Can an employer reduce a worker’s pay due to 'COVID-19's impact'?

Learn about 'variation of contract' and whether it was applied in this case

Can an employer reduce a worker’s pay due to 'COVID-19's impact'?

The Western Australian Industrial Relations Commission (WAIRC) had recently ruled on a case of an employee that alleged his employer breached their contract when it unilaterally changed his salary.

The employer said it had to reduce his pay because it suffered from COVID-19 closures, further arguing that the employee agreed to ‘vary his contract.’ Find out what the WAIRC has to say about the case’s circumstances and whose argument was favoured.

The employee was the general manager of a hospitality venue. His contract stated that he would receive $110,000 per annum.

Due to COVID-19’s restrictions in 2020, the WA government had effectively ordered the employer’s operations to close. The employee was then informed that he would be stood down under the Fair Work Act and his contract’s terms, but he continued to work and was paid full rates.

Soon after, the employer notified the employee that his hours and salary would be reduced. From around June until October 2020, his salary was decreased to 80%. He resigned from his employment, but his full salary was restored in mid-October until his resignation became effective.

The parties’ arguments

The employee claimed that he did not agree to the salary reduction and that the terms of his contract did not authorize it nor the FW Act and the JobKeeper Enabling Stand Down Directions.

On the other hand, the employer argued otherwise and said that the employee agreed to ‘vary his contract’ to reduce his salary, pointing out an email chain the employer had with him.

What should HR know about a ‘variation of contract’?

According to various decisions, a variation of contract occurs when the original contract remains in force, and only some of its terms are varied. Variation must be the subject of agreement between the parties and does not significantly alter the substance of the agreement or go to the “root of the contract.”

“A variation of contractual rights and obligations is, however, a contract, and therefore, the variation must meet the requirements of a binding contract, including the presence of consideration,” the WAIRC clarified.

Was there a ‘variation of contract’ in this case?

The WAIRC ruled that there was none. “The essential elements of contract formation are not

present. The employer unilaterally decided to reduce the employee’s salary and informed him of

 their decision. The character of the communication is not that of inviting or conducting

negotiations to vary the rate of pay prescribed by the contract,” the decision said.

“The email relied upon by the employer is not sufficient to evince the affirmation required for

such a change. There is no evidence of an intent to change the terms of the contract in such a

fundamental way,” it added.

The decision

The WAIRC noted that “where a salary is expressed as an annual rate, a variation in hours does not result in a change in remuneration.” It found that terms of the employee’s contract “provided for an annual salary, and accordingly did not authorise a reduction in remuneration.”

The WAIRC ruled in favour of the employee and ordered the employer to pay a portion of the salary denied to him. The decision was handed down on 14 April.

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