How to Prepare for a Pay Cut

Last Updated Jun 5, 2009 3:40 PM EDT

If you've gotten a pay cut lately or been asked to
work less hours, you're in good (and plentiful) company. In a href="">survey
conducted in May by outplacement firm Challenger, Gray and Christmas, more
than 52 percent of executives said their companies had slashed or frozen pay,
nearly double the figure from January; 29 percent of executives had cut workers'
hours; and 24 percent had imposed furloughs, or forced time off.

Among the many, many companies that have instituted pay cuts
recently are FedEx, Hewlett Packard, and Motorola, and many government
employees and countless other workers at smaller firms are in the same boat.
Luxury handbag maker Coach cut employees' hours late last year, and
sales manager Payal Sampat saw her hours and pay reduced by two-thirds. As a
result, she's moved from Atlanta, where she was living on her own, to
Los Angeles where she can live with her father rent-free while she works at a
different Coach store. But she's also obviously had to cut a lot out
of her budget. "It was hard, but I was grateful that no one lost
their job," Sampat says.

Though not as bad as an outright layoff, a pay cut, unpaid
furlough, or diminished working hours can still be a very difficult adjustment.
If your company has just announced a pay cut or furlough, or you fear they're
about to, here a number of important steps you need to take in order to
minimize their impact on you.

Get the Full Story

Goal: Gauge the impact on your job, salary, and

Your first reaction to news of a pay cut or furlough may be
anger at its impact on your paycheck, or even relief that you escaped a layoff.
It’s important, though, to get past the emotions and take a close
look at what your employer is actually offering so you can plan ahead. When
does the pay cut start? How long does your boss think it will last? And how
will it affect your benefits?

“Employers rarely make things clear,” says
Alan L. Sklover, an employment attorney and popular workplace href="">blogger. “It’s
only later that you find out what the ramifications of changes like this really
are.” So it’s incumbent on you to ask for the details
yourself. Sklover suggests reviewing your company’s current HR
policies, and asking your company’s HR department directly about the
possible effects of a pay cut or furlough on your benefits.

At many companies, benefits such as health insurance are
available only to employees who work more than a certain number of hours a
week, typically 30, notes Kirk Nemer, an employment lawyer and president of a
Denver-based employment negotiation firm. But the actual number varies by
company, so check your company’s HR policy. A host of other perks
such as pensions, bonuses, stock options vesting, 401(k) matches, and severance
pay are also calculated based on salary, work hours, or both, so a salary cut
or work reduction could slash or even eliminate some of these benefits, too.

Know Your Rights

Goal: Make sure your boss is treating you fairly.

Companies instituting pay cuts or furloughs will often make it
feel as though you’re “taking one for the team.”
With revenues declining steeply, they’ll tell you a pay cut for
everyone is fairer than layoffs for a few. As we’re in the midst of a
terrible recession, it’s fair to assume that most managers are being
honest. But there is always the possibility that a manager could use the
recession as an excuse to penalize certain workers unfairly or even illegally.

While there’s not much you can do if your boss’s
nephew escapes a pay haircut — personal favoritism is not actually
illegal, says Sklover — treating a worker differently because of
gender, age, ethnicity, religion, national origin, disability, or pregnancy is
illegal. And if you suspect discrimination, you may be able to get justice
even if you’re not prepared to file a class-action lawsuit. Before
resorting to a lawyer, file a complaint with your company’s human
resources department, advises Kirk Nemer. HR is legally obliged to investigate
the complaint and forbidden from retaliating against you for making it.
Moreover, the courts will not hear discrimination complaints until employees
have shown that they have filed a complaint, and that the company failed to act
on it.

How do you know you’re being discriminated against? If
your boss is dumb enough to spout bigoted remarks, then they could be used as
evidence. Otherwise, you’ll have to look for patterns among those who
were and weren’t given pay cuts and furloughs, which could be used to
help build a discrimination case, according to Sklover.

Big Idea

What About Unemployment Benefits?

Facing a drastic pay cut, you decide you’d rather
take your chances on the job market —so you quit. Can you collect
unemployment benefits? Workers are generally not entitled to unemployment
benefits if they voluntarily resign from a job. But if the modified terms of a
job are so different that a “reasonable person” wouldn’t
be expected to continue doing it, most states will qualify you for unemployment
insurance. What’s tolerable to a “reasonable person”
is up to the unemployment insurance examiner, though. A major change in hours,
pay, job location, or other working conditions may be enough to fit the bill.
And with the job market so weak, Alan Sklover believes that examiners are being
more liberal with their coverage decisions.

Try to Negotiate Something in Return

Goal: Seek out some opportunity amidst the crisis.

It’s likely your boss was forced to cut your hours or
pay because he or she had little choice. Your boss still wants you to remain
loyal, satisfied, and productive, though. So perhaps there is something he or
she can do in exchange for your acceptance of this new job situation. A few
consolation prizes to seek include a more flexible work schedule, a better job
title, more vacation time, or discounts on company products or services. Or you
could ask to retain some of the benefits you were set to lose (see Step 1).

Go to your boss first with this request. But if that fails,
consider banding together with your colleagues so that your plea carries more
heft. And if the idea of collective bargaining makes you uncomfortable, think
of it this way: measures that raise productivity and morale are a win-win for
managers and employees alike.

Adjust Your Finances

Goal: Marshal your resources to prevent a setback from
crippling you.

Pay cuts and furloughs are often presented as temporary
measures. But depending on the economy’s course and the company’s
fortunes, “temporary” could be a long time. Worse, the cuts
could be a harbinger of widespread layoffs. So brace yourself for big changes
to your financial situation even as you make smaller adjustments. A few
strategies to consider:

  • Divide all your expenses into “mandatory”
    and “discretionary.”
    Then, reduce your discretionary
    spending and get an idea of how long you can continue paying your mandatory
    expenses with your reduced salary.
  • Increase your savings cushion to prepare for the possibility of
    a layoff.
  • Establish a home equity line of credit. This can be a source of
    emergency cash if you need it, but you’ll have to apply while you
    still have a job. If, on the other hand, you have negative equity in your home,
    call your lender and try to negotiate a loan modification before a further
    financial setback lands you in foreclosure, suggests Kathleen Campbell, a
    financial adviser based in Fort Myers, Florida.
  • Maintain your access to credit. Make sure you occasionally use
    each of your credit cards so they don’t get closed due to inactivity.
    But pay the balance in full!
  • To make up for your lost spending power, take advantage of every
    last benefit your employer offers, such as transit reimbursements, flexible
    spending accounts for health or childcare, and company-sponsored discounts.
  • Beyond these steps, you should also make sure you’re
    cultivating your personal network for job leads, and also looking into href=";content">possible
    consulting opportunities in case your pay cut signals more drastic measures
    like layoffs. Proper planning can help you make the best of this painful

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