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Cutting salaries can preserve some jobs, but it is not a dependable one-for-one substitute for layoffs. A pay reduction helps only when it produces enough savings, addresses the reason jobs are at risk, and does not trigger costs such as lower morale, reduced productivity, or the departure of employees the company needs. Whether an employer may impose a cut also depends on local law and employment agreements.
Why companies lay people off instead of lowering salaries
Employers do not make this choice on payroll savings alone. A general pay cut spreads the cost across employees; a layoff can target positions or skills the company no longer needs. If the business is reorganizing, reducing capacity, or changing its workforce, lowering everyone’s pay may not solve the underlying problem.
Pay cuts may not protect the jobs at risk
A pay reduction can help when a temporary shortfall is the main threat and a credible savings plan connects the cut to retained jobs. It is less likely to address a lasting decline in demand or a decision to eliminate particular roles. The 2025 study by Antoine Bertheau, Marianna Kudlyak, Birthe Larsen, and Morten Bennedsen notes that some layoffs may be relatively unresponsive to pay cuts, while some cuts may prevent some layoffs. It does not establish a universal conversion between a percentage cut and jobs saved. Read the Federal Reserve Bank of San Francisco working paper WP2025-05.
Across-the-board cuts can carry broad costs
Lower pay can affect morale, effort, and retention across the organization, including among employees whose roles are important to keep. Employees may leave rather than accept reduced compensation. A targeted layoff may avoid reducing pay for everyone, although it can also mean losing skills that are difficult to replace.
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What the evidence says about pay cuts and layoffs
The 2025 paper links a summer 2021 survey to administrative records for 3,013 Danish firms with at least five employees. Its sample is described as representative of Danish firms in that size range; the findings provide evidence about those firms and the 2020 shock, not a forecast for every country or downturn.
- Among firms reporting revenue reductions in 2020, 29% used some form of pay cut. The categories included 15% that cut wages and 19% that cut bonuses or other pay; these categories can overlap.
- In linked worker-occupation-firm administrative data, approximately 20% of job-stayers experienced a nominal wage cut in 2020.
- On the layoff margin, 90% of firms agreed that avoiding skill loss was a concern, and 75% agreed they might be unable to hire a suitable replacement quickly.
- When asked what total pay-cost reduction could have prevented layoffs, 61% of firms could not give a quantitative answer.
- During the pandemic crisis, 41% of surveyed firms reported reduced sales and financial difficulties as a reason for layoffs. Other reported reasons included reorganization, efficiency, and worker productivity considerations.
The authors’ conclusion is that “most firms are able to cut wages but often choose not to.” In context, that finding means the choice involves costs and workforce goals beyond whether a wage reduction is technically possible; it does not mean firms never cut pay or that every layoff could have been avoided.
How to compare a pay cut with a layoff
Before choosing, make the assumptions behind each option explicit. A cut should not be presented as a job-saving measure unless the numbers and plan support that promise.
- Calculate the savings and duration. Estimate the cash each option saves, when the savings begin, and how long they last. Include the number of employees affected and any associated labor costs removed by layoffs.
- Identify the business problem. Distinguish temporary liquidity pressure from a sustained drop in demand or a lasting change in the work the organization needs done.
- Name the roles and skills to preserve. Consider which capabilities are essential and how quickly suitable replacements could be hired if employees leave or are laid off.
- Assess who bears the cut. Compare an organization-wide reduction with a targeted one. Consider how each could affect morale, effort, and voluntary departures.
- Account for work changes. If hours or workload will change along with pay, state how. Reducing pay while leaving work unchanged may be especially difficult to explain and sustain.
- Check legal and contractual constraints. Review local wage-and-hour rules, minimum wages, notice obligations, employment contracts, collective agreements, overtime classification, and any other rules that apply.
Alternatives to consider before retrenchment
Hong Kong Labour Department guidance lists measures employers may consider to reduce costs or avoid retrenchment. They are options in that guidance, not universal recommendations or legal entitlements.
- Allow natural attrition or consider voluntary exits or retirement.
- Train and redeploy employees where there is suitable work.
- Suspend recruitment and review budgets, operating costs, overhead, and supplier costs.
- Ask employees for ideas to improve efficiency.
- Consider paid leave or mutually agreed unpaid leave in the situations addressed by the guidance.
The same Hong Kong guidance advises employers to hold “frank and sincere discussions” if wage reductions are unavoidable and says consent should be obtained in advance under the Employment Ordinance context it addresses. See the Hong Kong Labour Department guidance for its full scope.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Can an employer cut your pay instead of laying you off?
There is no single worldwide answer. Whether an employer can reduce pay depends on the jurisdiction, contract terms, collective agreements, wage-and-hour protections, notice rules, and the worker’s classification. A change that is permitted in one place or situation may not be permitted in another. Employees and employers should check the applicable labor agency’s current guidance or consult qualified local employment counsel before acting.
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U.S. Small Business Administration guidance notes that wage, schedule, and furlough changes can have different effects depending on worker classification and state rules. Its page dates from 2015, so treat it as orientation rather than current legal advice, and confirm current federal and state requirements: SBA guidance on changing employee benefits.
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