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Reducing Salaries. Can You Do It?

Published July 02, 2021 Author: Employsure
Employer looking at ways to reduce costs

Some businesses are finding it tough. Some employers might find themselves looking at ways to keep all their staff employed, but don’t have the financial resources to keep paying employees their full pay. It might be tempting to ask everyone to take a 10% pay cut  in the interests of trying to keep the business afloat. But can you ask your employees to take a pay-cut, and if so, do they have to agree?

Reducing An Employee’s Pay Unilaterally

In answer to the above question, yes, you can ask your employee to take a pay-cut, but no, they do not have to agree. If they don’t agree, you must pay them the full amount for their normal working hours as stated in their employment contract, even if you have no work for them to do. Generally, an employer cannot unilaterally reduce an employee’s rate of pay safely without the agreement of the employee or without following a formal consultation process in the case of genuine financial reasons.

There may be legislation, employment agreements and workplace policies that can stipulate what an employee should be paid, when they should be paid, and how. Specifically, your employee is entitled to be paid at least the applicable minimum wage depending on their specific circumstances, which include their age, and whether an Adult, Starting Out, or Training Minimum Wage, or an exemption applies. Legislation also provides for additional rates if an employee works on a public holiday.

Reducing Pay In Accordance With An Employment Contract

An employee’s pay must be above the relevant minimum wage and comply with the employment agreement. Even if the employment agreement allows for a reduction in pay then the employee will still need to agree or the employer will need to follow a formal consultation process, as employees whose pay has been reduced without their consent or without a genuine reason and formal consultation can apply to the Employment Relations Authority for assistance.

If there is a general deductions clause in the employment agreement, then an employer must consult with the employee before they make a specific deduction under this clause. The employee can vary or withdraw their written consent to a deduction at any time by giving notice in writing. The employer must then vary or stop the deductions within two weeks of receiving the notice, or as soon as practicable.

If your company has a bonus scheme, which is payable at the discretion of management rather than tied to a specific performance level, you may want to consider not paying the bonus for a period during which money is tight. Keep in mind, even if the bonus scheme is discretionary, you should should act in good faith and consult with employees prior to a decision being made to alter or remove the scheme.

BrightHR can help you manage and keep track of employee rosters, timesheets, annual holidays, and you can record employee hours, breaks, sick leave and absenteeism with Blip, to help you with your employees’ pay.

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Effectively Reducing An Employee’s Pay

Deductions

Deductions may effectively reduce the employee’s take home pay, though it is not their purpose to assist employers to reduce pay, but to allocate the deducted money elsewhere for a lawful purpose. Employers can’t deduct from an employee’s pay on a whim. Deductions are usually only permitted in certain authorised circumstances, such as if required by law, (for example child support), at the direction of a court, or if it is lawful and reasonable in the circumstances and there is an agreement in writing with the employee, though the employee may withdraw their consent at any time.

The Wages Protection Act 1983 prevents unlawful deduction from wages and provides that deductions from an employee’s pay can only be made in the following circumstances:

  • If the deduction is required by law e.g.  student loan repayment or child support;
  • if the deduction is for a lawful purpose, is reasonable and the employee has agreed to or asked for the deduction for a specific amount and reason in writing;
  • if the deduction is reasonable and authorised in writing in the employment agreement, following further consultation with the employee once the specific amount and reason is ascertained;
  • the deduction is to recover an overpayment in limited circumstances; or
  • a court directs that a deduction be made.

So, for example, withholding an amount they have been overpaid from their wages if it was reasonably practical for the employer to avoid the overpayment, or docking the employee’s pay  for time lost due to poor performance, are not likely to be considered lawful deductions.

Reduction of Hours

You may be able to reduce an employee’s hours, which may effectively reduce the amount you are paying them, but their hourly rate of pay would stay the same.

Agreed hours of work per week must be in the employment agreement and if an employee has set days, hours, start and finish times, it is best to include these too. If an employee or employer wants to change the hours of work, an employer can’t change them without mutual agreement or without the employer following a formal consultation process with the employee.  Both the employer and employee should agree to the reduction in hours in writing as a variation to the employment agreement, provided the reason for the reduction is fair and reasonable.

