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Imposed pay cuts can be fair

Posted on 26th July 2011
Case law

When deciding if a dismissal of an employee who refuses to accept a pay cut was fair, the employment tribunal must focus on the reasonableness of the employer's decision rather than on the reasonableness of the employee's refusal to accept the pay cut.

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focus on the reasonableness of the employer's decision to cut the pay

Garside and Laycock Ltd V Booth UKEAT/0003/11 May 2011

The facts

The employer was suffering financial difficulties and decided to ask all employees to take a 5% pay cut. Consultation meetings took place and eventually only two employees refused to agree to the change, one of whom was the claimant, Mr B. The employer terminated his employment on notice and at the same time offered him new terms and conditions based on the reduced pay. Mr B refused to accept the new offer and appealed against his dismissal, which was unsuccessful. He did not change his mind about the pay cut, even after the employer offered to review his pay after six months.

At the employment tribunal Mr B won his case for unfair dismissal because the tribunal found that the employer had not been in a desperate financial situation, that Mr B's refusal to accept the change was reasonable and there had been a "poor attempt at consultation".

The employer appealed to the Employment Appeal Tribunal (EAT).

The EAT's decision

The EAT allowed the appeal and has sent the case back to a new employment tribunal to decide if the dismissal was fair. The EAT explained that:

  • The tribunal had made an error of law when it concentrated on the issue of whether the pay cut was crucial to the survival of the business. This is not the test. Employers do not have to show that the business reason justifying the change was special or extraordinary; the reason must be valid and important.
  • The tribunal must focus on the reasonableness of the employer's decision to cut the pay rather than the employee's reasonableness of his refusal to agree to the change. It does not follow that if one party is acting reasonably the other must be acting unreasonably. The Employment Rights Act 1996 requires the tribunal to have regard to the employer's reasonableness. (The employee's refusal will be a factor to be considered as part of the employer's decision in the circumstances).
  • The employment tribunal, when looking at the fairness of the decision, must take into account whether the employer considered other options, the consultation and procedure followed and which parts of the workforce might be affected by the cut in pay.

In practice

This is another sensible EAT decision for employers to draw comfort from. If an employer wants to make changes to the terms and conditions of employment it is essential to show there is a pressing business reason, but this case confirms that it need not be based on a special or extraordinary reason. Secondly, it remains important for employers to follow a fair procedure when implementing the change; a unilateral change without first trying to win the consent of the employees will almost always prove to be unfair and open to challenge.

In cases where the employer secures the vast majority of the employees' consent to the change this should mean it makes it difficult for the individual employee to show that his or her refusal to accept the change was fair. This is because if the majority accept the change this is by implication an acknowledgement of the legitimacy of the employer's position. 

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