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Salaries are often one of the largest overheads for a business. Therefore if a business is struggling financially or it simply wants to take steps to streamline its spending levels to improve its bottom line, employers will often consider implementing pay cuts as a ‘quick fix’ for reducing business costs.
Although an attractive option for employers, particularly where action needs to be taken swiftly to help the financial position of the business, it is a significant step with inherent difficulties and should not be taken lightly.
Some examples of the potential implications include:
The loss of staff as a result of a decision to reduce their pay and seek alternative employment offering improved pay levels. Staff who leave may also try to bring constructive unfair dismissal claims;
There may be a loss of morale, motivation and commitment towards the business due to the impact of makingpay cuts;
Additional costs to find replacement staff if they leave and in doing so, incur significant recruitment fees; and
Employers may incur further costs and expenses implementing induction programmes or provide training for new members of staff.
To help minimise the potential negative impacts of implementing pay cuts, there are a number of steps employers should take before taking this action. Firstly, they should consider whether there are any other viable alternatives to pay cuts. For example, if any staff members are engaged under costly agency or consultancy arrangements, consider more cost-effective ways to retain their services or terminate those agreements.
If there are no other viable options, employers should always take the following steps:
1. Check what the contracts of employment say about changing terms and conditions of employment. If there is a specific contractual process in place, it should be followed to reduce the risk of any claims for breach of contract;
2. Ensure all affected staff are consulted fully about the proposed changes before they are implemented; and
3. Ensure all staff are treated fairly and consistently to avoid discrimination claims. If pay cuts are only introduced for certain individuals and this decision cannot be objectively justified, employers may face allegations of unlawful discrimination.
Pam Loch, Managing Director of niche employment law practice, Loch Associates Employment Lawyers and Managing Director of HR Advise Me Limited.
Explanation of the legal and regulatory issues affecting small and medium enterprises