Throughout this newsletter series (Parts I, 2, & 3) we have explored ways in which businesses may manage any short-term economic decline resulting from the end of the furlough scheme on 30 September 2021.
Businesses may want to avoid any permanent structural changes (e.g. redundancies) and instead explore intermediate solutions, allowing them to tie themselves over from the end of the furlough scheme to the return to normal business. An intermediate solution may include temporarily reducing staff headcount, reducing the amount of work available to staff or reducing pay and benefits to staff. This newsletter will focus on ways employers may reduce pay and benefits to staff.
Can we reduce pay and/or benefits to staff as a cost-saving method?
1. Salary sacrifice
A salary sacrifice arrangement is an agreement to reduce an employee’s entitlement to cash pay, usually in return for a non-cash benefit. Salary sacrifice is attractive to employees due to the associated tax advantages, e.g. the employee gives up £100 of salary in return for £100 of child care vouchers. No tax or NI contributions will be deducted from the child care voucher. Other salary sacrifice schemes may include company car schemes, cycle to work schemes or additional employer pension contributions.
However, salary sacrifice is a limited way of affecting financial outgoings as it may only lead to a reduction in N.I contributions for the employer. Employers should seek advice from an accountant if they wish to introduce a salary sacrifice scheme.
2. Pay freezes
Although this means salaries will remain the same, employees’ salaries will reduce in real terms due to inflation. Although it is not an immediate cost-saving exercise for the employer, it will lead to cost savings in the future.
3. Pay cuts
Employers will require employees’ express consent to any changes concerning pay. Imposing any changes unilaterally will lead to a breach of contract, potential unlawful deduction from wages claims, and potential constructive unfair dismissal claims from employees with over two years’ continuous employment. A breach of contract will also mean restrictive covenants will become unenforceable.
If employees do not agree to pay cuts, employers may consider firing and re-hiring staff on a reduced salary. Whether a dismissal is fair when following this approach will depend on the facts of the case, and advice should be sought before following this approach.
4. Unpaid bonus
Whether an employer can refuse to pay bonuses will depend on whether the scheme is contractual or discretionary. If a bonus scheme is contractual, employers will need agreement from their employees to remove it from the contract of employment.
Despite some bonuses being discretionary, discretion must be exercised reasonably, when considering whether to award a bonus and how much. Care must be taken here as bonus terms could become unintentionally contractual, even though the intention was for the scheme to be discretionary. Advice should be sought before removing any bonus provisions from the contract of employment.
Changes are often more positively received by employees when employers are honest and open regarding the business reasons the changes. If you are unsure as to the contractual status of any scheme, we would advise seeking legal advice.
We are ready to advise and support your business through these challenging times. Please get in touch with your usual 3CS contact to find out more about how we can help.