Is it legal to impose a salary reduction if my business is struggling?
Reducing pay would be a variation of an employees' contract of employment. Employers cannot unilaterally vary a contract of employment.
This decision is therefore one the employees in question would need to consent to. They are not obliged to give their consent, and, could take legal action to prevent such a change. In International Packing Corporation (UK) Ltd v Balfour and others (2003) the organisation was struggling and reduced the hours and pay of the employees. The employees claimed that this was an unlawful variation of contract and an unlawful deduction from wages and their claim was upheld.
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.
If you need further information on any of the topics above for your business, get in touch.
For more information or to book an HR consultation please contact Karen Scott on 07762 629 448 or get in touch by clicking here.
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