How to Deal with a Pay Cut or Reduced Work Hours

If you lose your job completely, the strategies for surviving full unemployment are pretty straightforward.

But, if you’re only partially unemployed – due to either a pay cut, reduced work hours, or both – the situation could be a lot more complicated.

There’s no single strategy or solution that will get you through the crisis.

Luckily:

There are options and strategies that will help you get by until you regain full-time employment.

Can You Get Partial Unemployment Benefits?

For anyone who has lost a job the first source of help is your state’s unemployment benefits.

This is certainly the case if you have lost your full-time job through no fault of your own.

But what happens if your employer keeps you on board, but either cuts your hours, your pay, or both? Are you still eligible for benefits?

According to Employment Law Firms (published by NOLO), it is possible to collect a partial unemployment benefit. You may be eligible if either your hours or your pay has been cut.

As a general rule:

Unemployment benefits are available whether your separation is temporary or permanent, due to a reduction in work or revenue by your employer.

It doesn’t matter whether your separation is total or part-time. However, the rules are different in either case.

Full unemployment

If you’re fully separated from work, you’ll be eligible for benefits equal to a certain percentage of your pre-separation income, up to the maximum benefit available in your state.

The maximum benefit ranges from a low of $235 per week in Mississippi to a high of $1,220 in Massachusetts.

But, the more typical average is somewhere between $300 and $500 per week.

Partial unemployment

Partial unemployment benefits are available, but the calculation is more complicated.

The specific rules vary by each state, but you can expect the results to look like this:

• You must be working part-time through no fault of your own.
• Eligibility for benefits will not be available if you could work more hours but choose not to.
• You must meet your state’s minimum earnings and minimum hours worked requirements to be eligible. This is typically 26 weeks but can vary by state.
• You’re both able and available to work more hours if they become available.

Calculating Partial Unemployment Benefits

Your state unemployment office will calculate your benefit based on your full-time pay level.

They will then subtract the amount of part-time income you’ve received during each reporting period.

However, rather than deducting the entire amount that you’ve earned, you’ll typically be allowed to earn a certain amount of money without affecting your unemployment benefit.

Now:

Exactly how this is calculated will vary from one state to another.

But for the sake of example, let’s use the rules that apply in California since it’s by far the largest state by population.

Example: Partial unemployment in California (CA)

Under California’s unemployment benefit laws, if your weekly earnings are $100 or less, the first $25 in earnings do not affect your benefit. Any amount over $25 is subtracted from your weekly benefit amount and you’re paid the difference.

For example, if your weekly benefit is $150, and you earn $75 during the week, $50 will be reduced from your weekly benefit ($75 minus $25). Your benefit will be reduced to $100. When added to the $75 you earned during the week, your total income will be $175.

The calculation is different if your weekly earnings are $101 or more.

If so, the first 25% does not count. The amount earned in excess of 25% is subtracted from your weekly benefit and you’re paid the difference.

If your weekly benefit is $300, and you earn $160 from working, your benefit will be reduced by $180.

The first 25% of the $160 you earn – which is $40 – will not count against your unemployment benefit. But the remainder of $120 of the income earned will reduce the benefit. In this case, subtracting $120 and adjusted earnings from the $300 benefit, will reduce your benefit to $180 for the week.

That’s just an example based on unemployment in California.

You’ll need to check with the unemployment agency in your home state to determine what the rules are for partial unemployment.

Cash Flow Options During a Pay Cut or Reduced Work Hours

While determining your eligibility for unemployment benefits is the first strategy for dealing with a pay cut or reduced work hours, that’s unlikely to be sufficient.

Hopefully, you’ve built up a fully stocked emergency fund prior to your income reduction.

Most financial advisors recommend that you have 3 to 6 months worth of living expenses in an emergency fund.

In combination with a partial unemployment benefit, your emergency fund may last a bit longer.

For example, let’s say that your typical living expenses are $3,000 per month, and your emergency fund has $12,000, sufficient to cover four months.

If you are also collecting a partial unemployment benefit of $600 per month, and earning an additional $900 from part-time employment, you’ll only need to tap the emergency fund for the remaining $1,500 per month. That being the case, your emergency fund will be extended from four months to eight months. That will certainly be sufficient to help you ride out a partial unemployment that lasts only a few months.

