Can I reduce an employee’s hours or pay during tough times?

If your business is one of many being confronted with a potential downturn in business it’s difficult to know where to start and what options are available to you.

To ensure financial viability of the business you may be forced to consider reducing costs in all areas. For some this may mean reducing your workforce through voluntary or forced redundancies, having employees exhaust their leave or in some cases of forced government lock down, standing down employees without pay.

It’s a tough time for everyone involved. For those who can see a light at the end of the tunnel, redundancy is not the preferred option, and nor is it your only choice to reduce wage cost.

It is perfectly legal to discuss pay cuts with your staff under certain circumstances.

Back in 2016, an employer was praised by the Fair Work Commission (FWC), for its efforts to retain staff during a difficult period.

In that decision (Piggott v Wellpark Holdings Pty Ltd T/A ERGT Australia [2016] FWC 3188) the employer engaged with staff to discuss the financial difficulties the business was facing and asked them to accept a 10% pay cut to save the business and to save jobs. Most of the workforce agreed to the temporary pay cut in 2015 and had their full pay restored by 7 March 2016 when the business had recovered.

It highlights that companies and employers can work effectively together during difficult times to the benefit of everyone.

The key thing employers need to remember is to follow a proper consultation process, and to have everyone agree to any changes.

Sadly, ERGT still ended up at FairWork due to their failure to connect and properly consult with one employee in particular whom had refused the change and was subsequently terminated, for a reason which they described as harsh, unjust or unreasonable. However, the damage awarded in this case was a mere two weeks’ pay.

The key thing employers need to remember is to follow a proper consultation process, and to have everyone agree to any changes.

Now, where to start can be difficult. It will require a review of your contracts initially as if the contract holds a clause to state the employer is allowed to issue pay cuts during their employment then making pay cuts would be legal, but of course, this would not be common as most people would not sign a contract with this inclusion.

It could also be a provision that outlines annual performance reviews that may redefine the salary that was previously on offer, but again, most wouldn’t stay that pay could be reduced.

More commonly, the likely scenario would be for the company to approach employees and asks them to agree to a reduction in pay as was the case with ERGT.

It is important to seek specialist advise on the consultation process and to engage openly and honestly with employees about the businesses circumstances.

Most people are very reluctant to take a pay cut, but especially during such uncertain times with the current pandemic, it would likely seem a better alternative than losing your their completely.

In short, stand downs and redundancies aren’t the only option for business going through challenging times.

If you can clearly demonstrate that you are genuinely working with employees to save the business and their jobs long term, you can discuss and agree to pay cuts across the board.

However, you shouldn’t take this option lightly, your ability to do so legitimately without it being a breach of contract will typically mean you need to consent of each individual before it’s imposed and you’ll need to consider their Award coverage, your contract or enterprise agreement and the proper consultation process before doing so. Employees cannot be working for less than their Award or NES rate, so in this instance reduced hours would be better to negotiate.

If you would like any advice in relation to your business circumstances and how to approach the consultation process around potential pay cuts please reach out to PeopleStart here.

You can also download our tip sheet here

In closing, PeopleStart recommend open and honest communication with employees in regard to any discussion whether that be pay cuts, stand down, reduction of hours or redundancy. There are many legal pitfalls when it comes to reducing staff pay and it’s a highly emotional and challenging time for many, not to mention the need to maintain staff morale if you are continuing operations, so proceed with caution or seek expert advice.