Our Company’s profits have decreased in the present economic situation. Rather than redundancies, we are thinking of reducing salaries. Can we do this?


Patricia Rooney writes:


The starting point in dealing with a query such as this is to examine the employee’s contract of employment and the employer’s rights contained there. Does the company have a clear written power to vary terms and reduce salary?

On occasions, a contract of employment states that the employer will only give notice of changes, rather than reserving to the employer any specific power to amend or vary terms and conditions of employment. In considering the contractual rights of an employer to change an employee’s entitlements it would be necessary to look not only at the contract of employment itself, but any other related documentation, e.g. Staff Handbook or Policies and Procedures. The employer should identify whether the provisions of any Staff Handbook are incorporated into the employee’s terms and conditions of employment and thus form part of the contractual relationship. If so, as indicated it would be necessary to review the explicit powers of amendment/variation contained in all of the said documents.

A specific written provision allowing an employer to amend/vary employee’s terms and conditions of employment may allow the employer to reduce pay. However, such contractual provision should not be read in isolation but considered together with the provisions of the Employment (Northern Ireland) Order 1996.

Article 45 of the 1996 Order requires either a contractual provision permitting a deduction or an employee’s written consent for a lawful reduction in salary/benefits. Such written consent must be obtained prior to any deduction being made by the employer to avoid a finding at Tribunal that there has been an unlawful deduction of earnings. Any contract containing such a provision ought therefore to be signed by the employee.

Even where the employer alleges that the contractual documentation allows an implied power of variation, the courts have been reluctant to allow an overarching power of unilateral variation with resulting deduction in pay.

The case of Wandsworth v De Silva (1998) indicated that clear language is required to reserve to one party the unusual power of unilateral variation of a contract. In those particular circumstances, the Court indicated that where a contractual variation is suggested, which is capable of having unreasonable results on one party to the contract, the variation will be subject to a restrictive interpretation by the Courts.

A subsequent case in 2001 (Securities and Facilities Division v Hayes) allowed the Court of Appeal a further opportunity to confirm that any unilateral variation sought by an employer must be unambiguous. Such guidance was later enhanced in the case of Bateman v Asda Stores Ltd (2010). In that case, the Tribunal held that they were prepared to allow a unilateral variation of a contract where there was an unambiguous right to do so and which was demonstrated in the written contractual provisions between the employer and its staff.

To rely on provisions as in the Bateman case and move to reduce pay, it is suggested that the employer must be able to demonstrate that any such power is incorporated into the employee’s contract of employment. Such an unambiguous contractual provision would negate the alternative requirement to obtain an employee’s consent to the proposed variation of their terms and conditions.

In the absence of written consent, or the relevant provision in the employee’s contract, a unilateral reduction in pay could make the employer liable in a claim by the employee alleging unlawful deduction of wages, or allow the employee to resign alleging constructive dismissal due to the breach of the fundamental contractual term confirming salary entitlement.

Any attempt by the employer to reduce pay, should only be carried out after a proper process of consultation with the employee, resulting in signed written agreement to the variation of terms and conditions of employment. Any such written confirmation should be retained on the employee’s file. It could be stated that the reduction in pay is for an undefined period or for a fixed period to allow the company to review its financial affairs.

If the employee’s consent is lacking, and there are no specific contractual powers available to the employer, the employer could consider forcing through the proposed reduction in pay, after a process of consultation with the employees. In effect, this would entail a notice of revised terms and conditions of employment and threat of dismissal if the revised terms are not accepted, followed by an immediate offer of re engagement on the revised terms and conditions of employment, incorporating the lesser salary.

There are clear risks in this course of action in advising of dismissal and re-engagement. The employer would have to properly consult and follow the statutory dismissal procedures, including allowing the right of appeal. On a strict interpretation of dismissal and subsequent re-engagement, it still might be possible for an employee to allege that they have been unfairly dismissed even where that employee has been re-engaged by the employer and employed on a new contract of employment. Article 171 of the 1996 Order confirms that an employee is dismissed by his employer if the contract under which he is employed is terminated by the employer. Therefore, dismissal by the employer and re-engagement on different terms could still technically amount to unfair dismissal, allowing for recovery of a basic award together with any loss being the difference in salary, flowing from the change in terms and conditions.

In summary, the employer should obtain the employee’s written consent to the proposed reduction in salary following a consultation exercise. Silent consent or mere acquiescence, whilst possibly enough to defeat claims for constructive dismissal or breach of contract, would not be sufficient to meet the requirements under the 1996 Order to avoid an unlawful deduction from wages claim.

In the absence of written provisions, the employer would have to rely on an unambiguous power to amend/revise contained in the documentation governing the employment relationship: this is not straightforward. A clear review of all contractual arrangements should be carried out before any employer seeks to amend an employment contract.