BA is in the news again …

BA has been in the news … again and, as usual, for all the wrong reasons. The company formerly claiming to be the world’s favourite airline has now asked 40,000 of its staff to not just take a pay cut but to work for nothing for a month to ensure the company’s survival.  Now there’s an enticing offer … not.

The offer to staff involves them either working without pay for up to one month, or taking unpaid leave for that time.  The deduction would then be taken out of their salary over a period of three to six months.  Willie Walsh, BA’s Chief Executive, has agreed to take zero pay for July but as his monthly salary is reportedly £61,000  he will have enough saved up not to need to worry about how to pay the milkman. I did hear on the radio (although I haven’t found it again in print anywhere) that some of the affected pilots were being offered equity in the company to make up for the shortfall, which could be a good bet, but why isn’t it being offered to all staff? 

Enough of this: what should an employee do when faced with this dilemma? Very few employees love their jobs enough to want to work for nothing.  On the other hand if accepting a temporary moratorium on pay would prevent redundancy then the issue gets more complicated. Even if true, will the salary sacrifice make much difference? Many of those affected will already be hard pressed paying their mortgages and credit card bills. Will building societies and credit card companies also agree to a reduction in payments to them? My guess is no. If I were an employee of BA my first thought would be to assess whether I believed Willie Walsh when he said that the company’s future was at stake.  On balance, BA should probably be applauded for trying to find a solution other than just slashing headcount.

The legal issue is really the same as I discussed in my earlier posts on pay cuts vs. redundancy.  An employer faces some tricky legal issues when proposing a pay reduction or, as here a complete pay cut. An employee, if not persuaded by management’s declarations of poverty, could claim constructive dismissal if the pay cut is implemented without their agreement.  Under contract law, any unilateral variation of the terms of a contract is a breach of contract.  When, as here, the term in question is fundamental to the very essence of the contract, a breach can be said to be “repudiatory”, meaning the employee can treat him/herself as being released from all obligations under the contract if he/she chooses to do so.   

An employer would be well advised to consult with employees if it wants to impose a pay cut or pay moratorium.  If more than 20 employees are involved then at least one month should be allowed for the consultation process, or three months if more than 90.  The reason for this is that if any employees don’t want to accept the proposed reduction, they could claim not only constructive unfair dismissal but also a “Protective Award” of one or three month’s pay depending on the number of employees involved. It follows from this that there is little or no difference, from an employer’s point of view, in conducting a redundancy consultation process or a pay cut consultation process. An employer that consults over a proposed pay cut will probably be able to demonstrate (to an Employment Tribunal) that it has tried to take all steps to avoid redundancies if that later becomes necessary.

The employer needs to move cautiously and carefully if it is to avoid claims by disaffected employees.  If any “sweeteners” can be given to staff (such as equity, or additional holiday) that is more likely to succeed.  If an employee refuses the pay cut/moratorium the employer could potentially dismiss that employee and state the reason for the dismissal as being “some other substantial reason”, which is one of the potentially fair reasons for terminating an employee’s employment under the Employment Rights Act, but a claim for unfair dismissal will probably follow if that employee has more than 12 months continuous employment experience.

Advice to both employers and employees: take legal advice before going down this route.  If anyone out there reading this works for BA please do get in touch and let me know your views and decision.

More on Redundancy v Pay Cuts

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.

Redundancy or Pay Cut?

Not an enviable choice to be faced with, but one that an increasing number of people seem to be having to make, or have foisted upon them, in industry.  It is a practice that doesn’t seem to have caught on here in the City where swingeing headcount cuts still rule supreme when an employer wants to cut costs.  I’ve written many times in this blog before about the redundancy process and selection criteria and the claims that can arise when employers get it wrong.  However, what must an employer do if they decide that a pay reduction is preferable to a cull? 

 

It’s not an easy option because any variation in an employee’s pay, if imposed unilaterally by the employer, is a breach of contract and the employee would be entitled to sue for breach of contract and/or unlawful deduction from wages.   Consequently the employer will need to obtain the consent of affected staff before proceeding and, particularly in unionized workplaces, this is unlikely to be given readily. 

 

Some employers take the step of terminating all employment contracts and then re-employing the same staff on reduced terms.  This is highly risky because it can give rise to claims for redundancy, unfair dismissal and breach of contract if not handled properly.  An employer would need to consult with affected staff and persuade them that the only alternative to pay cuts was job losses, in order to obtain consent. How long the consultation period would have to be would depend upon how many  employees were involved and a prudent employer would want to observe the provisions of the Trades Union and Labour Relations (Consolidation) Act 1992, which provides for fixed periods of 30 or 90 days’ consultation where more than 20 or 100 staff are involved. 

 

For smaller employers the process of obtaining consent is going to be viewed as just as onerous as undertaking a redundancy exercise and that might make the whole process unviable.  Having said this, the new Employment Act 2008, which comes into force in April, repeals the current statutory dismissal procedure that applies on redundancies as to all other dismissals, and that may persuade more employers to go down the route of pay cuts.  I’ll be covering  more issues arising from the new legislation in future posts.

If you need advice on any issues arising here please feel free to call me on 0207 464 8433 or email me at michaelscutt@dalelangley.co.uk.

What would you do if faced with this choice?  Please answer the poll below.

 

 

 

A slightly different version of this post will appear in the “Docklands” and “Peninsula”newspapers week commencing 2nd March.