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Employee Pay Adjustments: Reasons Why

Payroll AdjustmentPayroll Adjustment
min read
August 21, 2023

Ideally, running payroll is seamless. And, if you have the right software, it can be pretty automatic. But, sometimes, you have to make changes to payroll, such as when you hire a new employee or give someone a raise. 

Here’s a quick guide to making pay adjustments, why you might use them, and how to set them up.

What Is a Payroll Adjustment?

A payroll adjustment refers to any change in an employee’s regular pay. This change can be an increase or a decrease. It can also be a one-time change or a permanent one. 

A pay raise, for example, is a positive and permanent adjustment because you’re increasing your employee’s pay moving forward. In contrast, a year-end bonus is a one-time salary adjustment where you increase your employee’s pay for one period, and then it goes back to normal. 

A negative pay adjustment happens when you need to lower an employee’s regular pay. You may need to use a one-time negative adjustment to correct an overpayment mistake. 

You may also hear a payroll adjustment referred to as a pay adjustment or compensation adjustment/

When Should You Make a Pay Adjustment?

There are a lot of reasons you might need to adjust your payroll. Here are some of the most common causes. 

  • Bonus: Year-end or performance-based bonuses.
  • Competition/market adjustment: Changes made to stay competitive with your direct competition or to stay current with the standard pay rates in the industry.
  • Contract termination: Adjustments made on a contract end date, such as paying an employee their remaining time off.
  • Change in hours/responsibilities: Adjustments that reflect a change in employee responsibilities, number of hours worked, or shift differential
  • Cost of living: This usually happens if the cost of living in the employee’s area increases or if you transfer the employee to a new location with a significantly different cost of living.
  • Correct a mistake: Increase or decrease pay temporarily due to a payroll error.
  • Demotion: Pay reductions when an employee is demoted to a lower job title.
  • Equity: Adjusting pay rates to maintain equal pay for equal work.
  • Inflation: Annual wage adjustments based on inflation to ensure the worth of your employee’s salary stays the same.
  • New employee: Adding a new employee to your payroll. 
  • Promotion: Increasing an employee’s rate of pay after a performance-based promotion (merit promotion).
  • Reimbursement: Paying employees back for work-related expenses, like travel. 
  • Tenure: Regularly scheduled time-based raises for long-term employees.
  • Unpaid Time Off/Temporary Adjustments: When an employee takes extra time off they aren’t getting paid for, or other changes that last for a limited period of time, like sick leave or temporary pay cuts to avoid layoffs.
  • Variable compensation: Includes performance-based pay, referral bonuses, and profit-sharing.

How To Adjust Your Payroll

Here are the five steps for making a pay adjustment:

1. Figure out Initial Adjustment

First, collect the basic information for the adjustment, such as the employee’s name and the pay period that needs to be adjusted. Then, figure out the amount to adjust. 

For instance, if you’re giving an employee a raise, their salary increase may be based on a percentage. You can use research past raises and industry standards to help you decide what you should do.  

2. Ensure Compliance with Unions, Contracts, and Regulations

If you have employees that are union members, their wages might be pre-negotiated. In this case, you may not be able to adjust wages. Similarly, you should review your initial employment contracts to make sure that your adjustments aren’t violating any terms you may have agreed to when you hired them.

If you are making pay deductions, you want to ensure two things: First, that your reasoning for a negative adjustment is legal and second, that you don’t violate any state or federal minimum wage laws

Make sure you’re in line with the Fair Labor Standards Act, which outlines federal requirements for overtime pay, recordkeeping, minimum wage and other standards.

Legally, there are some reasons you are not allowed to cut an employee’s pay, such as taking time off to vote or serving jury duty (unless the employee does not do any work for an entire week). You can always check with a legal or HR expert before making a negative pay adjustment. 

Finally, you want to ensure that you have pay equity at your company. As an employer, it can feel good to provide employees with raises or bonuses. That said, your pay adjustments should not lead to pay discrimination, such as not giving raises to a certain gender, race, age, ethnicity, sexual orientation, religion or other groups at your company.

Review the Equal Pay Act of 1963 (EPA), The Age Discrimination in Employment Act (ADEA), and the Americans with Disabilities Act (ADA). You can also check your state’s Department of Labor website to see if there are any statewide anti-discrimination laws.

3. Notify the Employee

It’s helpful to give your team advanced notice about any pay adjustments, even if they are positive. You can tell employees in person, ask managers to notify them, or write an email with the details. 

Whichever way you choose, let the employee know how much will be adjusted, when it’s going to happen, whether the change is temporary or permanent, and why you are adjusting their pay.

4. Communicate Pay Adjustments with Supervisors

After you’ve figured out the pay adjustment amount, you should let the employee’s supervisors know. Specifically, tell them who’s getting an adjustment, when, why, and if it’s positive or negative. 

This way, if your employee has questions, their manager will know how to answer them.

5. Adjust the Employee’s Pay 

Adjust your employee’s pay amount in your payroll software (or manually if that’s how you run payroll). Payroll software like Hourly makes it easy for management or human resources to set up adjustments whenever you need them. 

With Hourly, you can choose from standard payroll adjustments, like bonuses or reimbursements, or you can create a custom adjustment. Either way, Hourly software automatically calculates new deductions based on the adjustment, so you don’t have to worry about changing withholdings for taxes and benefits.

Final Thoughts on Payroll Adjustments

Payroll adjustments refer to any change you make in an employee’s pay. An adjustment can either be positive (paying more money) or negative (reducing pay). 

Positive adjustments, like overtime, bonuses, and raises, are more common. That said, you may have times when you need to reduce pay if an employee takes unpaid time off or receives a demotion. 

Once you know why and how much you’re adjusting, make sure you notify the employee’s managers and check for payroll compliance. After that, all you need to do is let your employee know about the adjustment and make the appropriate change in your payroll software. 

For payroll software that adjusts payroll easily, explore Hourly today.

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