In our ‘5 ways in 5 days’ series, we are looking at options to control labour costs which don’t involve implementing redundancies. Today, we cover:
- freezing or cutting wages/salaries; and
- freezing hiring.
WAGE/SALARY CUTS AND FREEZES
Wages and salaries are fundamental terms of the employment relationship. They are specified in the contract of employment, an enterprise agreement, or possibly both. In the case of most enterprise agreements, annual increases to the minimum wage/salary are also specified. As a result, generally an employer cannot unilaterally reduce the wage/salary paid to an employee. However, there are ways in which an employer can implement freezes, and possibly cuts, to wages and salaries:
- an employer will ordinarily need to obtain the consent of each individual employee for a cut to wages/salary. Experience has shown that many employees (and unions) have been prepared to accept cuts where, for example, the alternative is that compulsory redundancies would need to be implemented. For example, it was reported earlier this year that the CFMEU recently agreed to cut wages by up to 20% in the Western Australian construction industry, and a number of senior executives have also agreed to salary reductions in response to poor performance;
- where wages/salaries are specified in an enterprise agreement, an employer is not permitted to pay below those rates. However, the employer may be able to have employees vote on a variation to the enterprise agreement to adopt lower wage rates – for example, the recent Full Court decision in the Toyota Australia case confirmed that employers may seek to vary such an agreement even if it contains a ‘no extra claims’ clause;
- there may be innovative ways to ‘restructure’ remuneration, particularly for senior employees. For example, part of the remuneration might be made to depend on performance over a number of years (perhaps as a deferred bonus), while maintaining the same total package over the long term. This option has the added benefit of potentially increasing motivation to increase business performance. These arrangements would also usually require the consent of the individual employee;
- unless an employee is entitled to a specific increase to their wage/salary at a particular time (under contract or an enterprise agreement), an employer will usually be able to freeze wages/salaries for a period of time. If employees are paid above the minimum wages specified in an enterprise agreement, it may be possible to ‘absorb’ any specified annual increase within employees’ current pay. Wage freezes have been a popular method in many industries (including the professional services industry) to deal with the slow-down during the GFC; and
- many contracts contain clauses which refer to an annual ‘salary review’. It is important to remember, in these cases, that the employer will usually be required to exercise its discretion to award increases in a way that is not capricious, in bad faith or in a way calculated or likely to destroy the relationship of trust and confidence between the employer and employee. Typically this means taking into account all of the relevant factors, including both individual and business performance.
It is important to remember that there are a number of practical matters to keep in mind with these options:
- freezes or cuts will often be appropriate as a ‘last resort’ and for a limited period only. If they stay in place for in the medium/long term, this may impact motivation and lead to resentment – which means that employees may look elsewhere; and
- freezes or cuts may reduce the attractiveness of the organisation to prospective employees.
Hiring freezes are a common method to limit the growth in labour costs over time, especially when market conditions are tough. The option essentially involves a ban on all recruitment within the organisation. Combined with natural attrition, this may lead to a reduction in headcount over time (though natural attrition may be lower in difficult labour market conditions). Alternatively, an organisation may implement a ‘no net growth’ policy, which allows it to replace personnel but not expand the total number. While generally there are few legal issues associated with a hiring freeze (especially in the private sector), when implementing such a measure, employers should be aware that even in tough times, there are certain employees who have skills that are in high demand or limited supply. It is important to retain a degree of flexibility, rather than simply instituting a complete ban. Key personnel may depart at any time, and the business may not be able to survive (or operate profitably and without risk) if those staff are not replaced.
WITHDRAWING OFFERS OF EMPLOYMENT
Some employers may be in the position where they have made offers of employment to prospective employees, where the employee has not yet started work. In the event that a hiring freeze is implemented before the employee’s planned commencement date, there are a number of options available:
- withdrawing the offer of employment entirely – while an employer can ‘withdraw’ an offer of employment before the start date, if the employee has accepted the offer then there is a risk that the employer may be in breach of contract. In that case, it may be possible to mitigate the risk by paying the employee in lieu of the applicable notice period; and
- delaying/deferring the start date – it may be possible to negotiate with the prospective employee to push back the start date. This has been common in relation to graduate recruits or apprentices, especially as those candidates may be more prepared to delay their start so that they can pursue other interests for a period of time (such as overseas travel). Some organisations have offered compensation in order to encourage deferral.
Care obviously needs to be taken in these areas. The recent public dispute between the Seven Network and Network Ten over the ‘poaching’ of a programming manager highlights the potential difficulties.