Should You Take a Pay Cut to Avoid a Layoff?

Despite a fairly strong economy, there are still reports of layoffs happening at major employers. You may be in a mild (or perhaps not so mild) panic over the idea of losing your job. You may also be willing to go to certain lengths, like taking on extra responsibility at work, to avoid winding up on the chopping block.

Data from Clarify Capital finds that 19% of workers today would consider taking a pay cut to avoid being laid off. But that's a move that might backfire on you financially.

A mixed bag

When you lose your job, you lose your entire paycheck. In some cases, it may be possible to file for unemployment and get weekly benefits while you're out of work. But those unemployment benefits won't replace your paycheck in full -- not even close. So if you're left with no income, you might have to rely on your credit cards to pay your bills in the absence of savings. That could hurt your finances big time.

As such, you might assume that taking a pay cut is preferable to getting laid off. And to an extent, it might be.

But over time, a lower paycheck could hurt you financially as well. If your pay cut is substantial enough that it renders you unable to cover your essential monthly bills, you might still end up with costly credit card debt on your hands. That's not good.

Also, a significant pay cut could negatively impact your quality of life. If you're no longer able to spend money on leisure and hobbies because you don't earn enough, it could make you pretty miserable. That's not a situation you want to be in for months on end.

Consider a pay cut a temporary solution

You may decide to agree to a pay cut if it means being able to save your job. But don't just resign yourself to lower pay for the foreseeable future. Instead, keep plugging away to retain your paycheck and avoid getting let go -- but at the same time, start looking for a job that pays more so you're not stuck with your reduced paycheck for the long haul.

Before you agree to a pay cut, you may want to try to talk to your employer to understand what it entails. If your company is going through a rough patch and expects your pay cut to be temporary, that's one thing. It's another thing to sign up for a permanently reduced paycheck to keep your job.

Finally, if you have a large amount of emergency savings, you may decide to say no to a pay cut and accept your fate as a laid-off employee. If your job is demanding, the idea of doing it for less money due to no fault of your own may not sit right in your head.

If you have enough of a financial cushion to avoid that scenario, there's nothing wrong with that. This way, you can dedicate your time to finding a job where you'll be paid a more equitable wage. And you won't have to feel bad about working just as hard as ever for less money.