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Is it legal to ask an employee to take a pay cut?

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In a bid to weather the economic fallout from COVID-19, some businesses have asked their employees to take a temporary pay cut as a means of keeping the business afloat and keeping people employed. But is this actually legal? And what recourse do employees have if their employer does the wrong thing?

Extraordinary times, extraordinary measures 

The recent examples of KPMG and Deloitte present interesting case studies on what happens when an employer asks staff to take a pay cut. Both firms introduced across the board 20% pay cuts back in April, explained as a temporary measure to avoid redundancies. Just weeks later, both firms made hundreds of staff redundant, causing a significant backlash. Many employees felt that the lost income should be repaid given the companies had reneged on their promise of no job losses. 

While no doubt KPMG and Deloitte would argue this was a case of “extraordinary times, extraordinary measures”, that isn’t exactly how things have played out. In fact, both firms have since posted strong profits for the period, further angering those who lost income or lost their jobs. Critics argue that the firms simply used covid as a shield to cut costs in a bid to boost profitability.

Generally an employer can’t force an employee to take a pay cut. If the employee doesn’t agree to the pay cut, the employer can’t legally enforce it. If the employer goes ahead with the pay cut anyway they could be subject to potentially thousands of dollars in fines.

Any pay cut will vary from what was agreed in the employment contract and therefore must be agreed by both parties. The changes must be written into a new contract. Given both sides must agree to the variation, employers who want to opt for reducing employees’ pay may choose to counter the pay cut with other benefits instead such as increased annual leave entitlements or reduced hours to encourage employees to agree to the change and to make the process as fair and ethical as possible. 

In a recession, employees who are fearful that they will lose their job and will struggle to find another one, may choose to comply with the request of a temporary pay cut. While it is unlawful for an employer to terminate an employee for declining a pay cut, this may be difficult to prove as the employer may be able to argue that the role is no longer required. Unfortunately in the current conditions, an employee’s bargaining power in any negotiations with their employer is seriously undermined. 

In certain industries, the awards were amended temporarily to make it easier for employers to reduce employee hours and pay, generally by no more than 25%. However, for all other awards, an employee cannot be paid below the minimum wage set out in the relevant award or enterprise agreement. Of course, for those earning above this amount who have taken a pay cut, this won’t be much comfort. 

What about employees receiving JobKeeper?

For employees receiving JobKeeper, the rules are a little different. Employers receiving JobKeeper are allowed to stand employees down or reduce their hours, which may result in an effective pay cut. While there can’t be a pay cut to the employee’s hourly rate, there can be an effective pay cut due to less hours being worked. 

Employees will still need to be paid the minimum JobKeeper allowance which from 28 September will be $1,200 a fortnight for full-time employees and $750 a fortnight for part-time employees. However, employers need to have a legitimate reason to reduce the employee’s hours to hit that minimum amount. 

What recourse do employees have if their employer has done the wrong thing?

We’re really in uncharted waters when it comes to how employment law will apply to pay cuts throughout the pandemic. We are likely to see a number of cases on this issue emerge in the months and years ahead which will prove to be a test on what is legal when it comes to pay cuts and whether employees or ex employees will ever be eligible for compensation or able to recover lost income. 

For employees concerned that their employer may have acted unlawfully, it’s best to seek legal advice on whether any further action can or should be taken. For employers, it is best to get legal advice before going down the track of asking staff to take a pay cut, not just to get a sense of what is permitted within the law, but also to understand the potential fallout of going down that track. 

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Rolf Howard
Rolf Howard is Managing Partner of Owen Hodge Lawyers, in the legal practice since 1986 and a partner of Owen Hodge Lawyers since 1992. Rolf focuses on assisting clients to proactively manage legal responsibilities and opportunities to achieve competitive advantage, with a major interest in assisting business owners and their financial advisers to build and exit from successful businesses.