In Garside and Laycock v Booth, the Employment Appeal Tribunal (EAT) has confirmed that, in determining the fairness of a dismissal for failure to agree to a variation of contract, the correct test is whether the employer acted reasonably in deciding to dismiss, and not whether the employee acted reasonably in refusing to agree to the change in the first place.

Following a drop in profits, Garside asked their workforce to accept a five per cent pay cut.  Following consultation, all employees voted in favour of the pay reduction, with the exception of Mr Booth.  Eventually, the company dismissed Mr Booth and offered re-engagement at the reduced pay level.  Mr Booth rejected this offer and brought a claim for unfair dismissal.  The tribunal upheld his complaint, holding that Garside had failed to show that the dismissal was fair in all the circumstances.  As it was not in desperate financial straits, and the survival of the business was not dependent on the pay cut, the company did not have "cogent" reasons for imposing a pay cut.  Further, it was reasonable for Mr Booth to wish to resist the pay cut.

The EAT has overturned this decision, and confirmed that an employer does not necessarily have to show that the survival of the business depends on a proposed change in order to defend unfair dismissal claims.  In many cases, a reduction in workforce salaries will help to reduce financial pressures, but will not always be the sole or principal measure that will save the business.  Instead, the EAT clarified that the fundamental test is whether the employer acted reasonably in all the circumstances in taking the decision to dismiss, rather than focusing on whether the employee's refusal to accept the pay cut was reasonable.

Impact on employers

  • In unfair dismissal cases, it is always the reasonableness of the employer's actions that are under scrutiny.  As the EAT noted, "it does not follow that if one party is acting reasonably the other is acting unreasonably".  It may very well be reasonable for an employee to wish to protect their position and resist a pay cut.  However, this will not automatically mean that it is unreasonable for an employer to seek agreement to a pay cut, and to dismiss and offer re-engagement to employees who refuse.  This is particularly so where, as in this case, the pay cut is across the board and has been accepted by all other employees.
  • In the current economic climate cost-saving measures such as reducing salary levels are increasingly being used as alternatives to compulsory redundancy.  Whilst an employer must have good, objective, and persuasive reasons for proposing such measures, this case is a helpful reminder that an employer will not necessarily have to show that a pay cut is the only way out of a desperate business situation in order to defend claims of unfair dismissal.