No one wants to tell employees that pay cuts are looming, but sometimes salary reductions are a necessary measure to keep a business afloat.

The Australian Workers’ Union (AWU) took catering company Compass Group to the Fair Work Commission, accusing it of using “coercive” language. Compass Group had sent out communications to its workers outlining that if they did not agree to pay cuts for new employees, altering their enterprise agreement as a result, that Compass would not be able to retain a contract with a prominent client and “demobilisation of staff [would] begin”.

Compass added that this would mean employees weren’t entitled to redundancy pay as the “demobilisation of staff” would be the result of the discontinuation of a contract, which is considered as ordinary and customary turnover of labour.

Sound harsh? The FWC didn’t think so.

While the AWU argued the communication gave the impression that employees were to approve a pay cut or lose their job – and should therefore be deemed as coercive – Compass said it was simply relating a “candid statement” of what would take place should the organisation lose the prominent client contract. 

FWC deputy president Colman agreed, stating he did not deem the agreement to be coercive, and said Compass’s statement contained “highly relevant information”.

Coleman found the company’s statement on redundancies ultimately “assisted” employees to make an “informed and genuine” decision about whether to approve the variation.

Although the Compass can breathe a sigh of relief, the situation could have easily panned out differently if it did cross into coercive territory. So, it begs the question: how should employers communicate pay cuts in a reasonable, legal and fair way?

HRM speaks to Susan Sadler CPHR, AHRI’s South Australian state president and director of Red Wagon Workplace Solutions, to find out.

Be candid about pay cuts

Being frank and upfront can go a long way, even when the message being disseminated is an unsettling one. 

“I was really pleased to see a company be so brutally honest,” says Sadler, referring to the aforementioned FWC case.

“Just because it’s a message that people don’t want to hear doesn’t necessarily make it coercion.”

An open and honest approach may require the company to share vital financial information that will help employees understand the company’s financial predicament.

“You might need to be as upfront as saying, ‘We could lose the business,’” says Sadler. “I think that level of transparency and honesty is really important, but it’s not something we often see.”

Drawing on her own experience in negotiating enterprise agreements, Sadler says she aims to be “clear and transparent about how [they] arrived at the wage rates and proposed increases … People want to understand, otherwise they just think the CEO and executives are taking bonuses, and leaving the workers out to fend for themselves”.

Last year, Sadler became aware of a company that needed to shed a third of its workforce. The employees left behind were asked to accept a pay cut.

“The company said to them, ‘If you don’t stay, we understand, but we can’t respond to a challenging landscape in COVID-19 without your role, so we can’t make it redundant, but we still need to cut overheads.’

“That was quite challenging, but they maintained transparency in their communication really well,” says Sadler.

Conveying to employees that cuts are being rolled out across the entire organisation – from the executive and CEO level down to the graduate level – is likely to make the pay cuts more palatable for employees sitting further down the organisation’s hierarchy.

Indeed, the transparent approach taken by the particular company Sadler refers to has paid off. 

“They still have a positive and engaged workforce … That emphasis on how it wasn’t just the workers getting the cut is key.” 

Avoid murky waters

When can companies legally cut employees’ pay?

Section 324 of the Fair Work Act (FWA) provides a good starting point, stipulating the circumstances under which an employer can reduce their employees’ pay.

First off, it always has to be done in agreement with employees.

“There are no grey areas that apply here … You can’t just suddenly say, ‘Our business is struggling, we’re going to cut your pay.’

“In a normal course of business, if you want to reduce an employee’s pay, you need to have a reason for doing so, and it needs to be by written agreement. It could be something like reducing the hours and reducing the pay. If it’s performance based, you have to go through a performance [management] process first.”

The FWA also states the cut needs to be authorised in writing.

During COVID-19, Sadler has seen many companies encourage their employees to agree to  reduced pay with no other changes implemented.

“If they said, ‘The business is struggling. We all need to do something and even the directors and the executive are taking [pay cuts] then employees may potentially agree to that,” says Sadler, though she raises an ethical consideration.

“Technically, it’s okay … but I would feel uncomfortable from an ethical and moral standpoint, particularly because I know businesses that have picked up and haven’t increased employee wages by 10 per cent back to the pre-COVID-19 rate.”

However, coercion enters the picture if, for instance, an employer says to their employee, “If you don’t agree to doing exactly the same job with the same hours for less pay, then you will lose your job,’” says Sadler.

“There would be grounds for that to be contended in the commission.”

Don’t assume

JobKeeper has been a lifeline for many companies in the midst of COVID-19. Now that it’s ended, what happens next? 

For starters, employers shouldn’t assume their employees understand what the cessation of JobKeeper means for them, says Sadler.

“A lot of industry groups are saying there’s an expectation that there will be redundancies or layoffs as a result of JobKeeper ending …  If that’s not the case in your organisation, don’t assume people know that. I think employers need to say, ‘Your job won’t be adversely impacted at the moment.’ Make sure  you can follow through on what you promise though.”

Equally, if the organisation is in a financially precarious position, it is of even greater importance to keep the communication channels open.

“You can’t just make changes to people’s employment without having conversations with them about it first because there are always consultation requirements that an employer must follow,” she says.

“It may well be that the employee says, ‘I’d be willing to reduce my hours and have my pay reduced,’ which enables you to avoid a redundancy and [keep] a really good employee … Taking any sort of cut is always tough, but if done in the right way for the right reasons, most people are more likely to be reasonable about it.”

There are some key legal issues to keep in mind when approaching pay cuts with employees. Learn about them through AHRI’s short course.