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Employsure can help you better understand.

Reducing Salaries. Can You Do It?

Published November 12, 2020 Author: Employsure
Business owner considering employee salaries

These are tough times for business owners, and employers are 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.

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, as you risk underpaying them.

Reducing Pay In Accordance With An Employment Contract

There is a view that 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 to that effect. The argument is that the employee has agreed to the possibility of a pay-cut by signing the contract in the first place. However, this may not meet the consultation requirements under the Fair Work Act 2009. A reduction in pay, if not consented to, can put the business at risk of an unfair dismissal claim, even if the employee is still employed with the business. It will depend on whether the employer’s actions show that they no longer want to be bound by the contract. The Fair Work Commission has decided in a number of cases that a significant reduction in pay without employee consent is a repudiation of the employment contract by the employer and therefore a dismissal.

Effectively Reducing An Employee’s Pay

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 would have to go through the consultation process prescribed in the Fair Work Act 2009 and modern awards in order to talk to your employees about reducing their hours.  

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.

The employer should let the employees ask questions and give their views as to how this will affect them personally, particularly in respect of family responsibilities and carers’ commitments. Employers should then consider the individual employees’ circumstances before making any final decision. The outcome should be provided in a separate meeting and confirmed in writing. The employer should summarise the process to date; explain why employees’ suggestions are not viable for the business (if applicable) and set-out the final 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 carries the least risk for the business, provided the redundancy is genuine. A redundancy process is essentially the consultation process above, but the consequence is that if the employee does not accept the proposed reduction in hours, the alternative is that they will lose their job entirely.

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 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.

Reducing Hours As Part Of JobKeeper

During the COVID-19 pandemic, if both the employee and the employer are eligible for JobKeeper, the employer can ask employees to reduce their hours temporarily as part of a JobKeeper enabling direction. Although consultation is still required, the employees cannot unreasonably refuse to reduce their hours. The direction will only last until the employer rescinds the direction, or until the JobKeeper entitlement ends.

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