15 November 2011
Pay cuts have, for many, been an unpalatable side-effect of the latest recession. Sara Sawicki looks at a recent case which serves as a timely reminder for employers of the dos and don'ts of cutting costs in this way
During the recession, many employers have had to take radical steps to reduce costs. In particular, some have implemented company-wide pay cuts, often as an alternative to redundancy. What has been remarkable is the extent to which employees have been prepared to agree to pay cuts – no doubt a reflection of the uncertain economic situation. However, what if an employee refuses to accept a pay cut? Is it possible for the employer to dismiss the employee fairly in such circumstances?
The recent case of Garside and Laycock v Booth has confirmed that the dismissal of an employee refusing to accept changes to the terms and conditions of their employment contract can, in some circumstances, be fair.
Mr Booth had been an employee of Garside and Laycock for seven years when, in 2009, the business experienced trading difficulties.
Following a drop in sales and profits, Garside asked its employees to take a 5% pay cut to avoid further redundancies. A series of company-wide consultations with employees followed. Eventually, out of 77 employees only Booth refused to agree to the change.
Having met with Booth three times to try to persuade him to change his mind, Garside eventually terminated his employment and offered him a new contract to reflect the 5% pay cut.
Booth refused to accept the new contract and no further progress was made with negotiations despite Garside offering to review his salary in six months' time.
Booth brought a claim for unfair dismissal and the employment tribunal (ET) found in his favour. Garside then appealed.
The employment appeals tribunal (EAT) confirmed that, contrary to the ET's approach, a business can dismiss an employee fairly for a refusal to accept new terms and conditions – even where the business is not in such dire straits that pay cuts or other similar measures are unavoidable.
The EAT confirmed that in this situation a tribunal should look at whether the actions of the employer were reasonable. To be reasonable, an employer should take an employee's view into account, but the overall decision is motivated by whether the employer acted reasonably in the situation. The ET got this wrong; it concentrated on whether it was reasonable for Booth to refuse the new contract.
The EAT also proposed that it may be highly relevant to a decision on fairness for a tribunal to consider where the cuts would fall within the workplace. In this case they fell across the whole organisation, but it might be held to be unfair if, for example, only shopfloor pay was cut while that of managers remained the same.
Given the mistakes made by the tribunal, the EAT allowed the appeal and remitted the case to be reheard by a fresh tribunal.
Advice for employers
This case is useful for employers as it confirms it is possible to fairly dismiss an employee who will not agree to a pay cut. Furthermore, the situation at a company need not be so desperate that pay cuts or reductions in working hours are unavoidable.
However, employers need to be aware of some important principles before taking the decision to reduce employees' wages. While the situation of the company need not be desperate, the company does need a solid business rationale before proposing wage reductions. Furthermore, consultation about such proposals is essential. If an employer has over 20 employees who may be affected by the changes, the employer should follow a process of collective consultation under Section 188 of the Trade Union and Labour Relations (Consolidation) Act. If there is no recognised trade union, employee representatives must be elected and consulted with on the proposals. In addition, individual consultation should take place to seek agreement to the changes.
If, following consultation, agreement cannot be reached with one or more employees, the employer may terminate their employment contracts on notice and offer to re-engage them on new contracts which incorporate the changes. The more employees that agree to the changes, the more reasonable the employer will be seen to be. Furthermore, if pay cuts are deemed necessary then it is reasonable for management to have to suffer them, too.
Sara Sawicki is a partner at law firm Pinsent Masons: www.pinsentmasons.com
Sara Sawicki, partner, Pinsent Masons
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