Employee Pay Adjustment: A Definitive Guide to Effectively Manage Changes in Wages (2024)

Sometimes you need to change an employee’s pay—for good or bad. You must do certain things to ensure a smooth adjustment of the employee’s wages. Before you change an employee’s wages, make sure you understand pay adjustments and how to make them.

What is a pay adjustment?

A pay adjustment is a change in an employee’s pay rate. You can change an employee’s hourly wage or salary.

Typically, compensation adjustment is an increase in the pay rate, such as when an employee earns a raise. A wage adjustment can also be a decrease in pay, such as a wage decrease when demoting an employee or changing their duties

Reasons to make a pay adjustment

Before you change an employee’s pay, you need to make a salary adjustment justification. You might make a salary adjustment if you:

• Promote an employee
• Give the employee a raise for merit or experience
• Give an employee a cost of living increase
• Increase wages as a market adjustment or to keep up with competitors
• Are trying to equal out wages among your employees
• Have the employee work more or fewer hours
• Change the employee’s shift, resulting in a loss or addition of premium wages (e.g., shift differential)
• Transfer the employee to a different location
• Increase or reduce an employee’s responsibilities
• Demote the employee
• Need to reduce wages to prevent layoffs

There are numerous reasons why you might make a pay adjustment. Whatever your reason is to adjust an employee’s pay, make sure it is well defined. You need to explain your reason to the employee.

How to make a pay adjustment

You must follow the FLSA when making a pay adjustment. An employee’s wages cannot be less than the minimum wage. The employee’s wages must be at least the greatest of the federal, state, or local minimum wage.

You must also follow the rules for determining between exempt and nonexempt employees. You must pay overtime wages to nonexempt employees, but you do not have to give overtime wages to exempt employees. When you adjust an employee’s wages, the employee might go from exempt to nonexempt, or vice versa.

Before you implement the payroll adjustment, you should talk to the employee it impacts. Have a private conversation where you explain the pay adjustment.

Tell the employee why you are making the change and how big the pay change is. Explain any other changes that will happen because of the adjustment, such as the employee becoming exempt from overtime wages. Let the employee know when the change goes into effect.

When you adjust an employee’s wages, make sure you document the change and why you made it. You should have records of your employee wage decisions. It can be helpful to see how and why you adjusted one employee’s pay when making a decision about another employee’s pay. Also, it’s beneficial to have records in case you are ever sued or if the government investigates your business.

Update the employee’s wages in your payroll. Make sure the pay adjustment begins on the correct pay period. When you run payroll, double check the employee’s wages to make sure you correctly made the changes.

Use payroll software to keep track of your employees’ wages. In Patriot Software’s payroll software, you can easily add and adjust money types, so you can accurately pay your employees. Sign up for a free trial today!

This article has been updated from its original publication date of March 29, 2012.

This is not intended as legal advice; for more information, please click here.