COVID-19: Redundancies and Reductions in Pay

Guest article from Samantha Dickinson, Partner, Mayo Wynne Baxter

As the COVID-19 pandemic continues to wreak havoc upon UK businesses, companies have little choice but to restructure and/or consider pay reductions for their workforce as a means of avoiding redundancies.

Pay reductions may be necessary to protect fragile businesses and to safeguard jobs whilst weathering the current economic effects of the pandemic. Undoubtedly, it is a difficult time for all.

A reduction in pay constitutes a variation of an employee’s contract. The employment contract cannot be unilaterally varied by one party without the consent of the other, unless it has reserved the contractual right to do so. As an employer, if you attempt to reduce your employee’s salary without their consent, they are entitled to either resign from their position and pursue a claim for constructive unfair dismissal, or continue to work “under protest” but sue you for the unlawful deduction of wages. Even where you have flexibility to vary a term, you risk breaching the implied term of mutual trust and confidence which exists between you and your employee.  You must act reasonably and consult with your employees.

It is worth noting that in the present climate, employees may be open to accepting a reduction in pay, if they understand that the alternative would be redundancies amongst their colleagues. Normally, when an employer initially seeks agreement to pay cuts, it does not know how many employees will agree to the change, nor whether redundancies are inevitable. It would therefore be pragmatic to consult collectively from the outset, where potential dismissals will affect 20 or more employees. As a minimum, collective consultation should take place at least 30 days before any dismissals for between 20-99 employees, and at least 45 days if proposing to dismiss 100 or more employees within a period of 90 days. If more than 20 employees are affected by proposals to cut pay, the employer is legally obliged to consult with a trade union or employee representative about the changes.  Failure to do so can result in employees claiming up to 90 days’ pay.

During the consultation process, you should clearly set out the business case for pay reductions and the likely consequences of dismissals if changes are not implemented. If the employee does not consent, you have the option to dismiss and re-engage them on a new contract reflecting the lower rate of pay. You must give your employee the required contractual notice of dismissal and then re-engage them immediately after the expiry of that notice. Provided that the business case for reducing pay is genuine and that the consultation process has been handled fairly, an employer can rely on “some other substantial reason” under s.98(1)(b) of the Employment Rights Act 1996 as being a potentially fair reason for dismissal, if challenged.

Businesses ought to look operationally to consider whether savings can be achieved without making dismissals. This includes reviewing hours, overheads and redeployment. Employers should also be aware of the high costs associated with redundancies, particularly concerning senior and/or long-serving staff.