First, we should clarify your terms. I think you are using the term "annual review" to mean salary increase--versus an evaluation of an individual's job performance.
While you must at least pay minimum wage pursuant to the federal Fair Labor Standards Act or your own state's minimum-wage law--whichever is higher--unless you have a contract with an employee specifically stating that he or she will be given a salary increase on specific dates or at designated intervals, you have no legal obligation to bump up anyone's salary.
However, if the company cannot afford to give salary increases, it is still important to conduct performance evaluations on time so that employees know where they stand concerning their job accomplishments and that their efforts are appreciated.
It is prudent to proactively develop and communicate information about the "salary freeze" as soon as management realizes it is necessary. Even major companies have instituted such measures when times are hard.
Sometimes they push annual merit or cost of living increases from 12 months to 18 months. Sometimes, they simply announce that the salary freeze will be in effect until further notice.
It is important for everyone to understand the situation and to be assured that the salary freeze policy is being fairly administered across the board. In bad times, clear communication is even more vital than during a favorable business climate.
Question added to topic Human Resources • October 14, 2008
Am I legally bound to give employees an annual review?
By law, is it essential to give an employee an annual review even if the company isn't doing so well?
Penny is a seasoned human resources executive and consultant with over 25 years of diverse business experience in advising enterprise leaders on employment-related matters.