Cutting pay resulted in a constructive unfair dismissal claim

The Employment Appeal Tribunal (EAT) has considered whether an employee was constructively unfairly dismissed when his employer planned a significant cut to his pay. The employee was a showroom manager whose sales figures fell substantially over four years. His employer asked him to accept a reduction in his basic pay, from £45,000 to £25,000. He objected and the employer said it would proceed with the cut.

The decision focused on the “implied term” of trust and confidence. This obliges an employer not to act in a way likely to destroy or seriously damage its relationship with the employee. If it does breach this and the employee resigns, this will be a ‘constructive’ unfair dismissal.

In this case, the employment tribunal found that cutting the employee’s pay did not breach the duty of trust and confidence because the employer had reasonable and proper cause given his poor performance. However, the EAT held that this was the wrong approach saying that the tribunal should have considered that employers are not permitted to impose changes to key contractual terms (such as pay) without employees’ consent.

Things to consider when making salary cuts:

  1. If the employer has reason to question an employee’s performance, follow a performance management procedure. If the employee fails to improve, they can be dismissed on capability grounds rather than trying to cut salary.
  2. Consider making the post redundant in favour of offering an alternative role which has reduced responsibilities and therefore a reduced salary. For it to be a genuine redundancy and to avoid the risk of an unfair dismissal claim, employers must show that they no longer need the existing role and the new position is different. In this case, it would involve suggesting that there was no longer the need for a manager in favour of the new role of a sales rep with fewer responsibilities.
  3. If thebusiness is in financial trouble, seek the employees’ consent to pay cuts as an alternative to redundancy or the closure of the business. This must only be done following genuine and meaningful consultation.

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