Pay cut pitfalls: legal Q&A

Pay cuts are high on many employers’ agendas as they seek to cut costs to nurse their businesses through the recession. These can take several forms, as demonstrated by recent British Airways and BT efforts. However, employers must think carefully about how they should implement these cuts, otherwise they could fall foul of the law and leave themselves open to legal action.

Q Where does an employer stand on imposed pay cuts?

A The basic position is that an employer cannot vary an employee’s contract, unless the variation is either permissible under the contract itself, or the employee agrees to the change.

Q If an employer unilaterally cuts pay, after employees refuse to agree to it, what are the legal risks?

A In terms of a pay cut (be it either short-term or permanent), if the employer does not have the employee’s written agreement, then there are several claims the employer may face. By paying the employee less than they are entitled to under the contract of employment, the employer will face an unlawful deduction from wages claim. Also, the employee may walk out and claim constructive dismissal. The employer may have a defence to the constructive dismissal claim of “some other substantial reason” (SOSR), or possibly redundancy, if the change was proposed in a redundancy situation.

Q What can an employer do if an employee does not agree to variations in pay, or any other term?

A If there is no express right under the contract to make variations and the employee does not agree to the change, then the employer may decide to terminate the employee’s employment and re-engage on fresh terms. As this is an actual dismissal, this still carries with it a risk of a claim for unfair dismissal. While, as set out above, there is a potentially fair reason for the dismissal in these circumstances (SOSR or possibly redundancy), the employer must act reasonably in treating that reason as sufficient to justify dismissing the employee. For companies in serious financial difficulties, they may be able to show that their actions were reasonable.

Q What steps should an employer take?

A The employer should serve proper contractual notice to effect the termination and re-engagement (or “buy” the notice period out with a payment in lieu) to avoid an additional claim for wrongful dismissal.

Q What can an employee do?

A If the employee does not wish to accept the changes but continues to work for the employer, they must make clear that they are working under protest and they do not accept the new terms. If, however, the employee continues working and wants to bring a breach of contract claim, this must be done in the civil courts as employment tribunals do not have jurisdiction to hear breach of contract claims while employment is continuing. In a reduced wage claim, the simplest route would therefore be a deduction from wages claim, which can be made during employment.

Q What is the position of those on long-term sick leave or maternity leave if their colleagues at work have their pay cut?

A For those on long-term sick leave who are receiving statutory sick pay, they must continue to receive the minimum statutory level for as long as they are entitled under the statutory scheme. If contractual sick pay over and above the statutory minimum is being paid, then the employer can seek to make changes in the same way as set out above for those at work. If employees are on the PHI schemes, then subject to the rules of the scheme, such changes would usually not impact their payments. For those on maternity leave, their statutory maternity pay will be calculated in relation to their pay at a specific point in time.

Q If employees are sent home for extended periods of unpaid leave, how does this impact their paid holiday entitlement?

A If employees have agreed periods of unpaid leave, they will still be “workers” for the purposes of the Working Time Regulations 1998 and therefore their statutory holiday pay will continue to accrue during their absence from work. The employer may have provisions in the contract that contractual holiday on top of the statutory entitlement ceases to accrue in these circumstances, but it is unlikely that periods of unpaid leave of this type would have been envisaged at the time the contract was entered into and therefore it is likely that all holiday entitlement will accrue.

Joanna Wort, professional support lawyer and Gagandeep Prasad, solicitor, Charles Russell

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