Is it legal to impose a salary reduction if my business is struggling?

If an employer reduces an employee’s salary without their consent, the employee will be entitled to:

• resign and pursue a claim for constructive unfair dismissal; or
• continue to work under protest, but make a claim for compensation for the loss they have suffered as a result of their reduced salary.

If an employee does not agree to a reduction in pay, an employer could terminate their employment contract by serving them with contractual notice, then offer a new contract on a lower salary. However, employees whose contracts are terminated can bring claims for unfair dismissal, even if they have accepted the new contract.

In addition, if a certain number of employees are affected by the proposal of reduced pay, employers are legally obliged to consult with a trade union or employee representatives about the changes. If they don’t, they can face substantial compensation claims.

The results of a claim for unfair dismissal will depend upon:

• whether the employer can establish a substantial business reason for the pay reduction;
• whether the disadvantages the employee would suffer as a result of the changes were properly considered and whether these outweighed the advantages to the employer of implementing the changes;
• whether the employer had engaged in meaningful consultation about the salary reduction;
• whether a majority of the employees accepted the changes; and
• whether the employer acted reasonably when responding to employee objections.

Should an employer decide to pursue this course of action, in addition to the above points, they would need to ensure that; any pay cut is justified and that each step of the process is legally compliant, in order to help avoid costly employment tribunal claims and ensure ongoing good employee relations.