If an employee thinks that the change to their hours is disadvantaging them and that the process the employer followed was unfair or there were no genuine reasons for changing their hours of work, then they may bring a personal grievance for unjustified disadvantage.

In some situations, cutting back on an employee’s hours may be put forward as an alternative to redundancy. In these situations, the employer must have a genuine business reason for the proposed change. Furthermore, the employer must follow a fair and reasonable consultation process and act in good faith, which includes giving the employee a fair opportunity to consider and respond to the proposed change prior to a decision being made.

Redundancy

A genuine redundancy is when the employer no longer requires  a specific role in their business and there are no other jobs available within the business that the employee could reasonably do. Examples of genuine reasons for redundancy include outsourcing operations, changing the business direction or changing the way the company operates in order to reduce costs and increase the viability of the business.

An employer must consider redeployment options before making an employee redundant, such as whether you can offer the employee reduced hours; a change of status eg from permanent to casual; or a lower paid job, if that is all you have available within the business. It is up to the employee to decide if they want to accept the lesser hours or a lower paid job. If they refuse, then the employer should continue with the process which may result in their employment being terminated. In this case, the employer will have to give them notice, any redundancy compensation (where applicable) as well as any wages and entitlements owing.

An employer should pay an employee any outstanding pay for hours worked since their last pay, unused holiday pay and any other additional entitlements due to the employee as per the employment agreement or as part of their termination package, on their last day of work. BrightHR can help you manage and keep track of employee rosters, timesheets, annual holidays, sick leave and absenteeism with Blip to enable you to pay the employee their final pay.

An employer must keep wage and time, and holidays and leave records for the preceding six years, even if the employee is no longer with the business. With BrightHR, you can generate and print reports, and then store wage and time records and related documents securely in the cloud to comply with your record-keeping requirements.

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About Employsure

Employsure is one of New Zealand’s largest workplace relations advisers to small- and medium-businesses, with over 5,000 clients. We take the complexity out of workplace legislation to help small business employers protect their business and their people.

Frequently Asked Questions

  • Can I Reduce An Employee’s Salary Without Consent?

    An employer may be able to reduce an employee’s salary without consent if they have genuine financial reasons and a formal consultation process is followed prior to a decision being made. There are other ways that an employer can lawfully reduce the amount they are effectively paying the employee, by reducing their hours through formal consultation, or through a redundancy process or lawful deductions.

  • Can An Employer Legally Reduce An Employee’s Pay?

    Yes, with employee consent or after following a formal consultation process due to financial reasons, the employer can reduce the employee’s pay, but the employer cannot reduce the pay below the applicable minimum wage rate per hour worked regardless of whether they are paid a wage or salary. Reducing an employee’s hours requires consent or following a formal process and lawfully deducting from their wages requires employee consent, unless otherwise provided by law or a court order.

  • Can You Reduce An Employee’s Hourly Rate?

    No, not without an employee’s written agreement or after following a formal consultation process. There are some circumstances in which you can reduce an employee’s hours, which may effectively reduce the amount you are paying them, but their hourly rate of pay would stay the same.

  • How Much Can An Employer Reduce An Employee’s Pay?

    Even if an employee consents to a reduction in pay, an employer cannot reduce the employee’s pay below the applicable minimum wage rate.

  • What Is Voluntary Reduction In Hours?

    This is where the employee agrees to reduce their hours without any pressure from the employer. The reason for the reduction should be fair and reasonable, and agreement should be in writing and specify if it is a temporary or permanent reduction in hours.

  • Can I Lower An Employee’s Pay For Poor Performance?

    Even with a provision in a signed employment agreement allowing for a pay reduction in the event of poor performance, the employee would still need to give their consent. Poor performance would not be considered a genuine business reason for undertaking a restructure or redundancy process.

  • How Do You Communicate Pay Cuts To Employees?

    You should follow a fair and reasonable consultation process first, which allows employees to have their say, and agree to the pay-cut.  If the employee agrees, you should then confirm it in writing in the form of a variation to their employment agreement.

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