Employee pay-cuts: what should employers do?

When an employer needs to implement wage cuts, the relevant question in any subsequent dispute that may arise is whether it is reasonable for the employer to dismiss an employee who does not accept this decision. It does not hinge on whether it is reasonable for the employee to accept the lesser terms offered.

In a recent case before the Employment Appeal Tribunal, an employer needed to cut costs and increase profit, and as a result asked its employees to accept a pay reduction of 5%. One of the 77 employees would not accept the change, and he was dismissed after seven years’ service.

The Employment Tribunal initially found the dismissal unfair, but the Employment Appeal Tribunal took a different view. They decided that it is not correct to say that an employer may only offer less favourable terms if the very survival of the business depends on it, nor is it correct to assess whether or not the employer’s decision was reasonable by asking what was reasonable for the employee to do.

The Employment Appeal Tribunal gave guidance on the correct approach. The relevant issues are whether, in the circumstances (including the size and resources of the employer’s business), it is reasonable to treat the refusal to agree to a change in contract terms as sufficient to dismiss the employee, remembering that the dismissal must be “in accordance with equity”. This would be particularly relevant where, for example, management proposals are for a pay-cut for workers but not for management. The process by which the pay-cut was negotiated may also be a relevant factor, particularly if there was any question mark over “fair dealing”.

There therefore continues to be some flexibility for employers on changes in contract terms, including wage reductions, although the substantive basis and scope of any change and the consultative process leading to implementation will still be crucial factors.

Any business considering making pay-cuts is advised to seek specialist advice to ensure that their proposal and associated processes are fair and reasonable. For further information please contact Jane Laidler j.laidler@grm.co.uk