It can be reasonable for employer to ask for pay cut, tribunal finds

ONS figures released today show unemployment figures remain fairly static. Experts say this is due to the fact that employees are accepting pay cuts rather than facing redundancy. Businesses and their employees are still facing difficult times and there is a real need for them to reduce costs. Questions will be asked as to whether cutbacks in staff should be made, but redundancies should always be seen as a last resort.

Cutting jobs has a negative impact on the remaining workforce: it wastes talent and reduces the capacity of the business to recover and grow in the future. A preferable option is to attempt to reduce contractual costs, but retain the same employees.

This can be done in a number of ways, including asking that the workforce agree to pay cuts or to forego premium payments agreed in better times. However, changing the terms and conditions will generally require the agreement of an employee. So, what can an employer do if there is a refusal to agree, even when the business case is clear?

In the recent case of Garside and Laycock Ltd v Booth, the issue in dispute was whether refusal to accept a pay cut could amount to fair grounds for an employee’s dismissal.

Despite over 70 work colleagues agreeing to the employer’s request of reduced pay, TG Booth refused to give consent to the variation. As a result, the employer decided to issue him with notice of dismissal. Booth wouldn’t accept an offer of re-engagement on the new reduced terms and brought a claim for unfair dismissal, which was initially successful.

However, the employer appealed successfully and the Employment Appeal Tribunal has set out some key factors that must be taken into account when assessing if an employee has been unfairly dismissed in such a situation.

The first point to note was that dismissal in this situation would be on grounds of ‘some other substantial reason’, which is a potentially fair reason. It would not be dismissal on the basis of redundancy, as the employer’s need for employees to carry out the work has not diminished − the work just needs to be done at a reduced cost.

While the employee would not be entitled to a redundancy payment when dismissed, it may still gives grounds for unfair dismissal. The question will be: given all of the circumstances, did the employer act reasonably in dismissing the employee? The fairness of the employer’s approach has to be taken into account. For example, it’s more likely that the employer has acted fairly where all levels of employee are treated the same and less likely where management is exempt from the changes.

The size and administrative resources of the business are also pertinent factors. The larger the employer, the higher the expectation is in relation to the reasonable treatment of the employees and the procedure adopted.

As a minimum, the employer will be expected to carry out consultation concerning the changes over an extended period of time. The compulsory collective consultation provisions apply to this situation where 20 or more employees are affected. Consultation, whether compulsory or not, ensures that the reasons for the change are fully explained and that alternative measures can be explored to avoid or reduce the financial impact on the employees.

In this case, it was taken into account that the employer had consulted with staff over a long period regarding the proposals. The company had even offered Booth a review of his level of pay six months later, if he should accept the reduction.

In the circumstances, the decision of the Employment Tribunal that the dismissal was unfair could not stand. The wrong approach had been adopted and the employer was able to show the situation was so desperate that the only way of saving the business was to propose stringent pay reductions.

The employer wasn’t required to show that the situation was so bad as to put the business in danger before it was able to bring about changes. This was putting too great a burden on the employer. It had also been a mistake to assess the fairness on the basis of whether Booth had acted reasonably in rejecting the changes. The focus on assessing fairness should have been on whether the employer’s decision to dismiss was reasonable in the circumstances.

While this decision is by no means a ‘free pass’ for employers to change terms and conditions, it does highlight that there may be circumstances when it is not unreasonable to seek to reduce costs through pay cuts. An employee who does not cooperate may find themselves being even more out of pocket than if the changes had been agreed.


About elaineonyc

HR generalist who is passionate about the benefits of good HR practice. Experienced in delivering strategic and operational HR initiatives to clients in both public and private sectors. Specialises in working with SMEs.
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