Is It Legal For Your Employer To Give You A Pay Cut?

With the Brexit and other world events shaking up the global economy, organisations may be bracing themselves for hard times ahead. While we often hear about staff cuts as a way businesses reduce cost in a dour economy, some companies may opt to reduce the money they pay to workers instead. Is that even legal? Aren’t there laws around protecting your wage? Let’s find out.

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The idea of a pay cut may seem foreign to many people. Pay freezes, which is withholding pay rises for a period of time, are not uncommon but you don’t really hear about organisations actively reducing wages. It sounds like something that simply would not fly with the Fair Work Commission (FWC), but pay cuts are perfectly legal under certain circumstances.

For most if not all professional workers, when they start work at an established company, they’ll have to sign a contract that stipulates the terms of their employment. Often this would state the salary they will be paid, frequency of the payment, superannuation and the lot.

If the worker agrees to a contract that states that the employer is allowed to issue pay cuts during their employment then that would make it legal. It could be a provision that outlines annual performance reviews that may redefine the salary that was previously on offer. This isn’t really a common scenario because, let’s face it, not many people would readily agree to let their employers cut their pay any time down the track.

A more likely scenario is if a company approaches employees and asks them to agree to a reduction in pay. Professional information services firm Wolters Kluwer, which has expertise in employment law, noted that while businesses would often resort to redundancies to save money difficult times, one way to avoid putting staff out of work is to offer to cut wages instead.

Wolters Kluwer’s blog pointed to a recent unfair dismissal case involving an employee being sacked for not accepting a temporary pay cut request that most of his colleagues agreed to. Despite the FWC ruling in favour of the employee, FWC deputy president RS Hamilton recognised pay reduction as a reasonable method for employers facing challenging times:

“This is a legitimate course of action taken by the employees and employer, and no criticism should be made of it in my view. Indeed it might be said that it appears to be the sort of joint effort by employees and employer which should be encouraged by this tribunal. Unfortunately not all employers and employees are able to work together constructively in this way to save a business and a substantial number of jobs.”

Subsequently, the employee who won was only awarded two weeks’ worth of pay as compensation.

According to LegalVison: “[I]f there is no contractual right to reduce an employee’s pay then the employer could ask the employee to agree to a reduction in pay.”

Pay cuts may be difficult for employees to accept, especially for workers who are already struggling financially on their current salary or have a tight budget that is dependent on their set regular wage. But a pay reduction may be a better alternative than losing your income completely.

Wolters Kluwer said:

“In short, redundancies are not the only option for employers going through difficult times. The FWC has shown its support for employers willing to genuinely work with employees in order to save a business and jobs, even if the solution involves temporary pay cuts across the board.

While it is recognised as a legitimate way to keep struggling businesses afloat, organisations shouldn’t take pay cuts lightly. Boutique law firm BlandsLaw said:

“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.”

BlandsLaw had the following recommendations for employers considering pay reductions:

  • 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.

In short, open and honest communication with employees is the best way to approach potential pay cuts. Remember, there are legal pitfalls when it comes to reducing the pay of your workers, not to mention that it could be a blow to staff morale, so approach with caution.

For all the workers reading this article: Would you consider a pay cut if it means that you can keep your job? Let us know in the comments.

Did you just catch yourself wondering if something was legal or not? Let us know and we may be able to answer it in our next Is It Legal? feature.

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