The right way to implement a company-wide pay cut

When businesses announce plans to cut pay large proportions of staff and its leadership team due to the impact of Covid-19, they are hardly outliers. Mace, Severn Trent Restaurant Group, Foxtons, Dunelm, and even the Walt Disney Company, announced pay cuts over the course of lockdown.

According to CMI research for The Times, almost a fifth of employers have instituted pay cuts since the country locked down. Of those that haven’t introduced pay cuts, a third are prepared to do so. However, 52% said their organisations would not make pay cuts under any circumstances. One company we spoke to for this article opted for company-wide pay cuts rather than using the government’s Job Retention Scheme (furloughing) because it would have been too complicated to try to switch off parts of the business while keeping others going. In the end, across-the-board salary reductions were the most straightforward response to the crisis.

A further survey of employees by consultancy Barnett Waddingham found that 61% of employees have had their wages cut – 79% of those people said that it had affected their mental health.

This highlights just how difficult implementing a pay cut can be. It can be extremely difficult to get right and the consequences of getting it wrong can be costly. However, explains Alexandra Mizzi, legal director at Howard Kennedy LLP, staff can be quite pragmatic in tough times and will agree to reduce pay if it saves jobs. “There were lots of businesses that cut pay around the time of the financial crisis – in most cases, people agreed to it. But, it is a really difficult one for employers to handle correctly.”

Do you need to do a collective consultation?

If you’re considering cutting pay, the first thing you need to do is work out whether you will be doing a collective redundancy consultation as part of the process. (CMI members can find out more by searching ‘collective bargaining’ in ManagementDirect.) This will apply if you are cutting the pay of more than 20 people and are considering terminating their contracts and offer their job back under a new contract.

Collective consultation involves electing employee representatives. You must also send off a form to the Secretary of State for BEIS – it's a criminal offence if you don't do this step. “The logic of such a move is that, when push comes to shove, most people would rather keep their jobs,” says Mizzi. “If you are anticipating that you might have to terminate and re-engage, then the collective redundancy consultation obligations apply, and potentially you're committing a criminal offence.”

This is a high-risk strategy, and one that managers can easily trip up on. “it means that you don't have much of a stick to encourage people to sign,” says Mizz. “It's always quite a tricky tactical issue.”

Even if you're not doing collective consultation, you still need to explain why you're making changes. Anticipate the likely questions from employees and try to answer them as fully as possible, as early as possible. You must also be very conscious of any discrimination arguments – are any particular groups more affected than others by the changes?

“For example, if you decide that the company can't afford to pay enhanced sick pay, that's potentially going to have much more of an impact on people with serious health conditions, who may be legally disabled. That would potentially be discriminatory. And you as the employer would have to justify it,” says Mizzi.

Share the pain

If you really want staff to accept the cuts you’re proposing, the leadership team needs to be the first people in line to take a cut. “It's obviously very unattractive for staff if the management is still getting their bonuses or their share dividends.” One chief executive we spoke to for this article explained that, while the employees at his media company were asked to take a 25% pay cut, the directors took a 50% reduction; and the owners committed to taking nothing out of the business during the lockdown.

You also shouldn’t expect employees to work the same hours for that pay – it’s a surefire way to sap morale and increase the risk of burnout. Businesses cut pay because there is less work to go around – cut hours, not hourly wages.

Don’t rely on ‘reasonable changes’ clauses

Mizzi says that a lot of businesses enquire about using the clause in their employees’ contracts that state that the employer can make reasonable changes to terms and conditions as long as it gives notice of those changes. Using that clause to cut pay is a bad tactic, she explains.

“It's actually quite rare that you could confidently rely on a clause like that to introduce a really detrimental change such as a cut to somebody's pay. The courts tend to interpret those clauses quite narrowly. Even where there is that contractual clause, you should still aim to get their agreement. Although lots of contracts have these clauses, they're not necessarily a silver bullet.”

Be as open as possible

Explain the situation in as much detail as you possibly can, even if it feels like you’re stating the obvious. Go through all of the options the business has explored before reaching the decision to cut pay. Answer expected questions in advance if you can. “With tough stuff like this, the best thing is ‘communicate, communicate, communicate’,” says one boss we spoke to. After gathering all his employees at a virtual coffee morning to explain the need for a company-wide salary reduction, he then sent around a confirmation email to all staff with a note at the bottom that said: ‘If there’s anything you don’t understand or are unclear about, please call me’. His advice overall: think things through, then be as transparent as possible. He also asked line managers to speak directly to each member of their team to make sure that the pay cut wouldn’t mean that some people couldn’t pay their rent, for example. In one instance, the boss stepped in directly to make a personal loan to a staff member to tide them over.

“You're trying to win over hearts and minds. Try to anticipate questions that people will have and answer them as far as possible, most employers and send out a kind of FAQ document right at the start of the process, with all of the questions they can think of that people are likely to ask. Staff can see that you have actually thought about things from the employees perspective.”

Consider sending out a letter

If you're individual consultation with employees, send everyone a letter to explain what you're doing before you have the team meeting, including an agreement that they can sign and return. After a week, arrange individual meetings with anyone that hasn't returned it to address their concerns. Really listen to their objections and take the time to properly respond to them. Have some concessions ready so that staff can feel that they’ve negotiated a better deal. If that individual still isn’t on board, you may have to consider terminating their contract.

Factor in enough time

It’s quite likely that you will have to do this process remotely; it will inevitably take longer than it otherwise would, so factor that in when managing any pay cut procedures. “People might not be able to attend when you want them to or they might not have brilliant IT access; it might be quite difficult to kind of get hold of everyone. All of that can kind of delay matters.”

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You can also see what resources are available to you through CMI’s redundancy support service.