Please remember that your pay could go down as well as up ...

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Posted on 05 Sep 2011

In these uncertain economic times redundancies and pay freezes are constantly in the news. Increasingly, in our experience, managers are exploring the option of reducing pay rather than headcount. Employees can be more willing to agree to options that affect their terms and conditions of employment, but save their colleagues’ jobs.

Pay cuts are by no means an easy option and can be, in practice, more complicated than a redundancy exercise. In the absence of an express contractual right to reduce pay the consent of employees is required before any change can be made.  If some employees do not accept the change and the employer unilaterally imposes the pay reduction, there is the risk of claims for unlawful deductions from wages, breach of contract and unfair dismissal. You should also remember that an employee who refuses the pay cut has the contractual right to remain on their current level of pay.

If consultation is unsuccessful and the employee does not agree to the change, then employers have the option of dismissing them and offering to re-engage them on the new, reduced, pay terms, after they have worked their notice periods. If not handled properly, this can be a risky strategy giving rise to claims for unfair dismissal, breach of contract and redundancy pay. Depending on the numbers involved, termination and re-engagement can also require collective consultation, which can give rise to the risk of protective awards.

In Garside and Laycock Ltd v Booth, the company was experiencing financial difficulties.  It asked its staff to agree to a pay cut of 5%.  Two employees (including Mr Booth) refused to agree to the change and Mr Booth was dismissed.  He claimed unfair dismissal.  The EAT confirmed that with such claims, the test will be whether the employer has acted reasonably, rather than whether the employee’s refusal to accept the new terms was reasonable.  

Therefore, employers need not necessarily show that the change is crucial to the survival of the business.  However, they must be able to show a sound business reason for the change. The ET will look at the reasonableness of dismissal in the circumstances. If, for example, management proposed a cut to workers' pay, but not to its own, this may not be fair.  Further, the ET will look at the manner in which the pay cut was negotiated.  In this instance the company entered into extensive consultation. However, if employers do not consult about the business reasons behind their actions, or try to persuade the workforce to agree a common approach to a pay cut by reasons which are not good and proper ones, any change could render any subsequent dismissal unfair.

Any consultation needs to be carried out carefully. There have been occasions when companies have required their employees to accept a reduction in pay on the basis of the company’s financial dire straits only to announce record profits part way through the process. Such major clangers put employers on the back foot in the battle to the win the hearts and minds of the workforce. The result may be a disillusioned and disenfranchised workforce - staff might accept the changes in the short term, but then actively look to move on to pastures new, taking their talent with them.

Some practical steps can limit the risks and costs involved:

  • Consider whether the change is based on sound business reasons;
  • Be open with staff when explaining why the changes are required and the alternative if they are not introduced;
  • Consult collectively and individually, and explore any alternatives;
  • Involve Unions and any Information and Consultation body as appropriate;
  • Do not make the changes over night;
  • Consider whether to introduce the change for a short period of time only or to hold a review after, say, six months;
  • Lead from the top - if pay cuts are to be introduced for a few be prepared to explain why others are unaffected, particularly management;
  • Be clear and consistent about what will happen if the changes are not accepted;
  • Record the contractual change by way of a fresh contract or a side letter; and
  • Remain flexible in the consultation process. 

 This article was written by partner, Peter De Maria

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The articles published on this website, current at the date of publication, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your own circumstances should always be sought separately before taking any action.

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