Should You Cut Your Employee’s Salary Based on Their Remote Work Location?
In May, social media giant Facebook made headlines when the company announced that it would shift up to half of its employees to permanent remote work over the next five to 10 years. This wasn’t too surprising considering the rise of at-home work during the COVID-19 pandemic.
More surprising, however, was the news that while the company will allow existing employees to apply to work remotely, these employees will earn less pay if they choose to live in lower-cost areas. While surveys have shown employees’ preference for the flexibility that comes with remote work, reduced pay probably is … let’s say, less popular.
Now other employers— particularly technology companies—are wondering if they should follow Facebook’s lead.
Should you cut remote work salaries if it means different pay for the same work?
“Paying people different amounts based on where they live is actually not a novel idea,” says Dan Artaev, founding partner with Artaev at Law PLLC and former assistant attorney general for the Labor Division of the Michigan Attorney General’s Office.
“It sounds like something crazy, but it’s actually very common that people in the same profession get paid differently based on where they live, even in the same company.” He cites the example of law firms with offices in cities across the country. “Starting associate salaries in Detroit are going to be lower than in New York. Same work, different region.”
In the tech industry, the urge is understandable. “The big cities where a lot of tech businesses are based are becoming prohibitively expensive,” says Thomas Kochan, professor of work and organizational studies at the Massachusetts Institute of Technology’s Sloane School of Management. As a result, real estate prices for both employees and their employers have skyrocketed.
The notion isn’t limited to law firms or tech companies, though. “This idea has been discussed in consulting firms for various other white-collar jobs and occupations where people can work from home,” Kochan says.
COVID-19 has only heated up the debate
“Because of the pandemic and [the increase in] working remotely, the role of location in compensation is being questioned,” says Tauseef Rahman, a San Francisco-based partner in workforce strategy and analytics at human resources consulting firm Mercer.
“We’re recognizing that location really matters for some jobs and matters less for others. Cost of living theoretically shouldn’t have any impact on pay for jobs that can be done from anywhere.”
Kochan strongly opposes paying employees less based on location. “I just think it’s an abomination,” he says.
“We pay people for the work they do, the value they add to the business, the projects they take on, and the requirements of the job description. It shouldn’t matter where they live—that’s a personal and family choice. I don’t think we as a business proposition should be getting into personal choices of where people live.”
He further notes that work-from-home raises a set of new and complicated issues, as illustrated during the pandemic. Factors like the costs of childcare and obtaining the necessary equipment also must be considered. “You can’t just focus on whether the employee lives in a high or low cost area.” Kochan says.
The effect of cutting remote work salaries on top talent
Reducing pay generally is easier in theory than practice, too. “Often people react badly when salaries are lowered for any reason,” Rahman says. “If someone’s salary is lowered because they move to another location, they may look for another job.”
Kochan agrees that such a practice is likely to alienate workers. “It would open up all kinds of equity issues for people doing the same work,” he says.
“They will speak with their feet, or they will protest collectively. Workers are speaking up more directly on issues of concern to them, and I think we’ll see more of that. If companies start doing something with compensation that the employees feel is unfair, they’re going to hear about it.”
Also, Rahman says employers need to keep in mind the demand for the particular job. Regardless of location, he says, pay rates could stay high if talent is in short supply.
And, Rahman predicts, for jobs that can be done almost anywhere, pay cuts generally won’t fare well over time: “This is because the labor market for a candidate is now beyond any location restriction.”
This gives talented employees a wider pool of companies and employers to choose from.
“It’ll be a mixed outcome. Employers may be able to pay a bit lower in the long run for talent, but such talent could just as easily work for another employer.”
The tech job market might become national, with companies in places like Austin or Portland competing with Silicon Valley employers for talent—and forced to pay more. Local or regional labor markets could go away, replaced by national markets paid according to industry rates.
Employers also may find that remote workers in lower-cost areas have more lucrative opportunities than in the past and are ripe for poaching by better-paying companies.
So, is it really worth it?
Employers might find that the expected payroll savings don’t materialize. Research conducted by Mercer found that tech companies pay employees located outside of Silicon Valley more than you might expect.
The current difference in average compensation pay differential between San Francisco and Seattle, for example, is only about 6 percent—so someone earning $100,000 in the Bay Area would be paid about $94,000 for the same job in Puget Sound. (The researchers controlled for job characteristics, such as job level and function, and individual employee characteristics, such as years of experience.)
A shift to location-influenced pay has implications for HR, as well. “Beyond compensation,” Rahman says, “HR will need to reimagine and reorganize recruiting, onboarding, training, etc., to respond to a world in which the workforce is more distributed.”
Proceed with caution
Bearing in mind the factors discussed above, some employers may decide to plow ahead, converting existing employees to remote workers and, if they opt to relocate to a lower-cost area, trimming their pay. These employers need to think things through from a legal perspective.
“Most employees are employees at will,” Artaev says, “which means the employee can quit with no notice and the employer can not only terminate but also change the conditions of employment, including salary.”
Look no farther than the COVID-19 pandemic for evidence of this. “A lot of businesses just cut pay across the board,” Artaev says.
Two conditions could complicate matters for an employer, though: contracts and unions.
“Does this person have an employment contract?” Artaev says. “If so, they may be guaranteed a certain salary. The best way to approach that is to negotiate for a change because the contract can always be modified.”
The involvement of a union also could throw a wrench in the works. “Usually the employer has to guarantee certain salaries, and unions aren’t going to agree to reduced pay for their members unless you’re willing to give something up,” Artaev says.
He warns, too, about the risk of claims for unlawful discrimination. “I would caution employers thinking about reducing salary for working remotely that they have to be extremely careful. What if someone is working remotely because they have some sort of health issues that you don’t know about or their family status requires them to work from home?”
In other words, what stops a remote employee from alleging your lower-cost-of-living justification actually is a pretext for discrimination?
“It’s not discrimination per se [to reduce pay like this],” Artaev says, “but you could open yourself up to a claim if you do it without some forethought.”
He suggests a better route is to consider a non-salary component to account for location.
“I think what you have to do is pay people for the same work the exact same amount across the board, but, if you want to do some kind of supplement based on where people live, then call it a ‘rent stipend’ or ‘rent subsidy’ or ‘commuter subsidy.’ That way you can honestly say that you’re paying the same amount for the same work, but you’re achieving the same financial effect.”