Benefits and Compensation

Tips for Managing a Reduced Workforce Cutting Corners to ‘Save a Buck’ Can Cost Millions Down the Line

by Warren Nelson and Karl Lindegren, Fisher & Phillips, LLP 

In today’s tough economy, employers worldwide have been forced to shed key personnel in order to minimize costs. Companies large and small have reduced their workforce by drastic numbers, many left with no choice but to lay off valued employees.

However, in the wake of these sweeping cutbacks, companies must pay close attention to the legal issues surrounding their remaining employee relationships. Desperate to maximize savings, numerous corporations are taking shortcuts to cost reduction—slashing salaries, rescinding vacation time, and failing to reimburse work-related expenses—possibly violating workers’ rights and providing grounds for a costly lawsuit.

While the need to shrink labor costs may be unavoidable, employers, now more than ever, must be aware of the different laws governing their workplace. There are some key issues related to reduced-workforce management that employers need to keep in mind. Some tips to steer clear of legal troubles include:

  • Carefully consider all salary cuts. Before introducing pay cuts—an initial step for many institutions facing financial difficulty—a company must first give fair notice to all employees.  
    In addition, an employer must be careful not to cut exempt employees’ salaries below the level that makes them exempt.
    Finally, if a company has committed to reducing salaries, cuts must be made across the board. If financial favor is given to those with seniority, frustrated lower-level employees might be driven to file a lawsuit or other administrative claim.
  • Think before revoking vacation. For companies operating with only half of their previous staff, each employee’s time becomes twice as valuable, and it is therefore far more difficult to offer vacation time.   
    However, before denying a request for time off, a company must make sure that its employee handbook clearly states that “vacation is dependent upon the scheduling and needs of the employer.”
    If no such written statement exists, and employees did, in fact, sign a contractual agreement predetermining their vacation hours, a company faces legal risks by retracting time off.
  • Mind your 401(k) matching. Many companies are opting to reduce matching payments to employees’ 401(k) plans.
    However, before doing so, an employer must determine whether it is lawful to do so. Managers need to thoroughly examine their retirement plans and find out if the decision not to match requires resolution by a trustee.
    Moreover, companies must be aware that they cannot reduce their contributions retroactively; adequate notice must be given to all employees.
  • Honor lunch breaks and work hours. Dealing with a reduced workforce doesn’t license the mistreatment of employees who remain. Employers must resist the temptation to overwork the individuals who are “picking up the slack” left over from layoffs. By honoring the state and federal laws regarding breaks, lunch breaks, and work hours, a company cannot only maintain high company morale, but also avoid nasty litigation in the future.
  • Reimburse, reimburse, reimburse. In spite of shriveling budgets, employers must continue to reimburse employees for all work-related expenses. Failure to do so provides employees with an outright, justifiable reason to sue the company. These expenses could include gas mileage, airfare, hotel bills, company laptops and cellular phones, and recreational costs for “wining and dining” clients.

Business leaders who fail to abide by these laws could very likely face an ugly lawsuit, lose the entire company, or wind up with a staff of employees determined to form a union. Of course, employers should consult with their labor and employment attorney if they have any questions or concerns surrounding the latest employee management legislation.

2 Warren Nelson and Karl Lindegren are partners with the management-side labor and employment law firm Fisher & Phillips LLP ( in its Irvine, California, office. With a focus on both preventive counseling and defense of claims, the firm addresses the business and legal objectives of employers in a way that optimizes its clients’ performance in today’s changing marketplace. They can be reached at 949-851-2424 or at and

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