Can An Employer Impose A Reduction In Pay?

Employment law expert Alan Lewis considers the legal implications of an employer reducing the salaries of its employees in the present recession.

A recent ITV “Tonight” programme focused on an increasing trend of employers reducing employees’ wages and using the current recession as justification for this. So what is the legal position and what should employers and employees be aware of in this area of law?

The starting point is to recognise that an employment contract cannot be unilaterally varied by one party without the consent of the other. If an employer attempts to impose a reduction in an employee’s salary without their consent then this will entitle the employee either to resign and claim constructive unfair dismissal or, alternatively, continue to work “under protest” but sue for compensation for the loss that the employee has suffered as a result of their reduction in salary. In either case, employers should therefore avoid unilaterally imposing a reduction in salaries on their employees, particularly bearing in mind the current maximum compensatory award for unfair dismissal is Ł66,200.

If an employer is contemplating reducing employees’ salaries, then they would be best advised to attempt to seek agreement with their workforce so that such a change can be implemented by consent. In the current recession many employees are likely to agree to a reduction in salary if this is seen as an alternative to being made redundant or placed under the threat of redundancy. Indeed research for the ITV programme “Tonight” revealed that 40% of employees would agree to a pay cut in such circumstances.

Ultimately, if any employees refuse to agree to a reduction in their salary, then an employer would have the option of terminating employees’ contracts of employment by giving them contractual notice and offering a new contract on a reduced salary. However, employers need to be aware that if 20 or more employees are affected by such proposals then they will legally be obliged to consult with a trade union or employee representatives concerning the proposed changes. A failure to properly engage in this process could lead to significant protective awards of compensation being made against an employer of up to 90 days pay per affected employee. Often such awards can run into many hundreds of thousands of pounds if substantial numbers of employees are affected.

It is also important for employers to be aware that those employees whose contracts are terminated can still bring claims for unfair dismissal, even if they have accepted the new contract. Indeed the fact that employees can accept the new terms and conditions of employment but still pursue a claim for unfair dismissal is regularly overlooked by both employers and even some lawyers. Whether such claims for unfair dismissal are ultimately successful will depend upon a variety of factors, including:-

Whether the employer can establish a substantial business reason for the reduction in pay;
Whether the disadvantages that the employee would suffer as a result of the changes were properly considered and whether such disadvantages outweighed the advantages to the employer in implementing the changes;
Whether the employer had engaged in genuine and meaningful consultation in relation to the reduction in salary;
Whether a majority of the employees accepted the changes;
Whether other potential ways of reducing overheads were considered by the employer;
Whether the employer acted reasonably in all the circumstances when responding to any employees objections.

Manchester employment law solicitor Alan Lewis of Linder Myers LLP can provide advice to both employers and employees in relation to the implications of reducing employees salaries in the recession. Alan is presently advising a large number of employees in a group action arising out of the reduction in their pay. He also regularly advises employers on how to vary employment contracts whilst minimising costly Employment Tribunal claims.

1 JULY 2009

For Further information on Linder Myers expertise in dealing with the issues raised in this article please contact:

ALAN LEWIS, PARTNER
EMPLOYMENT DEPT
0161 837 6807
alan.lewis@lindermyers.co.uk