Weekly dilemma: Pay cut or redundancy?

Michael Ball, employment partner, Halliwells advises employers on whether to opt for staff pay cuts or job cuts.

We are having cashflow problems and were going to make a number of redundancies. However, we have said that if all staff take a 6% pay cut, we'll be able to keep everyone employed. The suggestion has been welcomed by all bar two members of staff. Can we force them to accept the pay cut based on a majority vote, or will we have to keep them on their current level of pay?

Many businesses are now consulting with staff regarding the possibility of agreeing pay cuts rather than having to start a compulsory redundancy programme. In the present economic downturn, many employees will be more than willing to agree to options that in other times they would have flatly refused. However, it is not possible to rely on a majority vote to impose pay cuts on all employees. In the absence of any express contractual right to reduce pay, it is important that employees individually agree before a pay cut is imposed. If some employees do not accept the change and you unilaterally impose the pay reduction, there will be a clear risk of claims for unlawful deductions from wages, breach of contract and constructive unfair dismissal.

Therefore, the employees who refuse to consent to the pay cuts have the contractual right to remain on their current level of pay.

However, in practice, if the majority have consented and are now receiving lower pay to avoid redundancies, it would not be acceptable to have a few fellow workers doing the same job for higher rates of pay. Apart from any potential legal issues, this is likely to cause considerable staff disruption and ill-feeling.

There is a potential answer regarding the two who refuse to agree to the pay cuts.

On the basis of a reasonable business case, after consultation you could dismiss them and offer immediate re-engagement after they have concluded working their notice. The terms of the new contract will reflect the lower pay that has already been agreed by the others. The dismissal being carried out in the course of changing terms and conditions will be for 'some other substantial reason', which is a potentially fair reason for dismissal. However, you will have to ensure that your actions are seen as reasonable and, until April this year, that you have complied with the three-stage statutory dismissal procedure, as there is the potential for the employees to reject the offers of re-engagement and bring claims for unfair dismissal.

The acceptance by others and the overall climate will assist the defence of any claims.