Taking a pay cut: fair to refuse?
Is it unfair to require an employee to accept a pay reduction when a business faces trading difficulties? Advice on the proper approach to this recurring issue, having regard to the case law
In Garside & Laycock Ltd v Booth  IRLR 735 the employer encountered trading difficulties and decided to ask its employees to accept a 5% pay reduction. The claimant was one of two members of the 80-plus workforce who refused to accept the proposal; he was dismissed. The employer had attempted to avoid dismissal by offering to review the position after six months. He rejected the employer’s offer and then claimed unfair dismissal.
The reason for dismissal was “some other substantial reason”, one of the five potentially fair reasons for dismissal. The employment tribunal balanced the relative advantages and disadvantages of the reduction in pay and the imposition of new terms and conditions, and ultimately found that the dismissal was unfair (correcting its initial judgment where it had said “fair”). Noting that the employer had not replaced the claimant and was using outside contractors to do his work, the tribunal concluded: “Balancing the advantages and disadvantages of a pay cut and the refusal to accept it,... it was reasonable for the claimant to seek to maintain terms and conditions which he had enjoyed for many years and in particular not to agree to a significant reduction in pay in favour of an uncertain bonus scheme.”
The tribunal relied on an authority from 1994, Catamaran Cruisers Ltd v Williams  IRLR 386, in its legal analysis of the fairness of the dismissal.
On appeal, the Employment Appeal Tribunal stated that the employment tribunal had misunderstood that decision, which had in fact rejected the proposition it relied on, i.e. that an employer may only offer terms which are less or much less favourable than those which pre-existed if the very survival of his business depended on acceptance of the terms. It had held that a reorganisation or restructuring of a business could amount to some other substantial reason even if an alternative was not that the business might come to a standstill, but merely “that there would be some serious effect upon the business”.
The tribunal had also wrongly focused on whether it was reasonable for the claimant to accept the change (rather than on the dismissal and the reasonableness of the employer’s actions). The Employment Appeal Tribunal quoted from another case, Chubb Fire Security v Harper  IRLR 311, in this regard which said: “It may be perfectly reasonable for an employee to decline to work extra overtime having regard for his family commitments, yet from the employer’s point of view, having regard to his business commitments, it may be perfectly reasonable to require an employee to work overtime... We agree with the comment... ‘it does not follow that if one party is acting reasonably the other is acting unreasonably’.”
In this case, therefore, the Employment Appeal Tribunal was satisfied that the employment tribunal had applied the law incorrectly. However, rather than simply substituting its decision for that of the tribunal, the matter was remitted to a new tribunal to rehear.
Pointers for employers
The Employment Appeal Tribunal gave useful guidance to employers facing these issues, which is sadly, nowadays, a common occurrence. Establishing a potentially fair reason for dismissal is a matter that the employer will need to establish. There needs to be “some other substantial reason of a kind such as to justify the dismissal of an employee holding the position that the employee held”. The Employment Appeal Tribunal noted that “some other substantial reason” is identified not in terms of a specific reason which justifies dismissal, but as being of a kind or a category or class to justify dismissal, i.e. it is a broad category of case. Simply identifying the existence of a substantial reason by itself is not sufficient, since the employment tribunal must be satisfied (in addition) that it was ultimately reasonable for the employer to dismiss the particular employee for that reason. In that assessment the employment tribunal must answer that question “in accordance with equity”.
The Employment Appeal Tribunal suggested that the word “equity” may have a particular force in these types of cases. For example, where an employer proposes to reduce staff wages, it could be highly relevant to the question of fairness (of any subsequent dismissal) to consider upon whom the wage cuts would fall. It may well be that they fell across the entire workforce, but that might not be the position in every case. A tribunal would have to consider whether equity, with its implied sense of fair dealing in order to meet a combined challenge of reduced trading profits, would be served by dismissals of those who refuse to agree to the wage cut.
In addition, the tribunal would need to be satisfied that the procedure that was followed in effecting the dismissals was fair in all the circumstances. That often required a close focus on the way in which the employer approached the issue in the particular circumstances. That could involve issues as to the extent to which the workforce were or were not persuaded by reasons which were not good and proper reasons for adopting a common approach in favour of cuts, when otherwise they might have viewed things differently.
Employers facing a downturn in work (and profitability) need therefore to plan their approach and the potential impact on staff carefully. A number of options exist, including dismissals by reason of redundancy and ways of reducing the costs to the business (such as wage cuts). Acting fairly and reasonably in all the circumstances, with dismissal a last resort, should be a key consideration. A tribunal will not accept an employer’s assertion that a dismissal was fair where a wage cut was not agreed, without clear evidence that the full circumstances were considered in each case. Carefully planning the approach with sound employment law advice is essential.
The full judgment can be found here.
David Hoey is a partner with BTO Solicitors, an accredited specialist in employment law and visiting professor of employment law at Strathclyde University.