The Legalities around an Employer giving you a Pay Cut
There is no hiding the fact that most businesses look to reduce staff levels in order to cut costs during harder times. Certain companies who can’t afford to lose staff may try other means to lower their expenses. This still often leads to reducing the amount they pay in salaries to their employees. The main question we want to ask, is under which scenario is this actually legal or not?
You're probably wondering which laws out there are in place to protect our wages from being cut in these sorts of scenarios. More common than a outright pay cuts is getting a "pay freeze", probably as companies are dubious of falling foul of the Fair Work Commission's (FWC) guidelines. Unfortunately though, pay cuts are still legal under certain circumstances.
Those of you who have worked at large, established organisations would be aware that all employees have to sign an employment contract when starting a job. This contract will stipulate the terms of your employment. In some instances this contract may also state your salary, frequency of payment and superannuation.
If the employee signs a contract stating that the employer is allowed to issue pay cuts during the term of their employment then this would make the action of a pay cut completely legal. There are a number of ways this can be written into the contract too, e.g. having provisional outlines for annual performance. However, this isn’t generally a common scenario because not many people would agree to a term such as this.
The more likely scenario that has been witnessed is when an employer approaches an employee to ask if they would agree to a pay reduction. This can help businesses avoid losing key staff members whilst at the same time reducing the monthly overheads of the business.
Wolter Kluwer, a professional information services firm that has expertise in employment law recently commented on an unfair dismissal case where a business sacked an employee because they did not accept a temporary pay cut, whilst all other employees did. The FWC did rule in favour of the employee and he did win 2 weeks additional pay as compensation.
LegalVision stated “If there is no contractual right to reduce an employees pay then the employer could ask the employee to agree to a reduction in pay.” It’s not an ideal situation, however taking a pay cut could certainly be better than losing your job altogether. However, do not let an employer blackmail you about losing your job. The tactic may be recognised as a legitimate way to keep a struggling company afloat, however pay cuts should not be taken lightly. At the end of the day you agreed and signed a contract regarding your employment and any devious behaviour classifies as a breach of contract. BlandsLaw mentions that an employer must seek consent from each and ever employee and receive agreement from all of them if they are to initiate pay cuts to all employees.
At the end of the day, open and honest communication from employers to employees is the best way to approach a delicate subject like this. A company must factor in all the implications this can have besides a slightly smaller overhead each month e.g. staff morale, sales drive or job dissatisfaction.
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