FLSA FAQs: Pay Agreements and Changing Employee Pay Rates

For many employers and employees, a new year means a review of pay levels and new agreements about pay going forward. (I hope that it means pay increases, but as we discussed with the Pay Period Leap Year last week and given the ongoing impacts of COVID-19, it might mean pay decreases, too). Inevitably, setting and changing pay rates raises questions for employers and employees alike about what wage and hour law permits (and forbids) employers to do.

Pay Agreements under the FLSA

The FLSA requires that most employees in the United States be paid at least the federal minimum wage (currently $7.25/hour) for all hours worked and overtime pay at not less than time and one-half the regular rate of pay for all hours worked over 40 hours in a workweek. The FLSA is relatively silent about how an employer can set that “regular rate” and how it can change, though. The Department of Labor’s Wage and Hour Division says only that “[t]he regular rate of pay is based upon actual facts and cannot be circumvented by an agreement. The regular rate may not be lower than the FLSA minimum wage or, where applicable, a higher state or local minimum wage.” Noticeably absent from the regulations and the DOL’s fact sheets on the FLSA are any rules around how and when employers can change the “regular rate.” That’s because the FLSA leaves it largely up to state laws and, ultimately, employers and employees to work out compensation agreements, as long as the compensation meets the minimum requirements.

State and Local Laws, Common Law (and Common Sense)

Of course, the lack of guidance in the FLSA does not mean that an employer should leave employees in the dark about their pay rates. Indeed, doing this can create legal issues in the event of a dispute. Under the FLSA and state laws, employers must pay an employee according to whatever wage agreement was in effect when the employee performed the work (hourly, bi-weekly, monthly, annually, flat rate, piece rate, etc.). This could be a rate:

• defined in a written employment agreement/contract
• stated in an offer letter
• input into a payroll system
• shown on the most recent pay stub
• discussed in an e-mail
• agreed on orally (Yikes! Please don’t do this, employers!)

Logically, if there is no written employment agreement or contract, federal and state courts and agencies will turn to the “parol” or “best evidence” rule to determine what the employer and employee agreed when the employee was hired or when setting the last wage. Whoever has the “best” or most convincing evidence of that rate and method of pay will usually prevail. Both courts and agencies tend to take employee-favorable views of evidence for obvious reasons, particularly where there is ambiguity about how to read an agreement or offer letter. Furthermore, for those of you relying on oral “agreements” about pay, in most jurisdictions, employers who completely fail to specify or agree on a pay rate and method will find that courts and agencies will simply determine what rate and method they think is “reasonable” for the type of work and require you to pay that.

Pay Agreements and the “At-Will” Employment Relationship

Keep in mind that agreements about how much and when to pay are different from whether your employee has a right to continue to work. In most (but not all) jurisdictions, employment is “at will.” This means that, absent an enforceable, written agreement to the contrary, employees have the right to end their employment relationships with their employers, with or without advance notice or cause, and their employers have an identical right. Absent some clear intent or statement in an agreement or other document that an employer intended to employ a worker for a definite period, courts will assume that employment is indefinite and that either side may terminate it for any lawful reason.

Changes in Pay Rates

Employers are not required to give employees pay raises or make any changes in employees’ pay, unless laws change and mandate such changes (such as minimum wage increases, or changes in the minimum salary for exempt employees). Absent some written agreement to the contrary (like a union collective bargaining agreement), employers can even choose to decrease an employee’s pay for any lawful reason, from business conditions to disciplinary actions. However, employers that do elect to change pay rates must give clear notice to their employees. In some states, like California and New York, wage and hour laws require employers to give notice, but written notice is a best practice to avoid disputes over the rate of pay.

Timing of the notice is important, too. Particularly given unprecedented financial pressures due to the coronavirus pandemic and the lack of substantial, ongoing federal and state relief, many employers find themselves in the position of considering pay reductions as an alternative to furloughs or layoffs. Not only must you provide notice of the reduction, but the majority of states (33 or 34) also require advance notice of these changes. These advance notice periods range from lengthy (30 calendar days in Missouri) to shorter (1 pay period in Alaska and Maryland, 7 calendar days in several other states) to minimal (24 hours in North Carolina). Nearly half of the states, including Indiana, Illinois, Colorado, Kansas, and Texas, plus Washington D.C., require advance notice but do not specify a particular period. As a matter of fairness, providing at least 1 pay period of advance notice at a minimum is the best practice, even if you can get away with less. States require strict compliance with advance notice and with deadlines and do not waive these requirements, even for pandemics, so plan ahead.

While some pay cuts are unavoidable, retroactive pay cuts are simply unlawful. An employer who agrees to pay $X for work and then, after the employee performs work, pays $Y for that work instead may open themselves up to breach of contract, equitable, and (if the pay falls below statutorily required rates) wage and hour claims and collective and class actions. Keep in mind that pay cuts may entitle employees to other remedies, too, such as unemployment benefits chargeable to you as an employer.

Employer Takeaways

While the FLSA only imposes the barest of requirements, most states and localities require employers to provide written notice to employees of their regular rate of pay and overtime rate, if applicable, both at time of hire and in advance of those rates changing. Even if your jurisdiction has no specific requirement, you still should provide advance, written notice to employees at least one pay period before the effective date of any rate change. Check your state and local laws to see if you must follow a specific format or use a specific form to communicate these changes.

Finally, it should go without saying: employers cannot reduce the rate of pay retroactively, only prospectively. Once an employee works under an agreed rate, you must pay that employee at that agreed rate, nothing less. As with so many wage and hour and HR topics, clearly, timely communication is your best friend, even when you must break bad news.