Could imposing a pay cut on your employees trigger collective consultation obligations?

In the UK, if an employer proposes to make 20 or more employees redundant within a period of 90 days or less, the employer must carry out collective consultation (with representatives of the affected employees) and must also notify BIS.

“Redundancy” in this context has always been interpreted quite widely. Essentially, any termination of an employment contract for a reason that does not relate to the individual employee will be considered a redundancy.

Previous cases have established that an employer changing employees' terms and conditions by dismissing and then re-engaging them on the new terms will be considered a “redundancy” situation for collective consultation purposes.

However, a recent Spanish case has gone even further. In that case, an employer imposed a 25% pay cut on a number of employees, and one of those employees resigned as a result. The European Court of Justice found that this counted as a “redundancy”, as the employer had imposed the pay cut unilaterally for economic reasons which were not related to the individual employees affected. In that case, the ECJ also highlighted that the employer had imposed a significant and detrimental change to a key part of the employee's employment contract, namely pay.

Unfortunately for the Spanish company, because it had also terminated a number of other employees’ contracts within a 90 day period (for a variety of reasons), the company then hit the threshold which (should have) triggered collective consultation. As they had not collectively consulted, they were liable for this failure.

What does this mean for you or your business?

Whilst this was a Spanish case, it will apply to all public bodies in the UK, and UK courts and Tribunals will also interpret our laws to give effect to that decision, so we may be stuck with it!

As an employer can be required to pay up to 90 days’ gross actual pay per employee if it fails to collectively consult when it should have done so, you do not want to get this wrong.

What should you be doing now?

If you are considering imposing a pay cut on your employees, you should consider the following: 

• You can make changes to an employee’s terms of employment, including pay, with that employee's consent, so always aim to agree changes where possible. Whilst employees will never be keen to agree to a pay cut, they will often do so if it is framed as a way to avoid compulsory redundancies, for example. Workers at JCB have recently agreed to a reduction in hours to avoid redundancies. 

• Consider how many employees will be affected by (and may object to) the pay cut, and how many other employees you may have dismissed or be dismissing in a 90 day period (for reasons that do not relate to the individual employees, such as redundancy). If the number totals 20 or more, you would be wise to collectively consult.

• Consider how big a pay cut is required - could you impose a small pay cut alongside making other savings? In the Spanish case, a 25% pay cut was considered sufficiently significant and detrimental to make a resignation in response a “redundancy” situation. Arguably, a smaller pay cut might not be sufficiently detrimental to bring a subsequent resignation within the scope of collective consultation.

• These notes have been prepared for the purpose of articles only. They should not be regarded as a substitute for taking legal advice.