Cutting pay is one of the most controversial moves that an employer can make. Although generally rare, the number of companies making pay cuts among their staff increased significantly during the financial crisis. But while cuts are deeply unpopular, for obvious reasons, they are often a necessary evil in order to avoid short term redundancies and ultimately save jobs. Michael Chattle, associate in the Employment, Pensions and Mobility team at Taylor Wessing outlines five key things that companies need to remember.
The right to be paid a certain salary or hourly wage is one of the most basic contractual rights that an employer has. Under UK law, employees’ contractual terms cannot be changed unless they expressly consent to it. Whilst it may be possible to rely on a general clause in the employees’ contracts that reserves the rights for the company to make contractual changes, this will rarely be the case for such a major change as a pay cut. Even if possible, there is no quicker way to having a unhappy and demoralised workforce than by trying to unilaterally force new contractual terms on them (just ask Jeremy Hunt).
Therefore, when a company is trying to implement a pay cut, they must get the express consent of all affected employees. Failure to do so may lead to claims for, among other things, breach of contract and/or unlawful deduction of wages and have a number of knock-on implications such as nullifying any restrictive covenants.
In order to get this consent, the employer must consult.
It is likely that the pay cut is being implemented for a good reason and is in the ultimate long-term interest of the company. These reasons need to be effectively communicated to the affected employees, explaining the rationale behind the move, setting out why it is necessary for the company, why it is in their long term interests and why other alternatives were rejected. This will help employees understand why it is in their interest to agree to the changes and increase the likelihood that they consent. The employees should be given as much notice as possible and consulted fully about the change, with their views sought and given full consideration. Depending on the number of employees affected, this consultation may be undertaken either collectively or on an individual basis.
While a balance must be struck between the need for consultation and the time cost that consultation will place on managers, it is important that full and adequate consultation with affected employees occurs. This will not only help avoid any potential legal claims in the future but will also ensure that the process proceeds as smoothly as possible.
Sweeten the pill
Although it is difficult to replace hard cash in the minds of the employees, offering other compensatory measures can make the move more palatable to those affected and increase the likelihood of a smooth implementation. These can be longer term benefits, such as setting a clear date for the cut to be reviewed or laying out plans for pay to be increased in the long run if market conditions improve; alternatively, they may be short term but more immediate, such as offering additional holiday days, increasing available shifts or changing the bonus structure.
If you don’t get consent
Unless a rare exception applies where enough leeway exists in the affected employees’ contracts to allow a unilateral change by the employer, if one or some of the employees do not consent to the pay cut then the change cannot be imposed upon them, even if the majority of employees have consented. To do so would be considered a breach of contract. Instead, the contracts of those holding out will need to be terminated on the grounds of not accepting the new terms and an offer made to replace it with a new one. If this is the case, a further consultation process will need to be carried out for these employees and a thorough business case presented for why the change is necessary. If more than 20 staff are refusing to give their consent, this will involve collective consultation with all of the employees and informing the Department for Business, Energy and Industrial Strategy.
Taking this course of action carries many legal and commercial risks (for example claims for unfair dismissal could be brought by those that do not accept and those that do accept are likely to be unhappy and demotivated) and should be taken as a last resort. Instead, where possible, further consultation should be undertaken with the affected employees to understand their objections and reach an agreement with them.
This may seem obvious; however, whilst all companies should realise the illegality of specifically targeting a particular group of workers for a pay cut, they may not be aware that indirect discrimination can often occur unintentionally when pay cuts are implemented. Most commonly this will occur when a particular group of employees are targeted. For example, if a particular department that was targeted for a pay cut had a disproportionate number of women with childcare responsibilities, this may indirectly be discriminatory. Likewise, if employees are being offered voluntary redundancy as a measure to avoid a pay cut, it could potentially be considered discriminatory to only offer this to those with shorter service (thus discriminating against some older employees).
Care should be taken throughout the process to ensure that no particular groups of people are being disproportionally affected by the proposed pay cuts.