Table of contents
A pay adjustment is a change to the compensation an employee receives for working on behalf of your business. This may involve either increasing or decreasing an employee’s compensation. Likewise, a pay adjustment can be permanent or temporary.
Many companies review their whole workforce’s pay on an annual or biannual basis. As a result, they may decide to increase all employees’ pay by a certain percentage.
There are, however, many other reasons your company may decide to make a pay adjustment. These adjustments can relate to a single employee or group of employees. Read on to find out reasons you might make a pay adjustment, what to watch out for, and how to communicate the change with your employees.
Reasons for a Pay Adjustment
You may decide to adjust an employee’s pay based on factors related to their individual circumstances. Alternatively, wider economic conditions may be a factor when determining a change in pay. Some of the most common reasons for making a pay adjustment include the following.
When a worker receives a demotion, they may also receive lower compensation to reflect their new position. As demotions are often difficult for both employees and businesses, you may want to seek legal advice when making such pay adjustments.
If an employee performs to an exceptional standard, you may reward them with a merit increase. You can do this on an annual basis, following a performance review, or based on their contribution to individual projects.
If your company’s pay rates lag behind those of your competitors, you may experience high employee turnover. As well as damaging morale, a high employee turnover can result in significant recruitment, onboarding, and training costs.
Fairness Among Employees
If employees within your organization are doing the same job but earning different amounts, a pay adjustment may be necessary. As well as being fair to your employees, this may be a legal requirement. If you fail to pay your employees fairly, you risk allegations of discrimination, which could result in legal action against your business.
We’ll discuss more about the law surrounding discrimination below.
Inflation/increased cost of living
When prices increase in the wider economy, your employees will find it more difficult to achieve the same standard of living with their salary. Should this happen, you may decide to increase your workers’ pay.
When you’re making cost-of-living increases, you may also want to factor in regional differences if your business operates in multiple locations. For example, the annual cost of living may have increased by 5% in one state and 10% in another. In this case, you could award a higher increase to those employees facing greater expenses.
After all, being able to afford a decent standard of living is crucial for your employees’ physical and mental well-being.
Changing market conditions
Pay adjustments may also be necessary to reflect trends within your industry. Imagine if workers in your field were suddenly in higher demand. In this case, rates of pay would likely increase across your industry, and you might need to make pay adjustments to be competitive.
Length of service
Some companies will reward their employees with a pay increase if they remain with the organization for a certain length of time. For example, you may provide your employees with a raise after a year of service.
A temporary change to a worker’s role
There may be periods in which your employees temporarily take on extra responsibilities. This could happen during busy periods or if another employee is temporarily unable to work. In this case, you may need to adjust an employee’s pay to reflect this new role.
Change in working patterns
If your employees work shifts, you may pay different rates for different shifts. For instance, you may pay workers a higher rate for working nights or public holidays. Any change to an employee’s shift pattern could mean you need to increase or decrease their pay.
How to Decide on the Level of Adjustment
When you make a pay adjustment, your first step is likely to be determining the level of the change.
If your pay adjustment relates to an individual employee, you might want to consider the value they bring to your business. For example, an employee who brings in considerable sales or handles key client relationships may deserve a generous increase.
It’s also a good idea to consider the rates of pay offered by your competitors. This way, you can ensure your company remains competitive within the labor market.
Considering historic pay trends within your industry may help you determine a reasonable adjustment rate. You can obtain this data by looking at reports detailing trends against companies and job categories. The Bureau of Labor Statistics can also be a valuable resource when looking for this type of information.
Tops Tips for Making Pay Adjustments
As pay adjustments can be a sensitive topic, it is essential that you handle the matter sensitively.
Following the steps below should help the process run as smoothly as possible.
Discuss the proposed changes with relevant stakeholders.
Any wide-scale pay adjustments will affect your business’s overall labor costs. It is therefore essential that you discuss any proposed changes with your business’s leaders. This allows you to double-check whether the change is feasible for the company’s finances.
As a pay adjustment may affect an employee’s mood or level of engagement, it is also wise to notify their immediate supervisor of the change.
Follow a strict process for notifying employees.
If you are making a pay adjustment, it is crucial that you carefully consider how you will communicate this to affected workers.
You should ideally conduct all communications about pay in a private setting and on a one-to-one basis.
It is also important that you provide the employee with written notice of the adjustment and include the reason for the change. You may also decide to include a member of human resources in all conversations relating to pay.
Finally, if your pay adjustments relate to merit, you should thank your employee for their hard work and reiterate their achievements.
Take care when making payroll adjustments.
All adjustments to your payroll system should be made in a timely manner. Otherwise, your employee may not receive their correct pay on time. Remember, you will need to take any relevant deductions or taxes into account when making these changes.
Pay Adjustments and the Law
When you are adjusting your employees’ pay, it is essential that you remain compliant with relevant labor laws.
Some of the key factors you will need to consider include the following.
The Fair Labor Standards Act (FLSA)
Under the terms of the FLSA, all non-exempt employees need to receive at least the minimum wage. This will be either the federal or state minimum, whichever is higher.
When you are adjusting rates of pay, you will need to ensure that employees covered by the act still receive at least the minimum wage. See our article Minimum Wage by State: 2022 and 2023 Changes to learn more.
All workers covered by the act are also entitled to compensation of at least 1.5 times their usual rate of pay for any hours they work in excess of the 40-hour workweek.
Any decisions that you make in relation to pay need to be fair and free from bias. This means that you cannot make adjustments to pay based on a person’s race, gender, religion, sexuality, medical history, or age. Consider a company that predominantly offers merit increases to younger workers, for instance. This could be an indication of age discrimination within the business.
Laws relating to the prevention of pay discrimination include the Americans With Disabilities Act and The Equal Pay Act of 1963.
If your employees belong to a union, they are likely protected by collective bargaining rules. You will therefore need to negotiate employment terms such as pay adjustments for groups of workers through the union.
If you are planning to change your employees’ pay, you should first consult with their employment contract.
Should you make any changes that breach this contract, you could face serious legal consequences. For example, you could be subject to legal action from your employees or an investigation from labor standards authorities.
Correcting Payroll Errors
If there has previously been an error with an employee’s compensation, you may need to make a prior-period adjustment. This involves changing details on a previous payroll.
Typically, making a prior-period adjustment is required when correcting an error in an employee’s rate of pay or hours worked. But you may also need to make a prior-period adjustment if you have wrongly classified a worker within your business.
For example, you may have incorrectly classified an employee as FLSA-exempt. As a result, you may not have paid the employee the overtime compensation they were owed.
If an employee has been underpaid, you should repay the full amount you owe as soon as possible. You can do this as a separate payment or as part of the next pay period.
The rules surrounding overpayments are less straightforward. In some states, such as California, you cannot force a worker to return overpaid wages unless they have previously signed a document agreeing to do so. Research the laws in your state thoroughly before attempting to recoup any overpayments.
There are numerous situations in which you may need to increase or even decrease an employee’s rate of pay. These changes can be either temporary or permanent.
Following a fair and well-documented procedure should help ensure the process runs smoothly. Further, it is important to understand the relevant laws surrounding pay adjustments. If you are unsure about any of these legal requirements, it is a good idea to seek independent legal advice.