Employers should tread very carefully when adjusting employee salaries and bonuses. HC talks to an employment lawyer about the risks involved in reducing employee compensation.
When times are tough, some employers may look to reducing salaries or bonuses as an alternative to laying people off. But how can you do this without triggering a breach of contract claim? HC spoke to Lucienne Gleeson, associate at PCC Lawyers, about the potential legal ramifications involved.
Reducing Salary
Gleeson warned that employers should bear in mind that salary payments are contractual entitlements of employees, and are protected by contract law and potentially also by awards, enterprise agreements and the National Employment Standards.
“An employer cannot unilaterally reduce an employee’s salary,” she said. “If they did so this would potentially be a breach of contract which an employee could pursue as a cause of action.”
Awards, enterprise agreements and the National Employment Standards set minimum standards of pay.
Gleeson advised that if an employer was to reduce an employee’s salary, for example below the national adult minimum wage (currently $656.90 per week), this would be a breach of the National Minimum Wage Order.
“An employee would accordingly be able to claim that the employer had breached the Fair Work Act and seek not only back pay but also potential penalties against the employer,” she told HC.
“Similarly, any breach of the minimum rates of pay under an award or enterprise agreement would be a breach of those instruments and the Fair Work Act.”
However, if an employer had legitimate reasons for seeking to reduce an employee’s salary, Gleeson said that they should communicate these with the employee before taking any action.
“One common example of when a reduction in salary might be sought is when an employer is seeking to cut costs during difficult financial times,” Gleeson said.
“Discussions with employees about this and the reasons for it could result in an agreement to outright reduce an employee’s salary or cut down their hours or days with a similar result.
“If done in the correct manner this could result in a variation to the employment contract meaning the reduction does not result in a breach of contract scenario.”
Bonus Payments
Similarly, Gleeson suggested that employers should proceed carefully when drafting bonus policies and clauses.
“It is advisable to have these clauses and policies drafted so as to ensure there is a discretionary element in favour of the employer,” she told HC.
“However, this is not going to allow an employer to act capriciously, arbitrarily or unreasonably when deciding whether or not to pay a bonus or how much to pay.
“Employers may be entitled to consider an employee’s performance, market conditions and various other specified factors when deciding whether any bonus, and if so how much, will be awarded.”
She added that ‘lost opportunity’ is a significant exposure for employers when it comes to bonuses.
“If an employer specifies in a contract that an employee will be entitled to a bonus based on performance measure to be settled later, but never gets around to specifying those they could nonetheless be liable to make a bonus payment,” Gleeson said.
“Case law has shown that employees should be given every opportunity to achieve a bonus and that only if an employee fails to meet specified expectations or other identified factors come into play – such as poor market factors and/or poor team performance – should the discretion to refuse to pay a bonus be utilised.”
Finally, Gleeson warned that employers need to be diligent when setting up bonus schemes to ensure that they provide employees with a real opportunity to achieve a bonus.
“Any agreed circumstance in which the employer can reasonably exercise its discretion not to pay a bonus should be clearly laid out in the relevant document,” she said.
Reducing Salary
Gleeson warned that employers should bear in mind that salary payments are contractual entitlements of employees, and are protected by contract law and potentially also by awards, enterprise agreements and the National Employment Standards.
“An employer cannot unilaterally reduce an employee’s salary,” she said. “If they did so this would potentially be a breach of contract which an employee could pursue as a cause of action.”
Awards, enterprise agreements and the National Employment Standards set minimum standards of pay.
Gleeson advised that if an employer was to reduce an employee’s salary, for example below the national adult minimum wage (currently $656.90 per week), this would be a breach of the National Minimum Wage Order.
“An employee would accordingly be able to claim that the employer had breached the Fair Work Act and seek not only back pay but also potential penalties against the employer,” she told HC.
“Similarly, any breach of the minimum rates of pay under an award or enterprise agreement would be a breach of those instruments and the Fair Work Act.”
However, if an employer had legitimate reasons for seeking to reduce an employee’s salary, Gleeson said that they should communicate these with the employee before taking any action.
“One common example of when a reduction in salary might be sought is when an employer is seeking to cut costs during difficult financial times,” Gleeson said.
“Discussions with employees about this and the reasons for it could result in an agreement to outright reduce an employee’s salary or cut down their hours or days with a similar result.
“If done in the correct manner this could result in a variation to the employment contract meaning the reduction does not result in a breach of contract scenario.”
Bonus Payments
Similarly, Gleeson suggested that employers should proceed carefully when drafting bonus policies and clauses.
“It is advisable to have these clauses and policies drafted so as to ensure there is a discretionary element in favour of the employer,” she told HC.
“However, this is not going to allow an employer to act capriciously, arbitrarily or unreasonably when deciding whether or not to pay a bonus or how much to pay.
“Employers may be entitled to consider an employee’s performance, market conditions and various other specified factors when deciding whether any bonus, and if so how much, will be awarded.”
She added that ‘lost opportunity’ is a significant exposure for employers when it comes to bonuses.
“If an employer specifies in a contract that an employee will be entitled to a bonus based on performance measure to be settled later, but never gets around to specifying those they could nonetheless be liable to make a bonus payment,” Gleeson said.
“Case law has shown that employees should be given every opportunity to achieve a bonus and that only if an employee fails to meet specified expectations or other identified factors come into play – such as poor market factors and/or poor team performance – should the discretion to refuse to pay a bonus be utilised.”
Finally, Gleeson warned that employers need to be diligent when setting up bonus schemes to ensure that they provide employees with a real opportunity to achieve a bonus.
“Any agreed circumstance in which the employer can reasonably exercise its discretion not to pay a bonus should be clearly laid out in the relevant document,” she said.
