Business survival – can I impose pay cuts?

15th April 2020

Many businesses are looking now not just at the immediate impact of Covid-19 and utilising the furlough scheme as one of a range of options, but also considering what action they need to consider in order to survive moving forwards.

Staffing costs are one of the highest costs of any business and so business owners will be considering what actions they can take to ensure they retain skills and experience for the future, whilst managing their overheads.

You may be in this situation and now considering a range of alternatives to moving immediately to redundancies and one of these options could be to implement pay cuts for some or all of your staff.

Can I implement a pay cut for some, or all, of my staff?

The simple answer is yes.

Pay will be seen as a contractual benefit and will no doubt be detailed in the employee’s contract of employment. Therefore any proposed change you plan to make, whether it has a positive or negative impact, must be agreed with either the individual or their representative before being implemented.

It is important that any change to pay is confirmed in writing and that agreement is reached.

How do I implement a pay cut?

This will depend on the number of staff affected by the proposed changes.

You will need to undertake a collective consultation if 20 or more staff are affected. The minimum timescales for the consultation period are 30 days where 20 – 99 individuals are affected, and 45 days if more than 99 individuals are affected.

If fewer than 20 individuals are affected, you will need to undertake a consultation process with them on a one-to-one basis for a reasonable period in the current circumstances.

What is collective consultation?

Collective consultation is where you will need to inform and consult with workplace representatives where 20 or more individuals are affected by your proposals.

A workplace representative can either be a trade union (if you recognise one or more on a day-to-day basis) or a group of representatives elected by their peers.

What information should I provide to individuals or workplace representatives during a consultation process?

It is important to clearly explain what changes you plan to make and the business reasons for these changes. We recommend that you ‘sell’ the proposals and look for ways in which the individuals will accept the proposals. It is also important to explain the consequences of not accepting the new pay rates and, if applicable, the potential for job losses if the changes are not carried through.

You should also provide an individual impact statement to each affected individual, clearly stating the details of the current and proposed pay arrangements so that they can make an informed decision about the proposals.

What if I don’t consult collectively?

If you don’t consult seriously or for long enough, you may face claims for a “protective award”, which, at worst, might be worth three months’ gross pay to each affected employee.

As well as that, you must not give notice of termination to employees until any collective consultation has come to an end.

Can I propose different levels of pay cuts to different job groups?

Yes. You will need to determine what level of pay you wish offer to different job groups. This will be dependent on how competitive you wish to remain in the market (in terms of future recruitment and retention), balanced with affordability.

You also need to ensure that any pay reduction is kept in line with the National Minimum Wage.

Can I impose the changes if an individual refuses to accept the pay cut?

Yes, if an individual refuses to accept the pay cut and you cannot find an alternative solution to reach your overall business goal, you can impose the changes. This will be on the basis that, in most cases, it is unlikely to be commercially viable for you to abandon or delay the change.

In order to impose the changes, you will need to dismiss the individual in accordance with their contractual or statutory notice period (whichever is the greater) and immediately offer them continued employment on the new contractual terms.

During the notice period, you should continue to speak to the individual to try to reach agreement on the new contractual terms.

What happens if the individual refuses to accept the new terms but reports for work after their notice period has expired?

Once you have terminated an employee’s old contract on proper notice, an employee who continues to work will be taken to have agreed, simply by continuing to come to work, to the new terms.

Of course it would be much better to know in advance which employees were going to accept the new terms (by signing up in advance or staying on after their notice has expired) and which were leaving your employment altogether.

Can the employees make unfair dismissal claims?

A If you terminate their contracts in order to make a change to their terms, your employees are treated as having been dismissed (even if they carry on working for you). If they have two years’ service, they can make a claim for unfair dismissal. However, if your commercial reason to make the changes is compelling and your consultation with the employees before dismissal is sufficient, you should be able to resist any claims of that kind.

What other things should I consider when considering pay cuts?

You will possibly have other benefits which are linked to pay levels, such as access to medical health schemes, death in service, and employer pension contribution levels.

Before entering the consultation process, you should do a full analysis of the impact upon any other benefits and consider making changes to these schemes. This will be important as this could affect the total reward package being offered to staff which could impact on the numbers voluntarily accepting the proposals.