Many businesses are facing sharply lower revenue and the need to reduce costs as a result of the coronavirus and social-distancing mandates. For some businesses, that pressure means cutting salaries and laying off or furloughing employees. For an employee at will without an employment contract or offer letter that specifies compensation or benefits, the employee likely has no choice but to accept the cut or look for another job. But, for an individual with an employment contract which specifies compensation levels, a cut in pay would ordinarily implicate rights under that contract.

On the most basic level, if an agreement sets a compensation amount, a reduction in compensation could give rise to an employee's claim of breach of contract. The employee and employer would need to consider the merits of renegotiating their agreement or possibly engaging in litigation. For an employer and employee who wish to maintain a good relationship, litigation would not make sense.

However, when faced with a substantial cut in pay, an employee may regard the cut as so severe that it amounts to a de facto or constructive termination of the agreement. Depending on the definition of termination and other provisions in the contract, termination—constructive or actual—could in turn trigger rights of employees such as severance, vesting of equity or options, and other benefits, and impose added obligations on employers.