Unilateral reductions in pay – part two

Part One – Unilateral reductions.

Employee consultation

If neither of the methods referred to above appeals to the employer there is a third option, namely, employee consultation.  This is generally less attractive to employers but more robust in terms of withstanding legal challenge. This option occupies the middle ground somewhere between the two approaches and requires significant bilateral consultation.

From the outset, the employer should announce the proposed reduction in wages, why it is necessary and when it is likely to take effect. Additionally, employees should be notified that a series of information/consultation sessions will take place during which the proposal should be discussed in more detail. It is important that employees are invited to provide comments and given an opportunity to put forward alternatives to the proposal.

Employees should be given an assurance that all suggestions and comments will be considered seriously by management. It is important to emphasise that the decision to reduce wages is taken as a last resort and necessitated by the desire to avoid redundancies. It should be emphasised (if it is the case) that the proposed reduction in pay will affect all levels of employee in the business.

Once the consultation process is complete a final announcement should be made that the reduction, in whatever form, will take effect on a given date. 

This consultation process may reduce the number of employees objecting but, like the other options, it will never eliminate potential claims. The advantage this particular method has when compared to the previous two is in its potential to reduce the number of successful claims. In other words, an employer following this process has a reasonable argument that the constructive unfair dismissal was fair.

Avoid “unfair dismissal”

Should one or a number of employees resign following the implementation of the pay reduction and claim constructive unfair dismissal they must show that there was an actual or anticipatory breach; that the breach was fundamental to the contract; that they have resigned in response to the breach; and they did not waive their right to claim.

Once established, the employer may seek to persuade the Labour Tribunal that despite the breach the dismissal was fair. The Labour Law says that where the employer acts reasonably in the circumstances a dismissal shall not be unfair if that dismissal relates to:

(i) misconduct (similar to gross misconduct);
(ii) misconduct following a previous written warning;
(iii) performance related issues following a written warning;
(iv) redundancy;
(v) the operation of law; or
(vi) some other substantial reason.

In these circumstances, an employer may seek to show that the dismissal was fair for ‘some other substantial reason’, namely, a genuine business need. A factor that may lead to a finding that the dismissal was fair is how the employer conducts itself during the consultation process. An employer must follow a fair procedure prior to implementing the reduction in pay. It will not be enough for the employer to simply rely on the business need in the absence of a reasonable consultation process.

The process adopted by the employer must be fair and reasonable and allow for employee participation, where possible.

All variations of terms and conditions of employment can be contentious for employers particularly when unilaterally imposed. In addition to pay, some other areas that often lead to disagreement and friction between employer and employees include the unilateral imposition of a reduction of contractual pension contributions or the level of health insurance paid by the employer.

The Law sets out the minimum entitlement for both pension and health although it is a matter for individual employers to contribute in excess of the minimum should they chose to do so. Such matters are likely to be set out in the employee’s contract of employment. Any reduction of the contractual pension or health benefits may lead to litigation in the same way as a reduction in pay. Prudent employers will use one of the methods described above should they wish to unilaterally impose a variation.

The bottom line – always be reasonable
Unfortunately for an employer there is no panacea to rely on when varying terms and conditions of employment, employers must adopt the most appropriate method of implementing a variation of terms. Not all variations require the same method but the absence of a positive approach by the employer is likely to lead to significant legal costs and disruption to business.

It is always advisable to be reasonable in dealings with employee’s terms and conditions, particularly so when the terms are fundamental, such as pay. Employees and the courts/tribunals will be looking for a reasonable approach by the employer, which if applied can mean the difference between success or failure or, in the worst case scenario, a small or large award of compensation.

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