Let’s Talk About Pay Cuts…

March 29, 2016
Pay Cuts

We talk a lot about rewarding employees appropriately, and using competitive pay as a way of increasing employee motivation. But what about those situations when you’re really struggling, and you simply can’t afford to keep up with everybody’s salary? What if you can see no other option than to make pay cuts? Why does nobody ever talk about that?

What to Do if You Need to Make Pay Cuts

You might find yourself considering pay cuts for several reasons. For example, perhaps the only alternative is redundancies, and you’d rather not put anybody out of a job.

The first thing to remember is that in the same way that it is perfectly legal to offer a pay rise, it is also perfectly legal to propose a pay cut.

However, pay cuts may only be made when an employee has agreed to such a change. In other words, you would need to draw up a brand new contract and get it signed by the employee it affected before the pay cut would come into effect.

Getting an employee to consent to a pay cut can be tough, but you might find that they are willing to support this if they understand that the alternative could be worse – e.g. redundancies.

What if an Employee Doesn’t Consent to a Pay Cut?

There is another way to effectively process pay cuts without technically ‘cutting’ pay, which is to dismiss employees and then re-hire them on brand new contracts – obviously these new contracts would be at a reduced rate of pay.

Of course, there’s every chance that upon dismissal, the employee would rather keep it that way! But some employers have found in the past that making a slight responsibility tweak to the new contract so that slightly less is expected can help to cushion the blow of a pay cut.

This approach is not without danger, and employers considering it should think about the following:

– Employees will need the required contractual notice of dismissal before immediate re-engagement

– Employees may challenge the termination as unfair

– You must have a “substantial reason” for acting in this manner to defend against an unfair dismissal claim

– If you are planning on dismissing and re-engaging 20+ employees, you must follow the statutory consultation procedures for collective redundancies

For further information about pay cuts, there is a more in-depth explanation of the above on XpertHR’s website here.


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