September 28, 2011
In these difficult economic times, employers may consider reducing costs by imposing a wage cut on its staff. Obviously this is never a popular decision, and is also fraught with potential legal issues. However, a recent court ruling by the Employment Appeal Tribunal has clarified the basis on which an employer may lawfully impose this kind of change.
The first step for companies is to ask all its employees to agree to a change in their contract, reducing their salary. Sometimes employees will agree to this, if persuasive information is given to them about the economic difficulties which the company is facing. However there are obviously strong reasons why staff will not want to agree to this change. If employees do not agree to the change, the employer is left with the prospect of dismissing the employees and re-engaging them on new contracts. As this will create a dismissal, it also creates the possibility of a claim of unfair dismissal by the disgruntled employees.
The decision in July clarified that it is not necessary for the employer to show that the survival of the business depends on the pay cut being implemented. Rather, as well as considering the size and administrative resources of the company generally, a Tribunal will consider the “equity” of the dismissal in the sense of whether there has been a general sense of fair dealing. Whether or not Management are also taking a pay cut may be relevant as well as the way in which the pay reduction has been negotiated.
A fair process will be essential. This will involve good consultation with the employees. Additionally, it has been suggested that obtaining an independent financial report from a firm of accountants showing the difficulties that the company is facing, together with the improvement that the pay reduction would achieve, might be relevant.
As this is a complicated and difficult process, we would also suggest that any employer should take professional advice if it considers that wage cuts may be necessary. For further information on this subject or other employment matters, please contact Debra Wetters, Employment Solicitor at Spratt Endicott Solicitors on 01295 204122, or email her at dwetters@se-law.co.uk.
