Can I cut the pay of my staff?

In harsh economic times, most companies start to examine how they can cut costs and save cash, with eyes almost inevitably turning to the company’s employee wage bill which will invariably take a large chunk out of the company coffers each week or month. The thought of just cutting wage levels across the board by a certain percentage to save money must sometimes be very tempting for bosses or by cutting the pay of underperforming employees.

Cutting an employee’s pay without agreement

Sadly for employers, employment law dictates that workers’ pay can only be cut with their express agreement. This is because an employee’s level of pay must form part of their employment contract (which could be written, oral or implied by the actions of you and the employee) so reducing their pay would amount to a variation of contract which you cannot do unless the employee agrees.

If you try and cut their pay without their say so, this would amount to a breach of contract and they will be able to walk out of their job and take you to employment tribunal with a claim for constructive dismissal. The tribunal could either tell you to reemploy the claimant on their original level of pay and/ or order you to pay compensation and damages.

Voluntary pay cuts

If your company is in serious financial trouble and either a redundancy situation or even company closure is inevitable unless cuts can be made elsewhere, it may be that your staff will agree to a pay cut in order that some or all jobs can be saved.

You might decide to ask, e.g. only your senior staff above a certain level to take a pay cut, or you might need to ask for a cut across the board. If possible you should ask your employees to appoint a representative who will be responsible for coming to an agreement with you which will then be binding on all staff. If this isn’t possible, you will have to get agreement from each employee in writing which you must then confirm by letter of variation to their employment contracts.

To get them to agree it might be an idea to offer them some incentives which could include:

• A promise to return pay to original levels once things start improving.
• Reduced hours.
• Flexible working arrangements.
• Allowing employees to buy extra holiday days.
• A pledge that if redundancy does become necessary after all their pay-offs will be based on their original pay levels.

Salary sacrifice schemes

An extension of the idea of offering ‘sweeteners’ to employees to persuade them to agree to a pay cut are salary sacrifice schemes whereby an employee agrees to a cut in salary in return for another sort benefit which usually carry tax benefits making it a good arrangement for both employer and employee. Peculiarities of the national insurance contribution NIC rules, for example, allow an employer can increase its employees' pension contributions without any increase in net outlay. Other such benefits include:

• Childcare vouchers
• Nursery places
• Home PC
• Mobile phone

If employees refuse a pay cut

If some employees refuse to agree to a cut it is up to you whether you want to cut the pay of those who did agree – it may save you having to make redundancies but is likely to cause severe bad feeling if word gets out.

Those who refused to agree must not be treated any differently by you in the future and their employment with the company must not be affected in any way – they cannot, for example, be the first on the list for redundancy if this becomes necessary as you could face an unfair dismissal claim before an employment tribunal for breach of your duty to be fair when selecting redundancy candidates.

Deductions

It is lawful for you as an employer to make some deductions from an employee’s pay packet – e.g. PAYE income tax and NICs. Deductions are allowed if the worker has agreed to them in writing, e.g. pension contributions or loan repayments or if they are permitted by the employee’s contract (in which case workers must be given a copy of the relevant contractual term or a written explanation before you make the deduction). You are also allowed to make deductions to refund an overpayment of wages, if the employee is on strike or to satisfy a court order.

Retail workers

Deductions from wages of retail workers can be made to recover cash shortages or stock deficiencies only if, as well meeting the above conditions, you:

• tell the worker, in writing, of the total shortfall you are recovering before the deduction is made;
• give them a written demand on a pay day for the repayment;
• make the deduction no sooner than their first pay day after telling them of the shortfall;
• do not deduct more than one tenth of the worker's gross pay on any pay day;
• make the first deduction within 12 months of uncovering the shortage.

If you make an unauthorised deduction from wages, the employee is entitled to make a claim to an employment tribunal within three months of the failure to pay them properly.

Getting legal advice

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