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Reducing Salaries. Can You Do It?

Published November 12, 2020 (last updated June 15, 2021) Author: Employsure
Business owner considering employee salaries

Some businesses are finding it tough. Some employers might find themselves looking at ways to keep all their staff employed, but don’t have the financial resources to keep paying employees their full pay. It is tempting to ask everyone to take a 10% pay cut to try and keep the business afloat. But can you ask your employees to take a pay-cut, and if so, do they have to agree?

Reducing An Employee’s Pay Unilaterally

In answer to the above question, yes, you can ask your employee to take a pay-cut, but no, they do not have to agree. If they don’t agree, you must pay them the full amount for their normal working hours as stated in their employment contract, even if you have no work for them to do. Generally, an employer cannot unilaterally reduce an employee’s rate of pay without the agreement of the employee.

Reducing Pay By Mutual Agreement

The national minimum wage and the National Employment Standards (NES) contained in the Fair Work Act 2009 make up the minimum entitlements for employees in Australia. An award, employment contract or enterprise agreement can’t provide for conditions that are less than the national minimum wage or the NES. The national minimum wage for award free employees and for employees covered by a modern award or enterprise agreement is reviewed annually each year by the Fair Work Commission. The Fair Work Commission may set different minimum rates of pay for different jobs depending on the age of the employee, and how the employee is classified under an award or enterprise agreement. If the employee does agree to a pay cut, then you cannot reduce their pay below the national minimum wage, or the minimum amount prescribed by an award or enterprise agreement for the job the employee is doing.

Reducing Pay In Accordance With An Employment Contract

You may be able to reduce an employee’s salary as part of a performance management process if there are explicit provisions in an employment contract that allow for pay review as part of a performance management policy. The argument is that the employee has agreed to the possibility of a pay-cut by signing the contract in the first place. As part of the performance management policy and process the employee should be given ample warning that their performance is not meeting the required standard, identifying the specific areas in which it is lacking. The warning must make it clear that the employee’s pay may be reduced in accordance with the policy and employment contract unless performance improves. The employee should also be given a reasonable opportunity to improve before any decisions regarding a reduction in pay are made. Again, you cannot reduce the employee’s pay below their minimum entitlement.

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Effectively Reducing An Employee’s Pay

Deductions may effectively reduce the employee’s take home pay, though it is not their purpose to assist employers to reduce pay, but to allocate the deducted money elsewhere.

Deductions

Section 324 of the Fair Work Act 2009 (the Act) allows an employer to deduct a specific amount from an employee’s salary in certain circumstances. These circumstances require the employee’s consent, and agreement in writing for the specified amount, and the deduction must be principally for the benefit of the employee, such as training costs The deduction may also be authorised in accordance with an enterprise agreement, award, by law, or by a court  order, for example deductions for child support. Employers can only deduct from wages owed under the award. They can’t deduct from other entitlements owed to the employee, such as accumulated annual leave.

Deductions that are permitted under the Act can include the recovery of costs for the private use of employer property, such as the cost of personal calls on a company mobile phone. However, an employer can’t deduct money if it benefits the employer directly or indirectly or is unreasonable in the circumstances, even if the deduction is made in accordance with an award, registered agreement or contract. For example, docking the employee’s pay if they are constantly late, or withholding an amount they have been overpaid from their wages without the employee’s agreement are not likely to be considered lawful deductions.

Reduction of Hours

There are some limited circumstances in which you can legally reduce an employee’s hours, which may effectively reduce the amount you are paying them, but their hourly rate of pay would stay the same.

Generally, the employee would have to be consulted, and would need to agree, and their employment contract would need to be amended to reflect the reduction in hours and whether the reduction is temporary or permanent. However, reducing an employee’s hours may have other financial implications under the award for the employer. Many awards have provisions for part-time employees that their hours need to be agreed in advance, and if any changes to those hours haven’t been agreed beforehand in writing, then any hours worked outside of those initially agreed hours are payable as overtime.

Consultation Process

As a reduction in hours would be a major workplace change with significant effects on the employee, you may have to go through any consultation process proscribed in the applicable award or agreement in order to talk to your employees about reducing their hours. What is deemed significant depends on the facts and circumstances of each case.

A consultation process can be conducted in many different ways. This process involves providing the employees about changes to their working hours and inviting them to a meeting to discuss the matter further. This consultation meeting must be held at least 24 hours after the invitation is issued, to allow the employee time to take in the information and organise a support person, or a legal or union representative to come to the meeting with them if they wish.

Employers should consider any suggestions the employee might make in light of their individual circumstances before making any final decision. The employer should confirm the outcome in writing and set-out the reasons for the decision and next steps together with appropriate timeframes.

If the employees do not agree to the reduction in hours, and the employer wants to reduce their hours regardless, then a redundancy process may be appropriate, which encompasses the above consultation process.

Redundancy

A genuine redundancy is when the employer no longer requires the employee’s job to be performed by anyone due to changes in the operational requirements of the business, and there are no other jobs available within the business that the employee could reasonably do. As part of the redeployment options presented during the consultation process you can offer the employee reduced hours; a change of status eg from permanent to casual; or a lower paid job, if that is all you have available within the business. It is up to the employee to decide if they want to accept the lesser hours or a lower paid job. If they refuse, then their employment will be terminated, and the employer will have to pay them notice and redundancy pay (where applicable) as well as any wages and entitlements owing.

If the formal consultation process is not carried out correctly, or the redundancy is not genuine, there is a risk that the employee could claim that they are being unfairly dismissed.

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Frequently Asked Questions

  • Can I Reduce An Employee’s Salary Without Consent?

    No. An employer cannot unilaterally reduce an employee’s salary without consent.

  • Can An Employer Reduce An Employee’s Pay?

    Yes, with employee consent the employer can reduce the employee’s pay, but the employer cannot reduce the pay below the national minimum wage, or the minimum amount prescribed by an award or enterprise agreement for the job the employee is doing. Reducing an employee’s hour still generally requires employee consent, unless otherwise provided in an award, or by law or court order.

  • Can You Reduce An Employee’s Hourly Rate?

    No, not without an employee’s agreement. There are some circumstances in which you can reduce an employee’s hours, which may effectively reduce the amount you are paying them, but their hourly rate of pay would stay the same (absent mutual agreement)

  • How Much Can An Employer Reduce An Employee’s Pay?

    Even if an employee consents to a reduction in pay, an employer cannot reduce the employee’s pay below the national minimum wage, or the minimum amount prescribed by an award or enterprise agreement for the job the employee is doing.

  • What Is Voluntary Reduction In Hours?

    This is where the employee agrees to reduce their hours without any pressure from the employer, so the business is paying them less. The agreement should be in writing and specify if it is a temporary or permanent reduction in hours.

  • Can I Lower An Employee’s Pay For Poor Performance?

    Yes, if there is an explicit clause in the signed employment contract tie-ing a pay review to performance, and a performance management process is followed that provides the employee with warning of the requirement to improve in a specific area as well as a reasonable opportunity to improve. employee fair warning their performance

  • How Do You Communicate Pay Cuts To Employees?

    You should follow the consultation process first and get the employee to agree to the pay-cut.  If the employee agrees, you should then confirm it in writing in the form of a variation to their employment contract.

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