It has been accepted that employers may negotiate with their staff to take pay cuts during difficult financial times as an alternative to redundancies. However, in a recent case heard by the FWC, it was found that a Wellpark Holdings employee was unfairly dismissed for refusing to accept a 10% pay cut. The company was experiencing a significant cash flow problem and was wary that cutting jobs may cause their employees to struggle in a tight labor market.

Whilst the company had discussed the option of a wage cut with employees, one employee was not consulted as he was on leave. Upon his return, he was given a letter advising that he had until the next day to agree to a 10% wage reduction or face termination. The FWC found that this was not an appropriate way to approach the issue and the employee should have received a full explanation of the company’s financial troubles, rather than being forced to accept the pay cut.

An employer’s ability to impose pay cuts will depend upon the existence of an employment contract. Generally speaking, an employer cannot reduce the pay specified in a contract of employment as this would amount to a breach of contract. Usually, an employer needs the consent of each individual employee before a pay cut is imposed. It is unlikely an employee will agree to this in the absence of a legitimate reason, but they may be more willing to accept a reduction in pay if they know jobs are on the line.

Employers should also consider whether or not their employees are covered by a modern award before imposing a pay cut. 

Modern awards provide a safety net for minimum rates of pay and working conditions.  Employers with workers under a modern award cannot reduce pay below the award’s minimum rate. Workers who are not under an employment contract or covered by a modern award cannot have their pay reduced below the national adult minimum wage, which is currently set at $672.70 per week.  

 

Lessons for employers

·          If considering company-wide pay cuts, schedule a staff meeting to propose the idea and explain the reasons behind it.

           Employees should be given the opportunity to respond with their thoughts and concerns.

·          Remember no action should be taken without the employee’s consent.

·          It is important to explain that the pay cut is not because their performance is declining or because they are valued any less.

           Maintaining morale and motivation is essential to get your employee’s on board with the idea.

·          Employers can implement a hiring freeze or withdraw offers of employment that are yet to be accepted.

           This should alleviate some of the financial strain involved in the recruitment of new employees.

·          If the pay cut is temporary, explain this to the employees and that it is intended to resolve a temporary cash flow problem.

           If possible the pay cut should only be imposed for a specified period of time.

           Otherwise, you might find your employees will be considering other employment options.

·          Ensure any contract provisions around bonus payments or incentive schemes are drafted so that any payment or entitlement

           is at the absolute discretion of the employer.

 

Andrew Bland

BlandsLaw