Pay cuts: the law and potential pitfalls

Emma Williams outlines what employers need to know when considering reducing their employees’ salaries

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Before former chancellor Kwasi Kwarteng was sacked by prime minister Liz Truss, MPs had reportedly filed a censure motion to halve the pay of both the chancellor and Truss. As MPs, Truss and Kwarteng receive a salary from the Independent Parliamentary Standards Authority, which is currently £84,144. On top of that, Truss and Kwarteng are also entitled to receive a ministerial salary of £79,936 and £71,673, respectively. It is those ministerial salaries that the motion proposes should be halved. If passed, the impact of a censure motion is almost entirely political, as it does not have a binding effect, so the censured ministers could choose not to take a lower salary, although it remains to be seen whether that would pass muster in the court of public opinion. 


As Truss and Kwarteng are officers of the House of Commons and not employees, this pay cut has been proposed in a very specific context. Pay cuts are, however, something that businesses and their employees have become more familiar with over the past few years. 


To mitigate the effects of numerous lockdowns and benefit from the 

coronavirus job retention scheme, many organisations looked to reduce their employees’ rate of pay either temporarily or permanently during the pandemic. Proposing a pay cut for poor performance, in a private company context, is, however, legally even trickier to manage. 


Employers cannot unilaterally reduce the pay of their employees, as this would likely breach the terms of their employment contract. To make a reduction in pay for poor performance, the employee in question has to agree to the reduction following consultation with the company. 


If the employee does not agree to the change, then they would need to be ‘fired and rehired’. This practice has, however, been heavily criticised, and a new statutory code of practice proposed to manage the process. Current guidance indicates that fire and rehire tactics should only be used as a last resort once all reasonable attempts have been made to reach an agreement with an employee through full consultation. 


If the employee has more than two years’ service then there’s a risk they could claim to have been constructively unfairly dismissed, if a change in salary is unilaterally imposed, or unfairly dismissed, if they are fired and rehired. In addition, an employer could face a claim for breach of contract. The root cause of any poor performance would also need to be taken into account; if it involves a protected characteristic (for example, a disability or pregnancy) then the employee in question could also allege that they have been discriminated against. 


Although a successful censure motion reducing Truss and Kwarteng’s ministerial salaries would garner more attention, the implications of reducing an employee’s pay for poor performance should not to be taken lightly. Strictly speaking, as officers, Truss and Kwarteng still have control over whether their salaries change if the motion is passed. 


Employers interested in taking a lower-risk approach to managing poor performance could consider putting the employee in question on a performance improvement plan before taking more decisive action. Whether government ministers can be put on performance improvement plans is something that perhaps should also be considered.


Emma Williams is an associate at Katten UK