Cashflow and the creation of a reliable income stream remain significant concerns in 2013. Employers may be forced to make difficult decisions. When faced with raising costs, or a reduction in income, it is common to put in place pay cuts for staff.
Forcing pay cuts
In principal, an employer cannot impose a pay cut unilaterally. This is the case whether the employee is employed on a permanent or temporary contract. An employer should always seek an employee’s consent for the proposed reduction in pay. Employees do not have to accept a proposed change, unless they are subject to a collective agreement with their union and the union agrees to accept the reduction on their member’s behalf.
If the employer enforces the pay cut without seeking or obtaining the employee’s agreement, or by terminating their employment and re-engaging them on new terms, the employee may either make it clear by writing to their employer that they are working under protest, or resign on the grounds that their employer has breached their contract of employment.
If the employee continues to work under notice, they may pursue an employment tribunal claim alleging unauthorised deduction from wages, seeking the difference in their wages before and after the pay cut.
If the employee resigns, they may pursue a constructive dismissal claim alleging that they had no option but to resign as a result of the unilateral reduction in their pay.
In the most part, an employer will try to obtain the employee’s agreement to the proposed change, as the easiest way for them to implement the pay cut is being able to obtain the employee’s express written acceptance. If the employee does not provide their consent to the reduction in pay, the employer will need to engage the employee in a consultation process to discuss their reason for the proposed reduction. The consultation process should give the employee a chance to ask questions and raise any concerns or objections that they may have. An employer will need to ensure that they are able to make a sound business case for the proposed pay cut, and the employee could ask to see some evidence that the reduction is necessary, perhaps through a review of accounts or financial documentation. Both collective and individual consultation should be considered, depending on the amount of employees impacted by the decision.
If employees do not agree
An employee is not obliged to agree to a reduction in pay even after consultation. However, following consultation, the employer could warn the employee that a continued refusal may result in their employment being terminated. Should the employee continue to refuse the proposed reduction, depending on the extent of consultation and the soundness of the business case for the proposed pay cut, an employer may be able to fairly dismiss the employee and seek to re-engage them on the new pay terms. The employee can then either agree the new pay terms at this stage, or pursue an unfair dismissal claim in the employment tribunal. An unfair dismissal claim in these circumstances will not be without risk, as an employment tribunal may have some sympathy for an employer who has a sound business case to require a pay cut.
Employers should advise employees to engage with the consultation process as far as possible. In doing so, the employee can see the employer’s reasons for proposing the pay cut. Employers should be aware that where the employee can establish that the reasons for the cut are not supported by evidence, their subsequent dismissal for refusing the reduced terms may be unfair. Where an employee raises objections or makes suggestions during the consultation process, they may be able to find a way to work around the situation – it may be that a less harsh pay cut can be agreed or a temporary reduction in pay can be negotiated.
Often, the way that employers approach the process of changing terms and, in particular the process of consultation with employees, will be significant to the employees’ willingness to accept the changes and ability to defend any subsequent Tribunal complaints. Where the employer can establish that it has a sound business case to suggest a pay cut, the employee should be persuaded that they may be better off to accept that, rather than face other cost saving measures, such as compulsory redundancies or the insolvency of the business in the future.