More employees likely to face pay cuts as furlough scheme makes taking a salary reduction socially acceptable

As first published in HR magazine on Thursday 9 July.

Partner Katie Maguire comments that thousands more UK workers could face pay cuts because the Furlough Scheme has made it more ‘socially acceptable’ for employers to ask staff to take a permanent salary reduction.

Employees across several sectors have already been asked to take permanent voluntary pay cuts as businesses struggle to cope as a result of the pandemic. However, Katie predicts there could be thousands more permanent salary reductions implemented when the Furlough Scheme ends.

Katie notes that: “We have already seen some employers implement permanent pay cuts because of the gloomy economic outlook. Whilst the Coronavirus Job Retention Scheme – the Furlough Scheme – is in place, it is acting as a financial crutch for many businesses to help keep them going. During lockdown, without the Furlough Scheme, many employers would have had to make employees redundant. The Scheme has therefore done what the government said it would and has kept employees and workers employed during the pandemic. However, with the Furlough Scheme ending on 31 October 2020, if the UK enters a recession as currently predicted, many employers are going to have to make some very tough decisions and more permanent pay cuts are likely across many sectors.

“It used to be the case that there was a stigma attached to cutting pay. However, the Furlough Scheme has changed that. For many employees and workers who have been furloughed they have had their salary cut by 20%, albeit on a temporary basis. As a result it will be easier for employers to ask their staff to take a salary reduction on a permanent basis as the Furlough Scheme has made cutting pay more socially acceptable. Especially where financial savings need to be made and a pay cut is seen to be the lesser of two evils opposed to the alternative being potential redundancy.

“This is the first time that I have seen pay cuts used by employers in this way. In the last recession employers either looked to make people redundant or reduced the working week down to 4 days, meaning that a 20% pay cut was implemented, but with an equivalent reduction in working hours.”

Katie says she has seen employers take a pragmatic approach during the pandemic and she expects many will continue to do so when it comes to making cuts.

“In my experience employers have adapted well and have been pragmatic during Covid-19. Pretty much overnight, businesses have had to get used to their entire workforce working from home knowing that those with children also have had them at home full-time too. Employers have been pragmatic and flexible as to the hours employees have worked in order to juggle work with childcare or home schooling and it has worked. If this time last year an employee said to their employer that they wanted to work from home full-time and they were also going to have their children at home full-time too, the employer would have said no way, as they would not have expected them to be able to get any work done. However, by working together within our own families and our teams at work we have all made it work. I would therefore expect employers to carry on being pragmatic and try to preserve jobs where they can. Redundancy should be the last resort.”

When looking at making pay cuts, Katie says that employers need to get the consent of the affected employees as the cut represents a variation to their contract of employment. There are other methods of implementation where consent is not obtained, such as serving the employee notice to dismiss with an offer of re-engagement on the new terms, such as less pay, but Katie says the most risk adverse method of implementation is to consult on the proposed changes and to seek consent.

“I would urge employers looking to make pay cuts to consult with their employees and ask them for consent to make the salary reductions,” she says. “Make it clear that everybody is in this together and the alternative to taking a pay cut is that redundancies will need to be made in order to achieve the necessary financial savings. Most of the time employees will accept this rather than losing their jobs. I would urge employers not to seek to make contractual changes unilaterally as to do so would be in breach of contract and will open the employer up to risks of claims for breach of contract or constructive dismissal.”

For more information on the topic covered, please contact Katie Maguire.

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