American workers have been reassessing their work set-up in recent years, particularly when it comes to where they work. Some employees have embraced working from home. Others may have taken it a step further and actually moved to a different area with a lower cost of living, a luxury they could indulge due to changes in work-from-home policies.
But if you change the location of your work, do you also have to expect a change in your annual salary? Here are some questions you may be asking, as well as things to consider before you make the move.
Is it legal to cut a salary for cost-of-living change?
In 2020, companies showed they could be flexible with remote work in order to keep business going during the pandemic. They embraced video conference calls and new ways to communicate among co-workers. In exchange, employees may have been able to find a better work-life balance or reduce a long commute.
It also made companies reevaluate their pay structure to account for these different cost-of-living standards. If an employee moved to a lower-cost city to work from home, some companies also lowered their compensation.
And yes, these companies do have a legal right to cut your salary if you move to a lower cost-of-living area.
Tech giants like Facebook, Twitter, and Microsoft discussed moving to a more remote-work model for their employees in 2020, and they said they would adjust compensation for the cost of living by location.
Stripe Inc. also took this approach. In September 2020, the business announced that it would give employees a $20,000 bonus for moving away from one of the tech company’s main offices in expensive cities like Seattle, San Francisco, and New York City. But there was a catch: Stripe would also cut the base salary by as much as 10%.
But while it’s legal, is it the best plan for tech companies? A 2020 survey by Hired found that 55% of respondents who worked in the tech industry said they would not accept a reduced salary to work from home permanently. So companies may be able to save money by accounting for an employee’s cost of living, but they may also lose talent who might not be willing to accept a cut.
Is it worth it to take the salary cut?
The Hired survey also found that 53% of workers would be “likely or very likely” to move to a lower cost-of-living area if they were able to permanently work from home.
But would a salary cut be worth it if you could move your job to a cheaper city? There are pros and cons to the move, and a review of your budget may be a good way to help you decide if it would be the right choice for you.
The biggest advantage might be the lower cost of living. You may have to take a pay cut, but you would still be making money. The real calculation, however, could be in how much everyday items like groceries, gas, and your home cost compared with how much you’re bringing in.
Lower expenses for day-to-day living could justify a move to a different area if it means you have more money left over at the end of the day. The additional funds you pocket could then be used for things such as saving for retirement, your kids’ college funds, paying off debt, or maybe updating your new home.
You also may want to think about intangibles such as living near family or raising your children in a particular area. You may realize taking a pay cut could improve your overall quality of life, which you might not be able to put a price tag on.
When it might not pay to move
On the other hand, there may be some negative factors to think about when contemplating a move. Check with your employer about state and local taxes, for example. You may be living in one state but still have to pay additional taxes in the state or city where your company is based. That could limit the places you might consider moving to.
You also might want to consider if this is a short-term or long-term move. It may be easier to move from a high cost-of-living area to a lower-cost area than the other way around, particularly when it comes to housing. Selling your home in a high-cost area and buying in a low-cost area could make you a sizable profit, especially in today’s housing market.
But living in a lower-cost area with a lower salary means you may not have the liquidity needed if you head back to the big city. Relocation to a more expensive area could mean higher taxes and higher costs for everyday items, especially housing. You may have to revisit your budget and find ways to save money that you didn’t worry about when living in another area of the country with lower costs.
And remember that you took a pay cut to move to that more affordable area. If your existing company asks you to move back to the high-cost area, you should be prepared to negotiate your salary so that it is appropriate for that area. That could be a difficult conversation if you took a pay cut in order to work from home or in a location that wasn’t as close to a physical office space.
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Yes, a company can cut your salary if you relocate, but there are factors to consider as you contemplate a potential move.
The first question is whether that pay cut is worth the change. A good budget can help you balance the financial pros and cons of such a move. It may also help you decide where you want to live. Perhaps moving to a different neighborhood in your current location may provide a lower cost of living without causing too much disruption to your salary. And moving to another state or even another country may be expensive.
You also may want to think about intangibles like quality of life or being able to spend more time with family. A shorter commute or more free time to pursue a hobby or go to the gym more may also be appealing. There is more than just the work that could make an opportunity one of the best jobs for you.
And think about factors such as job satisfaction. Perhaps it’s time for a change. Getting a new job in a lower cost-of-living area may be a big change but one you might welcome.
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