Keeping staff happy when making pay cuts

Pay cuts are rare in the UK, and any organisation thinking of trying to impose one has a legal minefield to negotiate. But the financial pill can be sweetened for employees, says Peta Hodge

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  • In principle, a pay cut cannot be imposed without staff consent.
  • If employers impose cuts without consent, they could face claims for breach of contract. If they dismiss staff and offer them new employment on reduced pay, they could face unfair dismissal claims.
  • A time limit on the pay cut, offering additional benefits or reduced hours are all ways to sweeten the pill.
  • Care should be taken to ensure pay cuts that affect one group of workers disproportionately are not discriminatory.

Since the start of the year, a number of familiar companies, including Honda and BMW, have looked to cut pay for staff. But despite these high-profile examples, and the problems many firms face, pay cuts in the UK are still rare.

A report released in April by global management consultancy Hay Group, Reward in a Downturn, indicates that although pay freezes have become quite common, adopted by 38% of the 98 UK organisations surveyed, cuts are still exceptional.

The research shows that none of these UK organisations are currently imposing compulsory pay cuts on blue collar or support and clerical staff, and only 1% are doing so at management and executive levels. Voluntary or negotiated pay cuts are more common, but still rare, with none of the survey’s respondents using them for blue-collar workers, 4% for support and clerical staff, 1% for management and 5% for executives.

But the research indicates that as many as one in 10 UK companies are thinking about bringing in voluntary or negotiated pay cuts for some staff in future. However, employers considering pay cuts will have to be aware of the legal implications. Pay is a contractual term of employment, so employers wanting to cut it must try to obtain employees’ consent first. Pulina Whitaker of law firm Kings and Spalding, says: “Throughout the process, employers must consult with the employees, or their representatives, under the terms of any existing representation agreement or on a one-to-one basis. Employers must be careful not to breach the implied term of trust and confidence in this process, so keeping an open dialogue with employees is extremely important.

“If employees do not consent to the pay cut, they could bring breach of contract or unfair dismissal claims if they resign and claim they have been constructively, unfairly dismissed or if the employer dismisses them for not accepting the pay cut.”

At the very least, the legal obligations placed on organisations in the UK could mean pay cuts are not always a quick fix to ease financial pressures. For instance, when technology giant Hewlett-Packard announced its intention to cut staff pay worldwide, it was reported that the cuts were implemented straight away in the US but a softer approach was being adopted in the UK and elsewhere in Europe, where employment laws are tighter.

Compensation and benefits professionals tasked with implementing pay cuts must also develop an effective communications strategy with staff and unions. Hay Group’s head of reward, Colin Evans, says: “Whether talking to staff or unions, it is important to make a clear link to the strategy and performance of the business and to show that the cuts make sense. It is also a good idea to explain the process by which the cuts have been identified.”

It is in everyone’s interest to make the process as co-operative as possible – after all, the employer is cutting pay to save costs and survive the recession, but does not want to undermine morale unnecessarily and reduce productivity at the same time.

One tactic employers can use to sugar the pill is to give ample notice before a pay cut is introduced, for example, a year. Alternatively, employers could set a date at which the pay cut will be reviewed. Offering other benefits, such as increased holiday, can also be effective sweeteners. Careful consideration should also be given to how benefits such as pension provision and salary sacrifice schemes, which are pegged to salary levels, will be affected by any cut in pay. Such issues could become a sticking point during negotiations with staff and unions.

If the cuts are based on reduced business demand, it may make sense to offer reduced hours for reduced pay, which some staff may see as an opportunity, especially if they know the arrangement will be reviewed in a few months’ time.

But caution is needed here because, in some cases, there may be grounds for employees to sue for discrimination, warns Charles Cotton, reward and employment conditions adviser at the Chartered Institute of Personnel and Development (CIPD). For example, if a company that decides to cut its working week to four days, Monday to Thursday, has a large number of female part-time workers who work three days a week, Wednesday to Friday, they will suffer a disproportionate drop in pay.

Cotton adds: “Similarly, if an employer wanted to introduce a pay cut for one department and there was a disproportionate number of women with childcare in that department, that might also be discriminatory.”