Can an employer reduce salaries?

Ever wondered if you, as an employer, can lawfully reduce an employee’s salary? It’s not an uncommon question. But lowering wages has its risks, including breach of contract claims, unfair dismissal claims, and potential breaches of minimum entitlements.

Given the cost of such claims, it’s vital to know where you stand.

Be aware of minimum wage obligations.

Before you go and reduce an employee’s salary, you should know your minimum obligations under Awards and Enterprise Agreements. The relevant Award or Enterprise Agreement (if one applies) will set minimum pay and conditions. You’re not allowed to pay an employee less than what’s required under the applicable Award or Enterprise Agreement, and there are significant consequences for getting it wrong including civil penalties and back payments.

If an employee is not covered by an Award or Enterprise Agreement, you still have to pay the employee at least the national minimum wage.

Contractual entitlements.

In most circumstances, you can’t reduce an employee’s pay unless the employee genuinely agrees. If you reduce an employee’s remuneration without their agreement, this may result in a breach of contract.

Though it’s unlikely that any employee would agree to you reducing their wages, they might be convinced if there are legitimate external pressures such as a downturn in business.

What about Redundancy?

If your business is facing financial hardship, you may need to consider a redundancy process. One potential outcome of this process is a reduction in pay or hours or work, which could provide the business with some relief.

It’s important to note that a redundancy is only genuine where an employer no longer requires a role to be performed, by anyone, due to changes in operational requirements. As part of this assessment, you may need to consider the business’s financial performance, advancements in technology, or structural changes within the business.

If you’ve determined the role is no longer required, you must consider redeployment options for the affected employee. These might include moving the employee from full-time to part-time or changing the position to suit the business’s operational needs.

It’s vital that you ensure the redundancy is genuine and follow the correct procedure, including complying with any consultation obligation under an Award or Enterprise Agreement. If you don’t do this, you could face an unfair dismissal claim. For this reason, we always recommend that employers seek professional advice when considering a redundancy.

Demotion

Demoting an employee to a lower paying position isn’t a straightforward process and can quickly turn into an unfair dismissal claim.

You only have a right to demote an employee in limited circumstances, including where the employee genuinely agrees to the demotion or where an Award or Enterprise Agreement allows for demotion without termination.

You could also find yourself wanting to demote an employee due to unsatisfactory performance.  Before you consider this, you need to make sure you’ve undertaken objective performance reviews and performance counselling sessions, as well as issued warnings and given the employee opportunities to improve. The risk of a constructive unfair dismissal claim in these circumstances means you should seek professional advice before demoting an employee.

Employers don’t have a right to reduce an employee’s pay at any time and it’s easy to be caught out by the risks associated with reducing pay. HR Assured can give you advice on how to approach reducing pay, and help you with the redundancy process if your business is changing. For more information on how HR Assured can support your business, contact us today.