Recent cases have likely put to bed the long-running debate regarding "reductions" of pay versus "deductions" of pay. Confusion in the area of the Payment of Wages Act 1991 (the "Act") derived from the High Court case of McKenzie & PDFORRA v The Minister for Finance [2010] IEHC 462 ("McKenzie") which determined that reductions in pay were not prohibited by the Act but deductions were (subject to exceptions). The latest case law means that employers should be very wary of applying a reduction to employees' salaries in the hope of relying on the McKenzie line of reasoning. Instead employers should follow best practice as briefly detailed below.

Latest developments

A string of decisions from the EAT, Labour Court and High Court since 2015 (Earagail Eisc Teo v Doherty, Hogan v HSE, McDermott v HSE, and Cleary v B & Q Ireland Limited) started the move away from the McKenzie line of reasoning. Two recent events have now arguably put the final nail in the McKenzie coffin.

First, on 20 January 2017 the High Court gave its decision in the case of Petkus & Ors v Complete Highway Care Limited [2017] IEHC 12 ("CHC"). The High Court emphasised that the part of the McKenzie decision differentiating between "reductions" and "deductions" was obiter and therefore not legally binding as a precedent. The Court therefore held that the 10% reduction in wages in this case was not outside the jurisdiction of the Act and the matter was referred back to the EAT to reconsider.

Secondly, in the EAT cases of Hogan v HSE and McDermott v HSE two hospital consultants claimed that the HSE had breached the Act by withholding (i.e. "deducting" under the Act) salary agreed as part of a deal struck in 2008 with all consultants. The EAT did not apply the McKenzie reasoning and found in the consultants' favour, awarding them €99,876 and €14,000 respectively. Media reports suggested that extrapolating these figures and applying the principle to all affected consultants would mean a potential exposure for the HSE of up to €700 million. The HSE lodged an appeal to the High Court but then announced on 25 January 2017 that it was withdrawing its appeal. The reported insider view was that the legal advice received by the HSE was to the effect that appealing on the basis of the McKenzie reasoning would have been fruitless. However, the Government has indicated that it intends strongly defending other cases taken by other consultants directly to the High Court, though it is understood that those cases allege breach of contract rather than a breach of the Act.

Comment

McKenzie has been distinguished only by other High Court decisions and not yet overturned by a superior court. However, the body of cases against it means that employers now should be very cautious about reducing employee salaries or wages in the hope that such reduction falls outside the Payment of Wages Act.

Employers must familiarise themselves with the Act, and in particular Section 5, which provides, amongst other things, that deductions can be made under the Act where the contract of employment allows for this or where the employee has consented in advance to such a deduction. Aside from a potential breach of the Act, a reduction in salary or wages could also be a breach of contract or may lead to a claim of unfair (constructive) dismissal.

It is important for employers to be cognisant of these risks and understand that financial pressures in the employer's business does not provide an automatic justification for a reduction in salary or wages. The following should be considered:

  • Does the company have clear measurable reasons for the reduction? The employer should ensure it develops and retains evidence of the financial reasons and other reasons for the reduction. It should also retain minutes of discussions at Board level regarding the necessity for the reduction, in addition to the process followed regarding the consideration of alternatives (other efficiencies and cost saving measures for example) and why such alternatives were discounted.
  • Has a consultation process with employees been followed? A court will expect an employer to act reasonably by engaging with employees or their trade union in advance of implementing a reduction.
  • Can the consent of the employees be obtained? This is the safest manner for proceeding. If the reason for the reduction is explained, as well as the consequences for the business and jobs if cuts are not made, it may be that employee consent can be obtained.
  • Does the contract allow for the reduction/deduction? Such a clause may be explicit as regards the envisaged change, or it may be a more broad 'general variation' clause. However, caution must still be exercised because using such a clause unreasonably may still lead to employee claims, not least under the industrial relations acts.
  • Acquiescence? Where employee consent is unlikely some employers make reductions unilaterally in the hope that employees acquiesce in the situation and therefore implied consent is obtained. This is one of the more risky strategies for employers as 'acquiescence' has no set time limit, and if employees have objected in any manner (whether through course of dealings for example or by explicit statement that they are working under an objection) then that is likely to scupper the employer's reliance on the principle.

As the Irish economic recession has shown, reductions or deductions in pay can quickly become a commercial necessity for businesses. Employers should be aware of the above principles, and also consider including appropriate variation clauses now in their contracts of employment in case they are called upon in the future.