employee's claim for unemployment benefits, holding that the reduction in pay didn't constitute a compelling reason for leaving work, because the other factors existing at the time weighed in favor of continued employment at the reduced salary. http://www.cuiab.ca.gov/Board/precedentDecisions/docs/pb88.doc 
 
The moral of the story is … before instituting any salary reductions, employers should communicate with their counsel.
 

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