Legal

Is it legal to cut an employee’s salary?

14 May 2019 By Pam Loch

Organisations seeking to reduce pay should be prepared to follow a strict process, as Pam Loch explains

An employer cannot usually impose a pay cut unilaterally on employees. However, there are situations where this may be possible – for example, the right to reduce their remuneration package may be covered in the employment contract. This can happen where the employee’s salary was originally negotiated on the basis of an expected level of performance which, if not met, meant the salary would reduce.

Generally, it is unlikely an employer will be able to lawfully impose a pay cut without consulting with employees first. An employer would also need to ensure that any reduction in pay did not fall below the national minimum wage requirements for the hours worked. 

Sometimes it is necessary to ask employees to take a pay cut to make the business viable, if it is loss-making for example. If more than 20 employees are affected by the proposals to cut their pay, an employer is legally obliged to consult with a trade union or employee representatives about the changes under the Trade Union and Labour Relations (Consolidation) Act 1992 (TULCRA). If an employer does not do so, the affected employees can bring claims for a failure to properly consult while still employed and claim up to 90 days’ pay as a protected award. 

If employers want to reduce pay for another reason – such as the employee underperforming, not meeting targets or earning more than the organisation can afford – they need to consult with employees. If they have more than two years’ service, the employee acquires rights not to be unfairly dismissed and can bring a constructive unfair dismissal claim. 

However, with less than two years’ service, if an employer simply reduces pay without consulting with the employee, they may try and argue they have suffered a detriment due to a protected characteristic and have therefore been subjected to discrimination. Alternatively, employees could claim they have been subjected to unauthorised deductions under the Employment Rights Act 1996 (ERA 1996). Consulting with employees and reaching an agreement is best to avoid these claims.

During the consultation process, employers should explain the business case for the reduction and send this in writing to the employees if required to obtain their agreement. Ultimately, if they do not agree, their employment could be terminated by giving them notice and offering a new contract of employment with the new salary dated from the expiry of the notice period.

Where there has been a TUPE transfer (Transfer of Undertakings Protection of Employment Regulations 2014), the employee could argue that any changes connected to the transfer are void even if they agreed to the reduction during the TUPE consultation process. The employer would have to evidence it was not connected to the transfer or there was an economic, technical or organisational (ETO) reason for the change. Otherwise there is an automatically unfair dismissal as a result of the change in salary.

What can an employee do if faced with a pay cut?

The employee may decide to resist the change and state they are working under protest due to financial constraints and not resigning immediately. This enables them to try to preserve their right to bring a constructive unfair dismissal claim later. They are required to mitigate their loss, so securing another job with no losses going forward could make it futile and costly to bring the claim, aside from scoring a victory and winning a claim for unfair dismissal with no award.

Alternatively, the employee could try to lodge an unauthorised deductions claim while they remain employed, which can place a huge strain on the employment relationship, arguing they are not being paid their full salary under the contract. Where senior employees are concerned, this can make the relationship untenable. The employer could then find scope to dismiss the employee as a result of a breakdown in trust and confidence.

An employee who does not want to remain with the employer could ask to have a pre-termination discussion with their employer in accordance with s 111A of ERA 1996 with the aim of having an off-the-record discussion to negotiate an exit package. If the employer is seeking to cut the employee’s pay due to their underperformance or as part of a cost-cutting exercise, it’s unlikely they will be keen to agree a large exit package.

The employee, or the employer, could also agree a phased reduction in pay with the potential for a review and increase in the future, to try to incentivise the employee to remain and retain the relationship. Any agreement reached between the parties must be recorded in writing in case there is a dispute later over what was agreed.

If an employer is considering cutting a senior employee’s salary, the financial and other implications can be significant. A senior employee could argue they are no longer bound by the terms of their contract because the employer has breached the contract by cutting their pay. This could have serious consequences for the employer if the employee leaves and joins a competitor, taking valuable contracts, clients or employees with them. 

Pam Loch is a partner and managing director of Loch Associates Group

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