Is it fair to dismiss an employee for refusing to accept a pay cut?

For those pondering this question, a recent Employment Appeal Tribunal decision will be food for thought.

It could be said that there is an assumption that pay is ‘sacred’ and there are of course various laws that protect employees’ wages. However, the law also recognises that employers may be subject to pressures that may mean that pay is perhaps not as sacred as some may believe.

In Garside and Laycock Ltd v Booth the EAT has held that an employment tribunal misdirected itself in finding that it was unfair to dismiss an employee who refused to accept a paycut.

B was employed by GL Ltd, which had decided that it would need to cut salaries by 5% in order to avoid redundancies. Having refused to accept a variation of his contractual terms relating to pay, B was dismissed and brought a claim for unfair dismissal. The employment tribunal upheld B’s claim on the basis that it was reasonable for B to seek to maintain his terms and conditions. GL Ltd appealed.

In allowing GL Ltd’s appeal, the EAT made two important findings:

1. The employment tribunal had wrongly considered the reasonableness of the employee’s decision to reject the pay cut, rather than whether the employer was reasonable to have dismissed B for not accepting the reduction; and

2. Whether or not a dismissal for refusing a pay cut is fair may depend on whether the employer was in a situation so desperate that the only way of saving the business was to propose stringent reductions in pay and conditions.

The EAT held that the case will be reheard by a fresh tribunal and then proceeded to give guidance on the correct approach for tribunals to take when dealing with such dismissals. In assessing the reasonableness of the dismissal, a tribunal must consider whether, in the circumstances (including the size and resources of the employer) it was reasonable to treat the refusal to agree a contractual variation as sufficient to dismiss the employee. Further, the tribunal should also consider whether the dismissal was ‘in accordance with equity’; the EAT indicated that this latter consideration may have particular force where, for example, management proposes a cut to workers’ pay, but not to its own. Equally, the procedure followed in implementing the pay cut may be relevant where a tribunal considers that it runs counter to the sense of fair dealing implied by ‘equity’.

For employees this decision may comes as a surprise given the protection that their pay has elsewhere in the law e.g. protection against unlawful deductions and also the requirement to pay the National Minimum Wage. On the other hand, employers may be relieved to learn that, provided that they act reasonably, they are not necessarily required to put their business at risk in order to protect employees’ pay.

This article was written by Lara Murray a solicitor in our Employment Department.

August 2011