Employment Law - Cutting The Wage Bill Part I

In these difficult economic times, many businesses are looking to reduce their wage bill in order to ensure survival. Ultimately, this may mean that redundancies will be required, but there are other options. From a legal, commercial, and arguably moral standpoint, redundancy should always be the last resort. The law requires an employer to consider alternatives to redundancy, while commercially, most employers will want to retain good staff in anticipation of the upturn, and avoid the morale shattering effect of letting people go.

So what are the options, and what legal challenges do they present?

In many businesses, pay cuts are on the agenda for the first time. The Celtic tiger years have seen salaries rise annually. Now, as we enter a deflationary period, with falling house prices, reduced interest rates, and job losses, pay cuts, which were unimaginable two years ago, may be considered the lesser of two evils, as survival becomes the goal.

However an employer may not have the right to impose pay cuts on staff. Although by law all employees are entitled to a written statement of their terms and conditions of employment, in practice many employers default in this requirement. However, even if an employee hasn't been given details of his contract in writing, there is a contract of employment. In such cases, the contract will consist of a combination of oral terms, as well as terms set down by legislation (such as the right to a minimum wage), and terms implied by custom and practice in the work place. Rate of pay is a fundamental term in any contract of employment, and like any contract, one party cannot change that term without the agreement of the other. Therefore, an employer seeking to impose pay cuts needs to tread carefully. An employee who finds that his salary has been cut without his agreement may be entitled to sue his employer for breach of contract, or for constructive dismissal under the Unfair Dismissals Act.

Some written contracts of employment contain a provision for annual salary review. During the boom, it was generally understood that salary review meant salary increase. However in the current economic climate, at salary review, an employer may be entitled to impose a pay cut despite the fact that this has not been the custom and practice in the past.

All workers are well aware of the economic difficulties faced by business, and most are open to discussions on the reduction of salaries. Therefore, before taking any action, the employer should consult with his/her staff. The specific effects of the downturn on the business should be communicated fully and openly. The employer should state clearly the level of cost reductions that are required, and how these reductions might be achieved. It is also helpful if the business can demonstrate that other cost savings measures have already been adopted. Open discussion should be encouraged, and ultimately, it ought to be clear to the employees that pay cuts are necessary. Indeed, it should be stated that if the pay cuts cannot be agreed there will be redundancies. In some cases, an employer may be in a position to offer reduced working hours, or increased annual leave in order to sugar the pill of pay cuts. In practice, if an employer presents the proposal in an open, reasonable, fair and humane manner, most employees will respond positively, and agree to the cuts. Once agreement is reached, the employer should give notice of the changes in writing to the employee.

If the contract of employment does not permit the employer to act without agreement, and cuts cannot be agreed, the employer will then have to consider alternatives.