Unilateral reductions

Recession for many businesses means a reduction in income and profit, which often leads employers to make difficult decisions concerning staffing levels. Common ways employers seek to reduce expenditure when faced with a budget that no longer balances is to reduce employee numbers by way of redundancy.
As a means of avoiding redundancies, businesses occasionally opt to reduce pay as a measure to save jobs. A unilateral pay reduction is by no means a soft option for employers and requires a great deal of resolve and application as the path will undoubtedly become rocky.
To unilaterally reduce pay, which in itself is a variation of terms and conditions of employment, an employer may either seek the consent of employees or, alternatively, push through the variation without it. In that regard there are a number of options open to an employer seeking to reduce pay.
From an employee’s perspective any unwanted reduction of pay by the employer is potentially a breach of contract. An employee, in these circumstances, will have two options; s/he can either bring a claim for the breach in court, whilst remaining in employment, for the sum equivalent to the accumulated reduction in salary; or bring a claim in the Labour Tribunal for constructive unfair dismissal.
The employee may of course decide to do nothing and accept the variation. However, if the employee chose to act on the breach and claim constructive unfair dismissal s/he must resign rather than continuing to work under the newly imposed terms and conditions. Resignations do not have to be instantaneous; an employee may choose to work under protest but can only do so for a reasonable period. Working too long under the new terms and conditions, under protest or not, will mean that the employee is likely to have impliedly accepted the reduction in pay. 
Faced with this reality, what can an employer do to reduce the risk of a successful court or Tribunal claim? Employers choosing to unilaterally impose a pay reduction may take a passive approach or alternatively, deal with the situation robustly. In a perfect world there would be a perfect solution but it is not, and unfortunately for the employer, the solutions are imperfect and limited.
Impose a variation – with fingers crossed!
Firstly, an employer may choose to simply impose the variation following a very brief announcement and hope that there are no objections. With the passage of a reasonable period of time and in the absence of employee resignations, the pay reduction may simply become part of the employee’s terms and conditions. By not rejecting the pay reduction and by remaining in employment, the employee will have impliedly accepted the reduction by not rejecting it. One of the problems with this tactic is that the employer will not realise the full extent of their exposure to potential claims until a reasonable time has elapsed.
What is a reasonable time? The answer to this question will depend on the nature of the variation. Reasonable time commences at the point the variation begins to affect individual employees. In the case of a unilateral reduction of pay failure to resign or protest following one or two pay periods may be enough to indicate implied acceptance. The greater number of wage payments the employee accepts the more likely there will be implied acceptance.
However, some variations of pay (or other variations) may not affect the employee immediately. An example of this might be a contractual bonus paid at the end of the financial year. In such circumstances, the employee might argue that as the variation has no immediate effect there is no opportunity to accept or reject the change.
As pay is a fundamental term of the contract of employment and its reduction is likely to be contentious, the passive approach may not be the best approach. There is likely to be significant opposition by employees to any reduction and consequently the employer may face wholesale rejection of the change. This approach has more success when applied to minor variations that do not significantly affect the employees.
Fire and re-hire
The second, more robust approach is to fire and then re-hire. Leaving aside immigration/work permit issues that may potentially undermine this process, the approach requires an employer to serve contractual notice of termination on the employee/s, dismiss and then re-hire. The idea is that when the employees accept the new position it will be under the new terms and conditions and on the new, reduced pay.
Problems arise where employees decide not to accept the offer of re-employment and claim unfair dismissal and severance payments. In such circumstances employees who have been dismissed will, in all likelihood, have been dismissed unfairly giving rise to claims for compensation.
For the employer to be successful it must necessarily rely on the employee valuing their employment with the business more than the alternative, which is having no employment. Employees are likely to value job security in periods of high unemployment more so than in periods of economic prosperity when jobs are abundant.
Consequently, the need for the employer to reduce expenditure coupled with employee reluctance to be unemployed may produce only a smattering of claims during times of recession, of course during times of plenty, the situation may be vastly different. This is hardly a foolproof method and, if the mood of the employees is misjudged, it can potentially be very expensive in terms of claims and cause considerable disruption to the employer’s business.  

Read about employee consultation and how to avoid unfair dismissal next month

Disclaimer: This article consists of general information only and is not intended to be legal advice. Whilst every effort is made to ensure the accuracy of this information, legal advice should be obtained from a qualified lawyer on any legal matter.


Legally Speaking by Appleby Associate Shaun Cockle