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Dismissed for refusing pay cut

BY Donald MacKinnon
Employment Law & HR
BG Purple

In the current economic climate, many employees are being asked to consider pay cuts as an alternative to possible redundancies.

In many workplaces, agreement has been reached with employees or unions in respect of voluntary measures to avoid redundancies including pay cuts.  What if agreement cannot be reached?  What if agreement can be reached with a majority of employees but a minority refuse to agree?  What can employers do?  Can they insist on employees agreeing to a reduction in pay and/or benefits?  

It is clear that, in the absence of a clear contractual right to reduce pay or benefits, employers cannot simply impose a reduction in terms.  If voluntary agreement cannot be reached, the only option in the employer's armoury may be to dismiss employees and offer them re-engagement on reduced terms.  Employees who refuse to accept re-engagement, and with more than a year's service, will have the option of challenging the employer's decision to dismiss them at an employment tribunal.  

Tribunals have to decide if the decision to dismiss in such cases is reasonable.  In previous cases, tribunals have taken the approach that it is difficult for employers to show that such a dismissal is reasonable if the object is simply to reduce employees' terms and condition; the exception being where the financial circumstances are so dire that the decision to dismiss and re-engage is the only way of saving the Company.  

The EAT, however, in the case of Garside and Laycock Ltd v Booth has updated its guidance in this area.  In this case, the Company had financial difficulties.  It sought to negotiate a 5% pay reduction across the board and balloted the employees.  77 employees agreed to the change, seven abstained and four refused to agree (though, of those, two were in the process of being dismissed for gross misconduct).  Despite further meetings, one of the two employees, Mr Booth, refused to accept the change and was dismissed.  The tribunal, at first instance, applying the traditional approach, found that the dismissal was unfair.  Mr Booth had a contract setting out his rate of pay and it was not unreasonable of him to insist on performance of that contract. 

The EAT overturned the decision of the tribunal.  It rejected the notion that the financial position of the Company need be so bad that it faced closure if such measures were not implemented.  The EAT also held that the tribunal was wrong to focus on the reasonableness of the employee's decision to refuse to accept the cut.  Instead, the tribunal ought to have focussed on whether the Company had acted reasonably.  In assessing this, the EAT suggested that it would be relevant to consider the extent of the consultation, the fact that all employees (including management) faced the same cuts and the undesirability of having one employee refuse to accept the pay reduction when all other employees had agreed to it.  The EAT declined to find that the Company's decision was fair but remitted the case for consideration by a new tribunal. 

Note that this case does not establish that it is fair to dismiss employees who refuse to accept pay cuts, and the step of dismissing and the offering re-engagement to staff is one that requires careful thought and implementation.  It will however give some succour to employers who are faced with difficult economic circumstances and seek alternatives to redundancies or more drastic steps to bring costs under control.

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