Reducing staff pay is just one strategy a company might employ in order to deal with cash flow and profitability issues. Alternatively, you may be overpaying a staff member to the general detriment of the business. In any case, whether you can reduce the staffs pay or not depends on a number of questions: Is the employee covered by an Award? Does the employee have an employment contract?
Review of Pay Conditions in Employment Contract
First step, review the employee’s contract. If the contract includes a provision that allows the employer to undertake an annual performance review then this may allow the employer to reduce the employee’s pay, in particular if the provision specifically deals with review of pay as part of the annual performance review process.
Second step, if there is no contractual right to reduce an employee’s pay then the employer could ask the employee to agree to a reduction in pay. The employee may be unlikely to agree to a reduction in pay, but if there are legitimate business reasons for the reduction in pay then you may have a better chance. For example, during the GFC many businesses took a variety of measures to reduce their payroll by making staff redundant, adopting flexible working arrangements, shifting staff from full-time to part-time employment, cutting hours (e.g. staff taking half days), cutting days (e.g. staff working 4 days instead of 5 per week) and/or freezing pay rises. If an employee understands that there are legitimate business reasons for the reduction in pay then they may agree to it, rather than risk losing their job.
Review of Pay Conditions in Award
If an employee is covered by an Award then it may not matter what is in their contract or whether they agree to a reduction in pay. The relevant Award will generally mandate the rate of pay that must be paid to each employee and the entitlements to which each employee is entitled as a consequence of their employment (for example, penalty rates, overtime, breaks and allowances). In Australia, an employment contract cannot remove employee entitlements provided for employees in the National Employment Standards (NES) under the Fair Work Act 2009 (Cth), unless the rate of pay afforded to the employee exceeds the minimum amount under the Award and any excess is reasonably sufficient to compensate the employee for the loss of their entitlements (if any). If an employer proposes to reduce the rate of pay of an employee then this may impact on whether the compensation received by the employee for any entitlements that have been removed is sufficient.
If an employee is not covered by an Award or some other form of workplace agreement then an employer also cannot reduce their pay if it would result in the relevant employee receiving less than the national minimum wage, which is the minimum wage that applies to employees in the national workplace relations system who are not covered by an Award or agreement. In early 2013, the full-time minimum wage for adults was $15.96 per hour or $606.40 per week. For casuals, the hourly rate is increased by 23% to $19.63 per hour. The relevant rates are different for employees with a disability as different rate schedules apply. The relevant rates are significantly reduced for juniors, apprentices and trainees, with rates depending on age or experience. All these rates are reviewed annually and start from 1 July in each year.
If an employer attempts to reduce a staff member’s pay and it is not otherwise entitled to do so then this would amount to breach of contract and may also be a breach of the staff member’s workplace rights. Any such breach would enable the staff member to take action against the employer for breach of contract or otherwise take steps to protect their workplace rights, which could result in the employer incurring greater expenses in the long term than if they had not taken the action in the first place. Any such action should be carefully considered.