Can an employer impose a pay cut on financial grounds?

26 September 2018

by Martin Malone

A recent case in the Liverpool Employment Tribunals has highlighted the risk for employers in unilaterally imposing pay cuts on employees in response to a downturn in business.

Mr Decker was a branch manager for a recruitment agency, Extra Personnel Logistics, specialising in driver recruitment for the logistics industry in Merseyside. He commenced employment in December 2008. On commencing his employment he worked 40 hours a week flexibly between 7.00 a.m. and 7.00 p.m. Monday to Friday. In July 2015 it was agreed that his working hours would be reduced to 32 per week. It was also agreed that he would be released from on call duties, other than covering holidays and emergencies.

On 20 February 2017 he was asked by the managing director, Brad Richardson, to reduce his working days from four to two (32 to 16 hours), equating to a loss of £205.95 per week. The following day Mr Richardson wrote to him, confirming the reduction to Mondays and Tuesdays only. He gave the reasons as the loss of two contracts and the industry market being quiet. The letter also informed him that the consultation period for the contract would run until 6 March, following which a meeting would take place the following day. Mr Richardson also referred to an offer of six additional hours doing sales which, although it had been declined by Mr Decker, would remain open for discussion.

On 3 March Mr Decker wrote to Mr Richardson to inform him that, due to his financial circumstances, he could not afford any reduction in his existing working hours and that he was willing to discuss matters further at the meeting on 7 March.

At the meeting Mr Richardson said that, as a result of the resignation of Mr Decker’s daughter in law (who had also been offered a reduction in working hours), he could offer a further eight hours per week. However, that was subject to him resuming on call work. Mr Decker said that he would accept the reduction from 32 to 24 hours if his day rate was increased from £102.97 to £110.00, on the basis that this would assist the employer in achieving its cost-cutting objective.

No agreement was reached at the meeting and on 19 May Mr Richardson asked Mr Decker which three days would be best for him. He replied, requesting Mondays to Wednesdays and pointing out that he would need a new contract recording the new daily rate of £110.00, working days specified as 8.00 a.m. to 4.00 p.m. and a 90 days’ notice period for any changes or reductions in hours. Mr Richardson replied, saying that he would “have this for him” on Monday, which was 22 May. However this did not happen and on 30 May he emailed Mr Decker with a new contract which did not include any of the things that Mr Decker had requested. It also included a requirement for 24 hour on call duties with n entitlement to additional pay.

On 1 June Mr Richardson emailed Mr Decker to say that the company could not afford the pay rise and asked him to sign the new contract. He said that there was ‘nothing else now to discuss” and the new contract would start from 5 June.

Mr Decker replied, pointing out that he had not agreed the new terms, that he had to leave because he could not afford to continue working for the company and asking for his notice period to be paid at his current salary. He provided a letter of resignation to Mr Richardson which was acknowledged the same day. Mr Decker’s employment duly terminated on 5 July.

The tribunal found that, based on the facts, the employer had fundamentally breached Mr Decker’s contract of employment, entitling him to claim constructive unfair dismissal. There had also been a failure to adhere to the ACAS Code of Practice on Disciplinary and Grievance Procedures, since there had not been a formal meeting following Mr Decker’s complaints which constituted a grievance. Instead, the employer had attempted (unsuccessfully) to deal with the matter by way of informal discussions. Mr Decker was entitled to a basic award of £4942.42 and a compensatory award of £11,882.20.

There is a common misconception that employers can impose pay cuts if they have a sound business reason for doing so, such as a downturn in income. Any attempt at reducing pay runs the risk of a fundamental breach of contract and consequent unfair dismissal. Consequently, employers should attempt to deal with the matter by negotiation and consent. If consent is not forthcoming it is essential to tread very carefully before taking matters further. Please do not hesitate to contact us if you would like to obtain advice about this or any other employment matters.


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