Pay cut considerations

Employers who are considering implementing Covidrelated pay cuts need to be mindful of the risks associated with such a move, explains The HR Company’s Linda Ward

As a result of the current Covid-19 pandemic, some employers may be considering the need to implement pay cuts over the coming months, due to difficult trading conditions. Employers need to be cognisant of the risks associated with pay cuts, and understand that financial pressures in the employer’s business does not provide an automatic justification for a reduction in salary or wages.

A pay cut represents a reduction in an employee’s salary/wage, which is often made to reduce lay-offs, while saving the company finances during a challenging economic period. This reduction in the employee’s salary/wage can be temporary or permanent, and may or may not come with a reduction in responsibilities. To avoid potential claims that may arise from reducing an employee’s wages, a number of issues should be considered by employers.

Consent: can the consent of the employees be obtained?

Obtaining an employee’s consent is the safest manner for proceeding. The reason for the reduction in wages should be explained, as well as the consequences for the business and jobs if cuts are not made. Employees should be made aware of why it is happening; when it will take effect; how many people in the organisation are being affected; if there will there be a payback at a later stage; and if benefits will also be cut.

There should be a period of consultation whereby employees can negotiate a part of the agreement. A third party/civil court will expect an employer to act reasonably by engaging with employees or their trade union in advance of implementing a reduction. 

Contract of employment: does it allow for the reduction in wages/ salary?

This clause may be explicit in the contract of employment, which would be normal.

However, regardless of whether this clause is contained within the contract or not, it does not give the employer the automatic right to proceed with wage/salary reductions. Employers should continue to gain an employee’s consent by consulting and negotiating a pay cut.

Reasonableness: does the employer have clear measurable reasons for the pay cut?

As an employer, you should ensure that you develop and retain any evidence of financial and other reasons for any pay cuts. You must have evidence, or reasons, of whether other cost saving measures were implemented or were not implemented.

Process to follow 

To reduce an employee’s wage/salary, there is a process to follow:

■ The business should be facing financial/economic challenges to justify the deductions of pay.

■ Employers should engage in an information and consultation process with employees and unions (where established). Effective communication is essential, and employers need to be mindful as to how information is shared. If employees are not represented by a union, communication and agreement process must be considered.

■ Where pay cuts are proposed, they need to be reasonable. Employers should, therefore, consider a sliding scale approach, reflective of salary positions.

■ Where a change is made to pay or other benefits, employers need to be clear on how this may impact other aspects of employment, including, for example, future calculations for redundancy payments, should they arise. Unions may request that the wage, pre-pay cut, is used to calculate any future redundancy.

■ As much notice as is practical of any change should be given.