A recent Spanish case has significant implications for UK employers seeking to avoid redundancies by making pay cuts as an alternative.  The European Court of Justice (ECJ) decided that the circumstances of an employee who resigned following their employer’s decision to unilaterally reduce their pay by 25%, fell within the broader definition of redundancy for the purposes of the collective consultation obligations imposed under the Collective Redundancies Directive.

In Pujante Rivera v Gestora Clubs, an employee who had been dismissed in circumstances that would have amounted to a redundancy under the specific UK statutory definition (fewer workers required to carry out work of a particular kind) argued that his employers failed to follow the collective consultation requirements when he was made redundant. Although he had been made redundant because of economic reasons, the number of redundant employees did not reach the appropriate trigger threshold for the collective rules under Spanish law. He needed to demonstrate that 10% of the workforce had been dismissed.  In order to meet this collective consultation trigger he asked the court to take into account his colleague’s resignation which followed a unilateral pay cut of 25%, which had been made by his employer for the same reason that Mr Rivera had been dismissed.

The ECJ ruled that the definition of redundancy in the Collective Redundancies Directive should not be interpreted narrowly and could include a resignation in such circumstances. It explained that “The fact that an employer - unilaterally and to the detriment of the employee  - makes significant changes to essential elements of his employment contract for reasons not related to the individual employee concerned falls within the definition of ‘redundancy’ for the purpose of ….the directive.”

Current position in the UK

In the UK collective consultation obligations are contained within s.188 of the Trade Union and Labour Relations Consolidation Act 1992 (TULRCA). We already know that the definition of redundancy under TULRCA has a much wider meaning than a redundancy under the statutory provisions contained within s.139 of the Employment Rights Act 1996. For example, dismissals which follow a refusal to accept new terms and conditions fall within this wider definition of redundancy for the purposes of collective consultation.

By extending the definition to cover a resignation by an employee in response to a unilateral change to salary rates, this case stretches the definition once more, certainly to a constructive dismissal.

Impact on employers

Employers who choose to impose pay cuts unilaterally as an alternative to reducing the number of employees within the workforce are now explicitly faced with a similar question to that which arises in an exercise in changing terms and conditions more broadly. Whether to start a formal collective consultation exercise at the beginning of the pay reduction process, or wait to determine whether everyone will agree to the change, which may avoid triggering the collective consultation obligations? This decision may be driven by the actual level of the pay cut and its anticipated effect on the workforce.

If the aim is to avoid any risk of a protective award then the safer option may be to follow the collective rules from the beginning of the pay reduction process. As such, if it is contemplated to reduce the salary of 20 or more employees (that may cause them to resign and assert constructive dismissal) in a period of 90 days, then consultation with elected representatives or trade union representatives should begin in good time, and depending on the numbers involved, the minimum time periods of 30 days or 45 days should be followed.

The alternative approach is to seek consent to make the pay cut and then assess the numbers of remaining employees who refuse to accept the pay cut. If the latter number is lower than 20 then the collective obligations may still not be engaged. However, the UK Tribunals have accepted that there may be a constructive dismissal at law even if an employee accepts the reduced pay whilst remaining in their role but on the basis that they are mitigating their losses without actually leaving their employment. Consequently employers will need to assess carefully the basis upon which any reduction may be said to be accepted or agreed.

Employers should also be aware that if the collective rules are triggered then the duty goes further than information and consultation. Employers are also obliged to notify the Secretary of State via the HR1 form. Although this is often dismissed as an administrative technicality there is a renewed interest in the notification requirement, following recent high profile cases reported in the media involving redundancies at Sports Direct and City Link.  Failure to notify gives rise to criminal liability, which can result in the prosecution of individual directors.  Although the former City Link directors were recently acquitted of criminal charges, it seems clear that there is a new approach towards enforcement being pursued by the Department of Business Innovation and Skills.