Legal Q&A: Pay cuts

In the current economic climate, many employers are considering a variety of creative cost-cutting measures, including pay cuts. But employers should also consider the legal ramifications as, in some circumstances, they may leave themselves open to legal action.


Q What steps should an employer take when it wants to impose pay cuts?


A In principle, a pay cut cannot be imposed without an employee’s consent. First, agreement should be sought in light of the employer’s financial position and, potentially, as a way of avoiding redundancies or other draconian steps. It should also be remembered that detrimental changes in terms are not permitted, in relation to employees who have transferred under the TUPE regulations, if the changes relate to the transfer. In the absence of agreement, a unilateral change is a breach of contract. To avoid such a breach, it is usually necessary to terminate the existing contract and offer to replace it with a new one. This is not free from risk.


Q Where the employee agrees to the proposed change, how should this be recorded?


A The employee should be issued with confirmation of the change in writing, and be informed that it is a permanent change, unless it has been agreed for a limited period.


Q What rights do staff have to resist such cuts?


A No employee has to accept the proposed change, unless bound by a collective agreement. If the employer makes the pay cut without the employee’s agreement or by formally terminating and replacing their contract, the employee may either make it clear that they are working under protest, or resign on the grounds that the employer has breached their contract of employment by imposing a unilateral change. In either case, they should raise a grievance detailing their complaint. The employee will then be in a position to bring a claim for unlawful deduction from wages and/or, if they have resigned, constructive dismissal.


Q If some employees accept a pay cut while others don’t, what are the employer’s options?


A If the agreement has not readily been forthcoming and the employer still wishes to proceed, they should consider carrying out formal consultation and, if all else fails, dismissing those staff who continue to object.


The employer must first consider how many staff will be affected. If they are proposing to change the terms of 20 or more staff, there will have to be collective consultation with appropriate representatives. If it affects less than 20, the employer can consult them individually.


The length of the consultation will depend on the number of staff affected. A 30-day period should be allowed unless 100 or more are affected, in which case 90 days is generally required. When any change can be implemented will depend upon what is agreed. Where terms and conditions have been collectively agreed with one or more trade union, negotiations should be conducted accordingly.


The employer will need to establish a sound business case for the proposed change, and employee representatives may expect to see financial documentation to support this.


If after consultation no agreement is reached, the employees should be informed in writing that a continued refusal may result in their employment being terminated. Any such dismissal must be undertaken in accordance with statutory provisions in force at the time of the proposed dismissal. The employees should be offered re-engagement on the new pay terms. Any claims for unfair dismissal resulting from the termination could be resisted on the basis of the business case constituting “some other substantial reason”.


Q If the employer terminates employees’ contracts, will they be entitled to redundancy pay if they refuse the pay cut?


A No. The employer will not be dismissing them on the grounds of a redundancy situation: ie, a diminishing requirement for a particular kind of work, workplace closure or business closure, but on the basis of the refusal to accept a pay cut.


Q If the measures do not result in the required cost savings and staff are made redundant, would their redundancy pay be based on their reduced rate of pay or their original salary?


A Statutory redundancy pay is calculated on the basis of a week’s pay subject to a current maximum of £350 from February 2009. A week’s pay is assessed at the calculation date, which is usually the date of dismissal. If there has been a contractual variation, even if this takes place shortly before the calculation date, the redundancy payment will still be calculated on the varied rate of pay. If the employee’s pay was reduced on a temporary basis, they will be able to argue for a payment based on their original salary.


Rachel Dineley, partner, Beachcroft