Employers across Wales are looking at reduced pay deals to cut costs as an alternative to making staff redundant. With the recession set to deepen further, Sian Davies, partner in the employment team at Capital Law LLP, looks at the implications of this strategy for employers and employees, and asks whether businesses are exploring all the options available.
It is not just manufacturing giants like Corus that are having to look creatively at their HR strategies in these unprecedented economic times. Small and medium-sized businesses in a variety of sectors are feeling the pinch and having to face the stark reality of making redundancies or finding temporary ways to reduce wage bills, at least until there are signs of business picking up again. For these smaller employers, it is not just the fact that they often feel more personally connected to their staff but, in relative terms, they are likely to have invested more time and money in training them up to the level required to make the business run effectively.
Scaling back pay, either by reducing working time or overtime levels, agreeing wage freezes or actually re-employing staff on reduced salaries, can be a legitimate way for businesses to avoid redundancies are keep skilled staff on the payroll. A package of measures by JCB, backed by GMB union representatives, reportedly reduced the number of redundancies from more than 500 that were considered to 178 at the end of 2008.
However, firms of any size cannot take this kind of action unilaterally and employers are required to consult with staff on these strategies or face the prospect of tribunal claims for breach of contract or unlawful deduction. It also follows that employers cannot ‘threaten’ an individual employee with redundancy if they do not accept a reduced pay deal that is under discussion. Redundancy exercises, especially those involving a significant number of positions, are governed by a legal process that every employer must observe to ensure that decisions on who stays and who goes are taken in a fair and equitable way.
There is also the key question of timescale and how long a ‘temporary’ arrangement should extend for. Six months is a typical period for a reduced pay agreement but the complexity of the current economic situation has led some employers to implement arrangements with no time limits – something that can have far reaching implications for employees.
With mortgage lenders becoming more selective in terms of who they lend to, employees applying to re-mortgage whilst on a reduced pay arrangement may find themselves rated on the reduced level, whilst others accepting reduced hours can also find that it affects what they receive in tax credits. Employees will also want to know whether signing up to a reduced pay deal now will impact on any financial package or pension income that may be payable in the event that their position is made redundant later - these are all factors that need to be taken into account by management.
As the recession continues to bite, employers across the country are looking at various options for cutting costs and this includes making changes to their employment contracts. Benefits like private medical cover, life assurance and share-save schemes, which provided a point of difference for employers in the good times are increasingly being seen as an unnecessary expense but as contractual benefits, they cannot always be cut without prior agreement.
The introduction of flexible working agreements has probably emerged as the key tool for employers looking to avoid redundancies and the route that is most palatable to staff, who can often offset the impact of reduced salary by saving on childcare costs or even taking on part time work to supplement the gap in income. It is normal for employers to insist that consent is sought for these ‘second jobs’, not least to ensure that employees are not involved in competitive activities outside working hours, but by keeping the team together, the business retains the ability to respond to any increases in customer demand when the ‘green shoots’ of recovery do start to appear.
For further information please contact Sian Davies T: 029 2047 4448 E:s.davies@capitallaw.co.uk
