Can you legally reduce someone’s remuneration?

Employers should tread very carefully when adjusting employee salaries and bonuses. HRM speaks to an employment lawyer about the risks involved in reducing employee compensation.

Can you legally reduce someone’s remuneration?
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? HRM spoke to Charlotte Bates, senior associate at Bartlett Law, about the potential legal risks.

“Salaries are a key term of employees’ employment that cannot be unilaterally changed,” Bates told HRM.

“In relation to bonuses, some employers have bonus schemes with set criteria that must be fulfilled before the employee is entitled to any payment.”  

Costs can be saved by lessening bonus pay outs – but only if the employer has a “truly discretionary bonus scheme” in place.

“If the employer wants to retain discretion over bonus payments, the bonus scheme should ideally be purely discretionary, or be explicit that the fulfilment of any set criteria doesn’t necessarily mean a bonus will be paid,” Bates explained.

“If the bonus is truly discretionary, the employer is not legally obliged to pay it, or can set the amount to be paid.

“Some big corporations will have an annual bonus scheme, but will make it very clear it is discretionary so there is no guarantee of any bonus payment, even where the employee has met their targets.”

However, where a bonus is not truly discretionary and forms part of an employee’s terms and conditions of employment, it will have to be paid if the criteria are met.

“A bonus is either discretionary or a term of someone’s employment,” Bates explained. “However, depending on the bonus scheme documentation (or lack thereof), this is not always clear”.

“If the scheme is not discretionary, it is a contractual term, so failure to pay it where the bonus criteria have been met would be a breach of the terms and conditions of employment.”

She noted that following the collapse of banks during the Global Financial Crisis, some of the world’s largest corporations were legally obliged to pay enormous bonuses to bankers, as they were a contractual term of their employment. 

Bates also advised that if an employer was considering reducing an employee’s salary or non-discretionary bonus, for example to cut costs, they would need to consult with the employee first and seek their agreement to the proposed changes.   

“Some employers in this situation would tell employees that they are proposing everyone takes a remuneration cut or face redundancy,” she told HRM.

“The employees don’t have to agree to the remuneration cut, and an employer can’t take action unilaterally – simply announcing remuneration cuts would be in breach of the terms and conditions of employment; remuneration is a key term of employment.”

However, if the employer went about offering employees the choice in a procedurally fair manner and could genuinely justify the cuts, they would be upheld legally.

“Provided the employer follows a fair process and there is a genuine need to cost-cut, they can make employees redundant to cut costs,” Bates explained.

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