Legal

Has Covid decided the future of location-based pay?

5 Nov 2020 By Nick Elwell-Sutton

Nick Elwell-Sutton explores employers’ options if they want to lower their salary cost base by moving to remuneration based on where workers live

There is little doubt the Covid-19 pandemic has led to a deep structural and cultural change in the world of work and almost all businesses have had to adapt to their employees remote working. Before Covid, home working was often viewed by employers at best with reluctance and at worst with suspicion, but the sentiment around this has now altered and shown anecdotally little, if any, difference in workers' productivity.

For employees, many have embraced the ability to work from home and enjoyed the savings made on expensive commutes and with time previously used for travel now available for leisure purposes. So a formerly hard-pressed office worker's nirvana, right? Maybe, for now.

Given we are likely to be in some form of enforced lockdown for some time, it is apparent that office working in future will probably be a mix of home working and occasional or necessary office visits. But with that there will be a focus on how much people are paid when they work predominantly or entirely from home. While explicit London salary weightings are rare, it was universally implicit that a proportion of salary was recompense for the time and expense of London working. In May, tech giants Facebook and Slack announced a move to location-based pay to reflect the lower costs of living outside expensive urban hubs. 

But what does an employer need to consider if they want to move to location-based pay? Changing salaries has always been a contentious matter but, having experienced a different quality of life, and in many cases a substantially better work-life balance, some employees may be prepared to agree to a voluntary salary reduction as simply the price to be paid for a better lifestyle.

When pitching a reduction, employers should take into account a sharing of the savings made on the employee's commute and associated costs such that it is win-win. If a negotiated position cannot be agreed then it may be open for the employer to force the point. For those with less than two years' service, who do not qualify for unfair dismissal rights, notice to terminate can be given with an offer of a new contract at the lower salary to take effect from the end of the notice period. With the expected tsunami of job losses it would be a brave employee to choose not to accept the lower offer and put themselves out of work. Whether it would be wise for the employer to do so long term given the risk to employee relations, loyalty and retention is another matter. 

But could an employer rely upon redundancy as its potentially fair reason? Well yes, it could. Section 139 of the Employment Rights Act 1996 gives a statutory definition: “For the purposes of this Act an employee who is dismissed shall be taken to be dismissed… if the dismissal is wholly or mainly attributable to… the fact that the requirements of that business… for employees to carry out work of a particular kind in the place where the employee was employed by the employer… have ceased or diminished…” 

In other words, if the employer can show they no longer require an employee to carry out particular work in a ‘place’, that is sufficient to meet the definition. 

A consultation process would be required and the employee would have to be offered the home-based role as a suitable alternative, albeit at the lower salary. However, it is then up to the employee to decide whether it is reasonable to refuse, taking into account their subjective views and personal circumstances. 

The salary differential would be a matter for legitimate consideration by the employee but, provided the difference was pitched right, particularly taking into account any saving the employee would make from not commuting, many employees may accept when faced with the loss of their job. It would be open for the employee to argue that the home was the ‘place’ in which they were employed and it would also be highly fact-dependent around prior remote work and any mobility clause among other factors. 

Whether this is appropriate for employers will depend upon their cultural approach, but as time goes on the issue of location-based pay will become a focus of hard-pressed CFOs and HRDs, even if only to assess the magnitude of any cost savings.

In the meantime, the proliferation of jobs advertised as home working continues to increase and one can only speculate whether the salaries offered already include a discount against what would have been offered for a solely office-based role.  

Nick Elwell-Sutton is a partner at Clyde & Co

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