I posted on this subject a while ago and it has received such a lot of visits I thought I better give my public more of what they want. It also gives me an opportunity to provide an update on the poll I set up below on this issue. At the moment 57% of respondents would elect a pay cut and 31% would take redundancy. The remaining 11% didn’t know. Whether those results will change after this post wil be interesting to see.
In my previous post on the 27th February I wrote that the risk to an employer in reducing or attempting to reduce salary was that it might constitute a breach of contract and could lead to litigation if the employee didn’t agree to the cut. A claim for breach of contract and/or unlawful deduction from wages and/or constructive unfair dismissal could be the result. Only employees with more than one year’s service can claim unfair dismissal, but any employee can claim for breach of contract or for unlawful deduction of wages, which is what an unagreed reduction in pay would be. The crucial issue, therefore, is to get the agreement of the employees concerned and, if this is obtained, many of the problems fall away. How does an employer go about this?
By consultation is the answer. An employer needs to approach the matter with sensitivity and it needs to set out to the employees concerned the reason for the proposal and to show that it has considered other options to a pay cut. Employees need to be given time to consider the proposals (within a defined timetable) and to put forward any suggestions they have, which should then be given due consideration. In all probability, other options to a pay cut will include redundancy and the employer will need to set out the business and financial reasons for suggesting the pay cut. Other options though might include laying off employees, reducing hours and reducing benefits. A pay cut is likely to be more palatable for employees if it is stated to be a temporary reduction, e.g. for six months pending further review by employer and employee.
In all these circumstances the employer will be aided hugely if the employment contracts it provides to its staff contain a clause that allows the employer to make amendments to the terms of the contract (most don’t it has to be said). In the absence of such a clause an employee who is not minded to accept the reduction in pay, or alteration to their hours, will be strengthened in any claim for breach of contract. That risk does not disappear even if there is such a clause because the employer must act reasonably when seeking to amend the contract, but it does give the employer scope for manoeuvre. In other words, if the employer consults properly and frankly with affected employees and can demonstrate the necessity for making pay cuts, it should reduce the risk of being successfully sued for breach of contract by a disgruntled employee.
An employer may be required to consult collectively with any recognised unions at the workplace or to get employees to elect representatives to consult on their behalf. I covered this point in my previous post.
Assuming that agreement is reached with employees, the employer should then get the affected employees to sign a letter confirming their agreement to the reduction in pay. The letter should set out the company’s reasons for imposing the pay cut (ie to avoid redundancy), refer to the meeting(s) with the employee during the consultation process and ask them to sign and return a copy to signify their acceptance. This isn’t guaranteed to prevent claims against the employer but it should help to minimise the risk of successful claims being made. In the current economic climate, the majority of employees will probably accept a pay cut rather than take the risk of being out of work altogether.
By the way, I mentioned “lay-offs” above. If an employer wants to “lay off” staff it should proceed with care and take legal advice before doing anything; there are many pitfalls and can lead to claims for breach of contract and constructive dismissal. A lay off is where an employee is, effectively, suspended from work without pay. I will write about lay-offs in a future post.