We continue our blog series on COVID-19 implications on executive compensation matters with a post that addresses salary or wage reductions on a company-wide or targeted basis.

Companies impacted by the COVID-19 pandemic, including the concomitant widespread shelter in place orders, may be considering pay cuts for some or all of their workforce, either in addition to or instead of furloughs and layoffs.  In implementing salary or wage reductions, companies should be mindful of federal, state and local wage and hour and labor laws, consent and notice requirements under contractual agreements with individual employees or groups of employees, tax implications on subsequent “make-whole” or “make-up” payments, impact on employee benefit plan participation, governance considerations, and disclosure requirements for public companies.

Prior to implementing salary or wage reductions, companies should:

• IDENTIFY affected employees and applicable state or local law:
  • Who are the employees affected by potential salary or wage reductions? Are they exempt or non-exempt? Are they part-time or full-time? How many employees are affected at any single location? Will company executives be impacted?
  • Is the salary or wage reduction being undertaken in connection with a reduction in hours? If so, is the reduction proportionate?
  • What state or local law is applicable to the employee’s employment?
  • What are the state and local requirements for the notice, if any, that must be provided to employees prior to or following a wage reduction?
  • Would a reduction result in the employee’s wage falling below the threshold level for exempt classification (currently $684 per week under federal law)?
• REVIEW the potential effects of a salary or wage reduction under applicable law, contract, agreements, offer letters, and employee benefit plans:
  • Is the employee a party to an employment agreement, offer letter, or other agreement or arrangement that sets base salary? If so, does it expressly provide that base salary cannot be reduced, such that it would need to be amended?
  • Is the employee covered by an agreement, offer letter, or plan with a “good reason” or similar definition that would trigger severance, equity award accelerated vesting, or other rights as a result of a salary reduction? Is there an exception for across-the-board salary reductions and, if so, whether a limit or such reduction applies?
  • Does the employee participate in employee benefit plans and programs (e.g., group health plans, retirement plans, 401(k) plans, severance benefits, and vacation programs) that may be impacted by a reduction in hours and/or salary or wage reduction? For example, salary reductions may reduce an employee’s severance entitlement, pension accrual or matching contribution.
  • Does the company’s employee handbook address salary or wages during a leave of absence or furlough?
• ACT to execute waivers, deliver notices, take action with respect to employee benefit plans and, for publicly traded companies, provide disclosure of the salary reduction where necessary:
  • Obtain consents to salary or wage reductions and waivers of “good reason” from employees as needed.
  • Provide advance notice in accordance with applicable state and local requirements.
  • Take any necessary actions under employee benefit plans and programs to continue or end coverage/participation, as applicable.
  • Prepare and file disclosure if/as required for public companies (e.g., Form 8-K, press release).
  • Consider creating a working group including representatives from HR, legal, and investor relations to coordinate actions and communications to internal and external interested parties.