A downturn in an industry can often highlight the least productive of a company’s employees at a time when it also becomes necessary to run a much leaner operation in order to remain in business. As an employer, you may be tempted to reduce the compensation of particular employees in order to maintain overall financial viability. At the same time, you should also be mindful that a reduction in compensation that constitutes a “substantial reduction” can give an employee a “necessitous and compelling” cause to voluntarily terminate employment without waiving the employee’s eligibility for unemployment compensation.

There is no bright line in Pennsylvania that gives an employer clear guidance as to what constitutes a “substantial reduction” in pay – in fact, cases applying the “substantial” reduction test have been clear in stating and restating only that there is no numerical test defining what constitutes “substantial,” and that each and every Unemployment Compensation Claim asserting a necessitous and compelling cause for voluntary separation in response to a reduction in compensation will be measured by its own facts and circumstances. What is clear is that the Courts do not want to give employers a hard numerical “safe harbor,” which would likely encourage employers to reduce employee compensation by the full allowable amount regardless of the facts and circumstances of each case, advantaging management over employees in the ongoing battle over compensation.

Ultimately, the overwhelming majority of Unemployment Compensation Claims cases are won or lost at the Unemployment Compensation Board of Review level. This means that it is vital that an employer meticulously and regularly document position-specific employee duties, individual employee performance and compensation arrangements in order to establish a factual record supportive of the employee’s position at a Review Hearing. Although the law in Pennsylvania regarding “substantial reduction” in employee compensation is unclear, when it becomes necessary to reduce employee compensation, an employer can take preemptive countermeasures to put a company in the most favorable position to avoid the negative aspects of a successful Unemployment Compensation claim against the company.