Can my employer reduce my remuneration in tough economic times?

Reducing remuneration of employees is one strategy that a company may employ in trying to deal with cash flow or profitability issues.  Overpayment of staff may also be viewed as damaging to the overall performance of the business.  Often, companies will seek to approach employees collectively to negotiate pay cuts which may assist in preventing them from needing to make employees redundant for financial reasons.

If you are covered by a Modern Award, this instrument may prohibit your employer from reducing your pay. Employers whose employees are covered by Modern Awards cannot reduce an employee’s pay below the National Employment Standards found in the Fair Work Act 2009 (Cth) (The Act), unless the rate of pay afforded to the employee exceeds the minimum amount under the Award and any excess is reasonably sufficient to compensate the employee for the loss of their entitlements to, for example, overtime payment, shift allowance, etc.

It is also advisable to consult your contract of employment or enterprise agreement.  If your employment agreement provides for a “performance review” procedure, your employer may be contractually obliged to review your pay according to your performance.

In some circumstances, a unilateral reduction in remuneration may amount to ‘constructive dismissal’ for the purposes of section 386(1)(b) of the Act which provides that a person has been dismissed if they were forced to resign from their employment because of conduct, or a course of conduct, by their employer.   In November 2014, this approach was confirmed by the Fair Work Commission in the case of Johnson v Zehut Pty Ltd [2014] FWC 7496.

The Commission concluded that an employee who was forced to resign after not accepting a remuneration reduction had been constructively dismissed.  The employee had worked for a retail employer for 12 years, and until May 2013 her base salary was $80,000.  In about May 2014, the employer sought to have the employee agree to reducing her remuneration to $54,000, and the reasons provided were difficult business conditions and to bring her salary in line with other company managers.

She was later advised by the employer that if she did not accept, she would be forced to resign.  When the employee indicated her intention not to accept the reduction, she was advised that this was taken by the employee as her resignation.

The employee was awarded 14 weeks’ salary in compensation for her unfair dismissal.