As a result of the current Covid-19 pandemic, some Employers may be considering the need to implement pay cuts. Employers should be aware that financial difficulties do not automatically equate to justification for reductions in salary. Businesses should understand the risks associated with salary reductions. 

Key considerations

A pay cut represents a reduction in an employee’s salary/wage which is often implemented to reduce the need for layoffs whilst saving the company finance during a challenging economic period. This reduction in the employee’s salary/wage can be temporary or permanent and may or may not come with a reduction in responsibilities. To avoid potential claims that may arise from reducing an employee’s wages, an Employer should be mindful of the following points.

Consent: Can I obtain my employees consent?

Obtaining an employee’s consent is the safest manner for proceeding. The reason for the reduction in wages should be explained, as well as the consequences for the business and jobs if cuts are not made. Employees should be made aware of; why is it happening? When will it take effect? How many people in the organisation are being affected? Will there be a payback at a later stage? Will benefits also be cut? Etc. There should be a period of consultation whereby employees can negotiate a part of the agreement. A third party/civil court will expect an Employer to act reasonable by engaging with employees or their trade union in advance of implementing a reduction. While it is not possible to cut salaries/wages without the employee’s consent, temporarily removing a bonus/benefit such as a company car or bonus scheme does not require the same consent.

Contract of Employment – Does the contract allow for the reduction in wages/salary?

This clause may be explicit in the contract of employment which would be normal. However regardless of whether this clause is contained within the contract or not, it does not give the Employer the automatic right to proceed with wage/salary reductions. Employers should continue to gain employee’s consent by consulting and negotiating pay cut if they wish to avoid employee claims or industrial relations actions.

That is why it is essential to provide a contract of employment to your employees. We can support you with this. Find more information here.

Reasonableness – Does the Employer have clear measurable reasons for the pay cut?

As an Employer you should ensure that you develop and retain any evidence of financial/other reasons for any pay cuts. As an Employer you should retain minutes of discussions at board level regarding the necessity for the reduction in wages. You must have evidence or reasons of whether other cost saving measures were implemented or were not implemented, and if not implemented, why were these measures not implemented?  As an Employer you must ask yourself are the reductions in pay equitable and proportionate across the organisation?

While Employers may use their discretion, it must be exercised reasonably.

Payment of Wages Act 1991

The Payment of Wages Act 1991, states that a unilateral pay cut may give rise to a claim for an unlawful deduction from an employee’s wages. Including the following: (By deduction of basic pay as well as any overtime; shift allowances or other similar payments; any fee, bonus or commission; holiday, sick or maternity pay; any other return or payment for work and/or any sum payable to an employee in lieu of notice of termination of employment).

More information of the Act can be found here.

Risks

1.  Claim, fines and penalties on WRC or Labour court for not following
2.  A civil action for breach of contract
3.  Constructive dismissal claims through the Workplace Relations Commission
4.  Collective or individual legal appeals

1. Payment of Wages Act 1991

The Payment of Wages Act 1991 provides that an Employer shall not make a deduction from the wages of an employee unless:
(a)  The deduction is required or authorised by statute.
(b)  The deduction is required or authorised by a term of the employee’s employment contract, which was included in the contract before and is in force at the time of, the deduction, or the employee has given his/her prior consent in writing to it.
(c)  The employee has given his/her prior consent in writing to it – (This is required for Covid-19 deductions.)

Read the full Act here.

2. Possible claim for breach of contract

Employees may also take a claim to the civil courts on the basis that the Employer breached the contract of employment by cutting their pay. There is also a risk that employees may seek an injunction before the High Court to prevent the Employer from implementing the pay cut. Such a claim would be very expensive to defend. These actions are potentially more likely to be taken by higher earners suffering a large pay cut.

3. Constructive dismissal under the Unfair Dismissals Act

A claimant taking a claim for constructive dismissal would have to show that the pay cut constituted a repudiation of the employment contract, leading to the claimant terminating the employment relationship. (only in cases of unfair reductions where Employer could not justify their reasons for doing so).

4. Actions under the Industrial Relations Act 1969

Claims under the Industrial Relations Act 1969 are more commonly associated with unionised environments. Claims may be pursued individually or collectively. In both circumstances, the outcome will be a recommendation only and therefore not legally enforceable as per the voluntarist nature of industrial relations in Ireland. If matters remain unresolved, the claim can be referred to the Labour Court by agreement of the parties or singularly by the union. The Labour Court is the court of last resort in such matters. These cases often encompass wider changes to terms and conditions and not just pay such as a reduction or increase in hours of work, change to premiums, bonuses, and allowances, or alterations to benefits including health insurance, pension, education assistance, etc.

Are you considering reducing your employees’ salary during COVID-19 as a cost saving measure? We can help you!

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