Pay cuts - what is reasonable?
13th September 2011
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By Paul Bennett of Bennett's Legal, Shrewsbury

As many of us in Shropshire will be aware following the news back in July that Shropshire Council gave its 6,500 staff notice of their dismissal on 30 September 2011, but offered them immediate re-employment if they accepted a 5.4% pay cut, the process known as changing of terms and conditions by dismissal and re-engagement can be a legitimate legal procedure. The alternative, said the Council, would be “large-scale” redundancies.

In the recent case of Garside and Laycock v Booth, the Employment Appeal Tribunal (EAT) has confirmed that, in determining the fairness of a dismissal for failure to agree to a variation of contract, the correct test is whether the employer acted reasonably in deciding to dismiss, and not whether the employee acted reasonably in refusing to agree to the change.    

Following a drop in profits, Garside asked their workforce to accept a 5% cut.  Following consultation, all employees voted in favour, except Mr Booth.  Nevertheless, he was eventually dismissed and offered re-engagement at the reduced pay level. 

Mr Booth rejected this offer and brought a claim for unfair dismissal.  The Employment Tribunal sided with Mr Booth and held that Garside had failed to show that the dismissal was fair in all the circumstances:

-           As it was not in desperate financial straits, and the survival of the business was not dependent on the pay cut, the Company did not have “cogent” reasons for imposing a pay cut. 

 -          Further, they considered that it was reasonable for Mr Booth to refuse the pay cut.

The EAT overturned this decision, and confirmed that:

-       An employer does not necessarily have to show that the survival of the business depends on a proposed change in order to defend unfair dismissal claims.  

-       The fundamental test is whether the employer acted reasonably in all the circumstances in dismissing an employee, rather than focusing on whether the employee’s refusal to accept the pay cut was reasonable.

Practical advice for employers

In unfair dismissal cases, it is always the reasonableness of the employer’s actions that are considered by the Tribunal. It may be reasonable for an employee to wish to protect their position and resist a pay cut.  However, this will not automatically mean that it is unreasonable for an employer to seek agreement to a pay cut, and to dismiss and offer re-engagement to employees who refuse.  

In the current economic climate,  measures such as reducing salary levels are increasingly being used as alternatives to compulsory redundancy, and at least one other Council is said to be considering this action. Whilst an employer must have good, objective  reasons for considering such options, this case is a helpful reminder that an employer will not necessarily have to show that the survival of a business depends on a pay cut, in order to defend claims of unfair dismissal.


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