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Business Math: How to Calculate a Pay Cut by Percentage

A woman adding up money

Pay cuts aren’t ideal; however, they’re sometimes the only option when an employer faces difficult economic periods. As the coronavirus takes its toll on the economy, many employers have had to make the unfortunate decision to cut many employee’s wages. Some small business owners were lucky enough to obtain Payment Protection Program (PPP) loans. This money allowed business owners to pay their employees and get back on their feet; however, the money given was often not enough to pay all employees their original wages. If you received news that your pay decreased and you need to know what your new salary or hourly wage is, read this article or you can try our free pay cut calculator.

Can an Employer Cut an Employee’s Pay?

Yes. An employer can cut any at-will empployee’s pay at any time. An “at-will” employee is someone who doesn’t have a formal employment contract and isn’t covered by a bargaining agreement. If the employee doesn’t have an agreement regarding termination, demotion, or salary decreases, an employer can cut their pay at any time.

How Much Can an Employer Cut?

If an employer cuts an employee’s pay, the employer must pay employees at least the federal or state minimum wage. As a reminder, if an employer reduces a salaried employee’s pay and still wants to keep them exempt from overtime, the employer must adhere to FLSA salary threshold rules. That means the employer must pay the salaried employee at least $684 a week in order to maintain their exempt status. 

When an Employer Can’t Cut Pay

Pay cuts are very common and can typically happen at any time, however, there are some exceptions. There are times when employers cannot give an employee a pay cut, such as when the pay cut is a surprise, retroactive, discriminatory, is a form of retaliation, or when it breaches a contract. 

Please note that some states require employers to notify their employees via email, verbal communication, or letter when they’re reducing someone’s pay. Additionally, some states require employers to give days or weeks of advanced notice before implementing the new wage. In general, it’s a good idea to check with your local labor board to ensure you follow your state’s rules correctly. 

Calculating a Pay Decrease by Percentage

To figure out what your new wage is, you’ll follow these steps:

Hourly Employee Example: You earn $16.00/hr and your employer notifies you that you’re getting a 15% pay cut. 

  1. First find the decimal value of the percentage decrease. The decimal value of 15% is 0.15. 
  2. Next, multiply your original hourly wage by the decimal value of the percentage decrease. In this case you’ll multiply 16.00 by 0.15, which equals 2.4.
  3. Subtract the previous value from your original hourly wage and you’ll get your new hourly wage amount. $16.00 minus 2.4 equals 13.60. Your new hourly wage is $13.60.

Salary Employee Example: You earn $55,000 annually and your employer notifies you that your pay will decrease by 10%.

  1. First find the decimal value of the percentage decrease. The decimal value of 10% is 0.10. 
  2. Next, multiply your original annual salary by the decimal value of the percentage decrease. In this case you’ll multiply 55,000 by 0.10, which equals to 5,500.
  3. Subtract the value above from your original salary to obtain your new salary amount. 55,000 minus 5,500 equals 49,500. The employee’s new salary rate is $49,500.

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