When an employer is looking to reduce the salary or pay of their employees, what is their legal position and what should employers and employees be aware of in this area of law?
Employee consent is necessary for a salary reduction
An employment contract cannot be unilaterally varied by one party without the consent of the other.
If an employer attempts to reduce an employee’s salary without their consent, this will entitle the employee to take any of the following action:
- Resign from their position
- Pursue a claim for constructive unfair dismissal
- Continue to work “under protest” but sue for compensation for the loss that they have suffered as a result of their reduction in salary
Therefore, if an employer is contemplating reducing the pay of their employees, 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 it is seen as an alternative to being made redundant or placed under the threat of redundancy.
What if employees refuse a reduction in pay?
If an employee doesn’t agree to a reduction in their pay, an employer has the option of terminating their contract of employment by giving them contractual notice and then offering them a new contract on a reduced salary.
Employers need to be aware that where a certain number of employees are affected by such proposals, they are legally obliged to consult with a trade union or employee representatives concerning the proposed changes. Failure to properly engage in this process can lead to significant compensatory awards being made against an employer, which can run into hundreds of thousands of pounds if a substantial number of workers are affected.
Legal repercussions for terminating employee contracts
It is important for employers to be aware that employees whose contracts are terminated can still bring claims for unfair dismissal, even if they have accepted the new contract.
The fact that employees are able to accept the new terms and conditions of employment and 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 depends 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 employee objections.
Should an employer choose to reduce the pay or salary of their employees, ensuring that the action is justified and every necessary stage of the process is legally compliant can help to protect employees from becoming involved in any unfair situations, and also reduce the possibility of Employment Tribunals being brought against a business.Find out more about our Employment department