Yet another cash flow enhancement can come in the form of reduced employment-related expenses.

First is commuting related expenses.

If your job has been reduced from five days per week to two days, your community expense – gasoline, tolls, parking, and wear and tear on your vehicle – should drop by about 60%. There should be a similar decrease in work-related expenses, like dry cleaning, the daily stop at Starbucks, and restaurant meals for lunch.

But if you participate in a retirement savings plan at work this can be a major reduction in cash outgo.

Let’s say you normally contribute 10% of your pay to your employer’s 401(k) plan, or about $400 per month. By temporarily suspending this contribution you’ll free up extra cash flow for much-needed living expenses.

Alternatively, you can simply cut it back, to maybe 5% of your pay. Either strategy will leave you with more free cash flow each month.

Other Strategies to Improve Your Cash Flow 

A period of reduced income is an outstanding time to bring out your innovative skills and implement new strategies to improve your cash flow and survive.

Make a budget and stick to it

If you’re in a survival situation – which certainly will be on a reduced income – you’ll need to eliminate any expense in your budget that isn’t absolutely necessary.

If you’ve never had a budget in the past, it will help if you take advantage of one of the many budgeting apps that are available to help you make it happen.

Re-evaluate your goals and investments

Since you’ll be living on a shoestring, you may need to temporarily suspend contributions to any investments you’ve been making.

For example, if you have any investments outside of your retirement plan, like mutual funds or a robo-advisor, you may want to put those contributions on hold until you’re back at work full-time.

And depending on how long your period of partial unemployment lasts, you may want to re-evaluate certain goals.

For example, you may need to consider retiring a few years later than originally planned.

Consider alternative sources of income

Preferably, those alternatives should be the kind that won’t negatively impact your unemployment benefits.

Of course, if you are receiving unemployment benefits, it’s game-on to do whatever you need to do.

For example, you can consider selling any items you have that you no longer need. It’s quite possible you have hundreds of dollars – or maybe even thousands – worth of unused goods around your home.

Converting them into cash could be a way of generating extra funds without negatively impacting your unemployment benefits.

Anticipate emergencies

Emergencies are bound to happen, but they seem more likely – or at least more damaging – during a time of reduced income.

You can’t prevent emergencies from happening, but you can do your best to anticipate them so you can at least loosely plan in advance.

For example, be purposeful about keeping everything you have in good working order. Start with your car. Even though it’ll be an extra expense, a time of reduced earnings is one of the best times to get a complete tune-up. That may prevent or at least delay a costly major breakdown.

Use loans only as a last resort

Borrowing money is a common way people get through income disruptions.

But, except in true emergency situations – like a medical emergency – it’s best avoided.

First, using credit can be so easy it’ll become addictive.

This is especially true with credit cards. They’re a temptation to spend more money than you can afford since they produce no immediate consequences.

And that creates the second problem, which is a sudden new monthly expense.

Sure, the credit card purchases you make this month may ease the pressure for a few weeks. But once the monthly bills start coming in, you’ll have an additional expense.

And third, using credit to get through a crisis can actually prolong the crisis.

That’s because money you borrowed during the crisis may take many months or even years to pay off after the income problem is solved. That could easily turn a six-month problem into a two-year cash flow crisis.

Bottom Line

In a real way, dealing with a pay cut or reduced work hours can be more difficult than an outright layoff.

Not only will you be confronted with the trade-off between unemployment benefits and earning income, but the prospect of returning to your job full-time can keep you from seeking other employment.

If you’re never rehired full-time by your employer, which is hardly an unlikely outcome, you may waste weeks or months not looking for a suitable replacement.

But in a real way, a pay cut or reduced work hours is mostly about getting through the moment. It will take a series of temporary steps to enable you to do that successfully.

And after you do, use it as a learning experience.

As the job market seems to have only become less stable in recent years, it’s important for us all to be prepared for whatever may happen.

Think of this as a tune-up for the next crisis, using it as motivation to do what’s necessary to be better prepared next time around.