Are employers entitled to make pay cuts?
An employer cannot usually impose a pay cut unilaterally on employees. Generally, it is unlikely an employer will be able to lawfully impose a pay cut without consulting with employees first. An employer would also need to ensure that any reduction in pay did not fall below the national minimum wage requirements for the hours worked.
Sometimes it is necessary to ask employees to take a pay cut to make the business viable, if it is loss-making for example. If more than 20 employees are affected by the proposals to cut their pay, an employer is legally obliged to consult with employee representatives about the changes. If an employer does not do so, the affected employees can bring claims for a failure to properly consult while still employed and claim up to 90 days’ pay as a protected award.
If employers want to reduce pay for another reason – such as the employee underperforming, not meeting targets or earning more than the organisation can afford – they need to consult with employees. If they have more than two years’ service, the employee acquires rights not to be unfairly dismissed and can bring a constructive unfair dismissal claim.
However, with less than two years’ service, if an employer simply reduces pay without consulting with the employee, they may try and argue they been subjected to unauthorised deductions under the Employment Rights Act 1996. Consulting with employees and reaching an agreement is best to avoid these claims.
During the consultation process, employers should explain the business case for the reduction and send this in writing to the employees if required to obtain their agreement. Ultimately, if they do not agree, their employment could be terminated by giving them notice and offering a new contract of employment with the new salary dated from the expiry of the notice period.