Communicating Employee Pay Cuts: Strategies for Avoiding Conflict

Demonstrating the fact that pay cuts are part of the reality of professional life in the UK, six of the British Broadcasting Corporation (BBC)’s flagship presenters, all male, accepted reduced wages in January 2018.

These cuts are indicative of their efforts to address the gender pay gap within the organisation. “I was earning a lot of money and it seemed entirely proper to me that I should take a few pay cuts,” said Mastermind presenter John Humphrys, whose salary was scaled down to “a lot less than £600,000.”

Reducing the wages of employees is often a much less streamlined process than is illustrated by the recent cuts in the BBC, particularly if the salaries in question are “a lot less than £600,000” to begin with. These presenters are public figures –  in an organisation whose success rides on the tide of public opinion – both likely catalysts in their own right for the seamless acceptance of these particular pay cuts. 

The gender pay reporting legislation introduced in the UK in 2017, which requires companies to be transparent about their financial structure, presumably served as a further incentive; for the prudently timed proposals themselves, as well as their acceptance.

Concerns faced by staff in the wake of pay cuts

Across the UK’s corporate culture, staff of all levels of seniority typically give a green light to proposed pay cuts much less readily than in this scenario at the BBC, and it’s prudent that employers anticipate problems staff may encounter in the light of a pay cut. Concerns employees may have include being unable to sustain their current mode of living, or paying their mortgage or other debts.

When reductions are proposed – if they do not consent to working at the suggested reduced rate – employees have a range of options available to resist the change and/or pursue legal action. Claims can be made against the employer, and it is vital that employers are familiar with the specific litigation surrounding reducing remuneration, prior to initiating any form of discussion of a pay cut. This the best possible means of avoiding successful claims being brought against the company by disgruntled employees.

When can a company legally cut pay?

Promoting equal pay is just one of a multitude of reasons that employers might decide to reduce salaries. Cuts may be proposed, for example, to help keep a business afloat during difficult times, or for more individualised reasons – for example, if the business decides that an employee is being overpaid for the quality and/or quantity of work they produce.

It is not unusual for employees to react, at least initially, by perceiving any proposed salary reduction as unexpected and/or unfair. However, this is not necessarily the same as unlawful. In the majority of cases, employers propose pay cuts having thoroughly investigated the current contract with the employee and their legal right to do so. 

In general, an employer is within their rights to issue a salary cut as long as their course of action meets the following specifications:

1: Before it can take effect, the employer must propose the pay cut, and the employee must consent to it.

In rare cases, the contract will anticipate a pay cut; for example, if the starting salary was initially negotiated on the basis of a particular level of performance which has not been met. If their contract sets out a given salary entitlement without clauses such as this, issuing a pay cut without first obtaining consent constitutes a breach of contract. An employer must therefore ensure they discuss the proposed change with the affected employee(s) rather than simply making the reduction, to minimise the risk of any disputes and claims.

2: The reduction in pay must not fall below the National Minimum Wage requirements for the hours worked.

The minimum wage is the wage a worker is entitled to per hour in the UK. From April 2019, all workers aged 25 and over are legally entitled to £8.25 per hour. 

3: The employer must consult with a trade union or employee representatives, if the salaries of more than 20 members of staff will be affected.

This is a legal obligation under the Trade Union and Labour Relations (Consolidation) Act 1992 (TULCRA). Employers who issue a pay cut without taking this necessary step could be liable for failing to properly consult; employees can remain in employment while making this claim, with the right to a protected reward of 90 days pay. It is important to note that when proposing a pay cut to a cohort of workers, it is wise to take extra care to ensure that this action cannot additionally be interpreted by the group as discriminatory.

Which laws should employers consider when planning pay cuts?

In order to minimise the likelihood of discussions surrounding a proposed pay cut escalating into claims and disputes, organisations should familiarise themselves with legislative policies which their employees are likely to draw on in navigating an unaccepted pay cut proposal. These include:

The Employment Rights Act 1996. Employees who do not wish to remain with the organisation following the pay cut proposal may rely on this legislation to ask for a pre-termination discussion or a without prejudice conversation, with the aim of negotiating off the record the scope of an exit package (section 111A). Alternatively, employees could choose to remain employed without consenting to the cut, and then file a claim for unlawful deductions of wages (section 13). Employers should be aware that an employee remaining at work while protesting the claim could be a prelude to resigning and filing a constructive dismissal claim later on. (See ‘Constructive dismissal claim’ below for more information.) 

TUPE transfer (Transfer of Undertakings Protection of Employment Regulations 2014).

The TUPE Regulations preserve terms and conditions of staff contracts when a business or undertaking is transferred to a new employer. Employees can reject changes related to management transfers, and employers must prove the Economic, Technical or Organisational (ETO) reason for the change. A reduced salary which is proven to be solely connected to the TUPE transfer regardless of when it took place and/or a failure to inform and consent.

What claims can be brought by employees after refusing a pay cut?

Courses of legal action which employees who do not consent to a pay cut might choose to pursue may include:

Unfair dismissal claim. When an employee decides not to work for the suggested reduced salary, an employer’s next course of action may then be to make them redundant. In the light of this, employees may then have the grounds to make an unfair dismissal claim. The employer must prove the validity of the redundancy and that fair dismissal procedures were followed in order to refute the claim.

Constructive unfair dismissal claim. Employees who have worked for the company for over two years have the right to make a constructive unfair dismissal claim. This involves resigning; they may then have grounds to claim that the proposed pay cut constitutes a fundamental breach of contract on the part of the company. 

Discrimination claim. Employees who have been with the company less than two years and who cannot therefore make a constructive dismissal claim may explore other possibilities of legal action, such as claiming they have been unlawfully discriminated against as a result of the pay cut applying to them.

Creative and careful approaches to proposing pay cuts

When coordinating pay cuts, it’s advisable that employers act with a view to minimising the likelihood that the proposal will be construed as a breach of contract, or result in claims relating to discrimination, or constructive or unfair dismissal.

Some approaches to implementing changes in pay may be more graciously accommodated by certain employees than others, but communication is key. It is not only important to avoid the souring of relationships with staff from a legal and financial perspective, but to safeguard the success of the company; employees in senior positions may apply to rival firms in the light of a pay cut, taking with them valuable connections and clients. If there has been a breach of contract the company may no longer be able to rely on valuable restrictive covenants either. 

An employee may be more receptive to the proposal of a phased reduction in pay with the potential for a review and increase in future, than – for example – to having their contract terminated and being offered a new contract with a lower salary. Strategies conducive to preserving the relationship should be given preference, with all resultant arrangements to be recorded in writing to avoid ambiguities and any problems in the future.