An employer cannot unilaterally reduce an employee's salary without their agreement. Pay is a fundamental term of the employment contract, and changing it without consent constitutes a breach of contract.
Lawful Ways to Reduce Pay
- Mutual agreement — the employer explains the business need and the employee agrees to the reduction (get this in writing)
- Contractual flexibility clause — if the contract contains a clause allowing the employer to vary pay in certain circumstances (though such clauses must be reasonable and applied in good faith)
- Collective agreement — where a recognised trade union negotiates the change on behalf of employees
- Dismiss and re-engage — as a last resort, the employer can terminate existing contracts with proper notice and offer new contracts at the reduced rate (known as "fire and rehire")
Fire and Rehire
The government's Code of Practice on Dismissal and Re-engagement (effective July 2024) sets out expectations for employers considering this approach:
- It should be a genuine last resort after exhausting all alternatives
- Employers must consult meaningfully with employees and/or their representatives
- The consultation must explore all alternatives before issuing notice
- Tribunals can uplift compensation by up to 25% if the Code is not followed
Risks of Getting It Wrong
- Breach of contract claim
- Unlawful deduction from wages claim
- Constructive dismissal — if the employee resigns because of the unilateral change
- Unfair dismissal — if the employer dismisses and re-engages without following proper procedure
Before making any changes to pay, consult our employment law specialists for advice.