What you should consider before you agree to take a pay cut
As a result of the economic downturn, many employers have asked their employees to take a pay cut so that they can reduce their overheads and keep trading. If you have been asked to take a pay cut, then you need to consider the following:
- Asking employees to take a pay cut is a drastic measure. It should only be considered when all other cost saving measures have been implemented and the only remaining alternative is to make employees redundant.
- Your employer should consult you fully about any proposed pay cut. They should tell you how much of a cut they want to make and over what period the reduction is required. They should be required to produce figures to justify the particular amount of pay reduction being requested.
- In deciding whether to accept the cut or not, employees need to consider the following:
- Can you survive financially on the amount of reduced pay? Whilst it may present a challenge, accepting a pay cut may save you from losing your job altogether although that cannot be guaranteed;
- Consider what element of your pay is being cut. If the proposed cut is to basic pay, this could have other consequences. For example, if you accept a pay cut and are then made redundant, your redundancy pay could be less than that which you would have received had you not accepted the pay cut. Similarly, if you are in a final salary pension scheme, the amount you receive by way of pension could also be reduced. In the circumstances, if your employer is seeking a reduction in pay, it may be more advantageous to you if the cut is made to variable pay e.g. shift allowance or performance bonus, than to basic pay.
- Is your employer offering any incentive to encourage you to accept a pay cut? At the very least, you may want to ensure that any agreed pay cut will be reversed if the business’s financial position improves. If you want that security, any agreement should provide that once the business hits a specific financial target, your pay will return to its original level and that you will be reimbursed the full amount of the reduction made to your pay.
- You should avoid agreeing to an open-ended reduction in pay. Instead, agree to a reduction for either a limited period or until the company reaches a specific target; and
- Ensure that pay cuts are being proposed across the board i.e. that everyone from management level down is being asked to make the same sacrifice.
- Finally, you should be aware that your employer cannot cut your pay without your consent. If it does so, it will be in breach of contract and you could claim unfair dismissal (provided you have at least one year’s continuous service) and/or you could claim damages for breach of contract to the value of the amount your pay has reduced.