Implementing pay cuts
Updated: Feb 16
There are occasions when a pay cut is the only thing that stands between a business and redundancies or even receivership. If an employer is in this situation, they need to make sure that they enact those cuts legally as there are specific things that need to be observed when doing so.
By law, contractual terms (including the right to be paid a salary or hourly wage) can’t be changed unless the employee has expressly consented to it.
So what’s the best way to obtain that consent?
Something wholly unexpected is likely to be received badly; conversely, something about which people have plenty of advance warning, and the reason for which they fully understand, is likely to be received with a far greater degree of positivity.
Therefore, the employer needs to begin the period of consultation about pay cuts, both their likelihood and their degree, as soon as they become aware that those cuts are likely.
The first thing to do is to make an announcement to all those affected. This may be the whole business, or it may be a particular department. That announcement should then be confirmed in writing and consultation meetings held. Depending on the number of employees affected, this consultation can be done either collectively or on a one-to-one basis.
It is generally accepted (although not a legal requirement) that a minimum of three working days’ notice should be given of consultation meetings.
As the meeting will be informal, employees do not have the right to be accompanied although employers may be fine with them bringing a work colleague in.
At the meeting itself, the following should be discussed:
Why the pay cut is necessary for the company’s survival.
Why it is in the long term interests of the employees to accept it.
What other options were considered first and rejected and why.
The effect that the pay cut will have on each employee (with figures).
Any initial thoughts as to whether the employee will be agreeing or not.
Any counter-proposals the employee would like to make (it is important that these are given active and serious consideration, with further meetings arranged if necessary).
A pay cut is often a bitter blow for employees who may be, to coin a phrase “just about managing”. That’s why it’s a good idea to consider measures that may sweeten the deal somewhat. Those measures can include things such as a review date for the pay cut or plans for an increase in pay if conditions improve.
Measures can also be short-term in nature, including additional leave days, an increase in shifts available or a change to the bonus structure.
Following agreement, the employer must give the employee written notification containing details of the change and when it will take place as soon as possible and no later than one month after the change has taken effect. It is not necessary to re-issue the contract, but a clause must be inserted into the written notification indicating that ‘all other terms and conditions as contained within the contract of employment remain unchanged’.
It is worth noting that an employee’s period of continuous service is not affected when varying the terms and conditions of employment.
If consent cannot be obtained
There may be occasions where the agreement of some or all of the employees affected by the proposed variation of terms cannot be obtained. In these circumstances, the employer has three options:
Decide to do nothing.
This might occur in circumstances where there is an overwhelming rejection by the workforce of the proposal and the employer decides that it is not worth the potential difficulties they will face if they impose such a change.
Impose the change anyway.
The employer may be able to justify this if, for example, one employee refuses the proposed change and the rest of the workforce agrees to it. The employer may then, after appropriate consultation, determine that they will take the risk and impose the variation of contract on all employees. The disgruntled employee may take the view that the employer is in breach of contract and claim constructive dismissal and/or bring an action for breach of contract or an unlawful deduction from wages either in the civil courts or employment tribunal. Depending upon the nature of the dispute and the level of support for the workforce, an employer usually succeeds with this type of ‘defence’. However, the employer is advised to take advice prior to embarking upon this strategy.
Terminate all contracts.
It is open to an employer to terminate the contracts of all of the workforce and offer everybody fresh contracts of employment on terms which are more acceptable to the employer. Whilst this is a tactic that has often succeeded for an employer, it is fraught with danger (and should only be adopted as a last resort) as employees, assuming they have the requisite qualifying service, have the right to accept the termination of their employment, refuse the alternative offer of employment and claim unfair dismissal in the employment tribunal.
It is important in this situation that the employer follows a fair dismissal process and offers the employee the right of appeal against their dismissal.
If the number of staff who have not given their consent (and thereby have their contracts terminated) is twenty or more, a process of collective consultation involving all the employees (either through a recognised trade union or workforce representatives) will have to take place and the Department for Business, Energy and Industrial Strategy will need to be informed.
If an employer does not collectively consult, they could be faced with a Protective Award for all employees who have been affected. This could be up to a maximum of ninety days’ pay.
The notice that an employer is obliged to give the employee of the termination of the contract will be contained in the contract of employment or it will be the minimum statutory notice period, whichever is the longer.