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When can employers cut wages (if at all)?

When can employers cut wages (if at all)?

Cut wages, costs

It is a question on the lips of many employers, but one they are often too afraid to ask: Can we actually reduce the amount we pay our staff?

The slashing of worker salaries or wages is not a commonly discussed topic, and little wonder – employees don’t want to put the ideas in the minds of their employers, while their bosses are concerned that such moves may damage the reputation of the business, result in adverse action or even be illegal.

But in certain situations, reducing wage costs may be vital to ensuring a business can survive a sales downturn, external shock or other unforeseen hit to revenues.

So where does the truth lie – is it possible for employers to reduce payments to staff when times are tough?

A complex situation

The simple answer is yes. But like all aspects of workplace relations, it isn’t so black and white.

There are certain legal parameters to consider first, as well as the impact that doing so will have on employee retention, morale, productivity and workplace culture.

Legalities of cutting pay

While there are no direct workplace rules banning the lowering of employee remuneration, a number of employer obligations do touch on this:

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  • Award rates and the minimum wage: Rates of pay cannot be taken lower than the relevant industry award or the national minimum wage (whichever is applicable). Employers already paying above award rates do have the option to cut back toward this level.
  • Contractual obligations: Some enterprise bargaining agreements (EBAs) include clauses relating to exactly this scenario, and so any action will need to be in line with the relevant employment agreements.
  • Adverse action rules: A spokesperson for the Fair Work Ombudsman (FWO) told My Business that under adverse action laws, changing an employee’s job to their disadvantage (including reducing pay) would be unlawful if the action was taken because the employee has or uses a workplace right, does or does not belong to a union, does or does not take part in industrial action, or has some other protected attribute (e.g. anti-discrimination protection).
  • Redundancy provisions: There are rules against making someone redundant specifically to hire them back in the same position for less money.

Impacts on staff

As a general rule, taking back something is more painful than denying it in the first place, and so any decision to reduce employee compensation shouldn’t be taken lightly.

Yet there is a lot to be said for business leaders who attempt to save jobs and retain existing staff by any means necessary, and most people would prefer to retain their job with a temporary pay cut than lose their employment altogether.

Consider these points as part of your decision-making process:

  • Impacted employees may leave altogether
  • Poor communication about why salaries are being reduced can quickly build resentment
  • Staff morale can take a serious hit, both because their earnings are lower and the fact that the business is struggling
  • Lower morale can in turn impact productivity
  • Lower pay rates can turn off would-be candidates in any new roles
  • At the other end of the spectrum, good communication can encourage employees to find and implement other ways of cutting costs to ensure the longer-term survival of the business

As with virtually all HR matters, employers should know where they stand legally before making any changes, and also be transparent with their employees as to the rationale behind the decision, in order to minimise the chances of any ill-effects or disputes down the line.

When can employers cut wages (if at all)?
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