Can an employer lawfully reduce staff salaries?

Almost every employee is thinking about the next pay raise – it’s a welcome increase to their income, but for employers, it can be added stress about managing a rise to payroll. In today’s economic climate businesses may be wondering what can be done to reduce costs. Have you ever asked if you, as an employer, can lawfully reduce an employee’s salary? Despite what you might think, it’s not an uncommon question, however, lowering wages has its risks, including unfair dismissal claims, and potential breaches of minimum entitlements. And, because these claims can be costly to businesses of any shape and size, employers must know where they stand, their obligations, and the law.

Here, we point out what you can and cannot do as an employer when it comes to reducing staff salaries. Let’s get into it…

Be aware, not alarmed, of minimum wage obligations

Before you go ahead and reduce an employee’s salary, employers must understand the minimum obligations under any applicable awards and enterprise agreements, as the relevant one will set the minimum pay and conditions that businesses must offer. Business owners aren’t allowed to pay an employee less than what’s required for their classification level under the applicable award or enterprise agreement, and there are significant consequences for getting it wrong including civil penalties and back payments.

If an employee isn’t covered by an award or enterprise agreement, employers still have the obligation to pay staff at least the National Minimum Wage.

What about contractual entitlements?

In most circumstances, you can’t reduce an employee’s pay unless the concerned employee genuinely agrees. If you reduce an employee’s remuneration without their agreement, this may result in a breach of contract. Though it’s unlikely that any employee would agree to a reduction in their wages, they might be convinced if there are legitimate external pressures such as a downturn in business.

What about redundancy or restructuring?

Employers must remember that a redundancy is only genuine when a business no longer requires a role to be performed, by anyone, due to changes in operational requirements. As part of this assessment, consideration must be given to the business’s financial performance, advancements in technology, or structural changes within the business.

If it’s been determined that the role is no longer required, redeployment options must be considered for the impacted employee. These might include moving the employee from full-time to part-time or changing the position to suit the business’s operational needs.

Ensuring that the redundancy is genuine, and the correct procedures are followed is vital, and this includes complying with any consultation obligation under an award or enterprise agreement. Not completing this process correctly can result in unfair dismissal claims and significant risk to the business. For this reason, we always recommend that employers seek professional advice when considering a redundancy.

What about demoting an employee?

Demoting an employee to a lower-paying position isn’t a straightforward process and can quickly turn into a costly mistake or an unfair dismissal claim.

You only have a right to demote an employee in limited circumstances, including where the employee genuinely agrees to the demotion or where an award or enterprise agreement allows for demotion without termination.

The concept of a demotion and whether it amounts to a dismissal is grey. There’s no clear rule from the case law and there have been decisions that go either way, as it’s heavily fact dependent on the employment circumstances. However, some general principles are relevant:

1. A demotion can amount to a decision to terminate the employment. This can occur where the demotion involves a significant change to an employee’s duties or salary that can’t have been contemplated at the time the employment commenced, or isn’t allowed in the relevant award, enterprise agreement, or employment contract.
2. If a demotion (or deployment to a different role) is contemplated and allowed in the terms of the relevant enterprise agreement, award, or employment contract then demotion won’t amount to a dismissal: this was confirmed in 2022, by the Fair Work Commission in NSW Trains v Todd James.

If any of the information in this article has raised questions about reducing an employee’s pay or you have another workplace matter you need assistance with, please reach out to our workplace relations experts via our 24/7 HR Advice Line.

About our author

Zaynab Aly is a Senior Workplace Relations Consultant at Citation HR. She has a particular interest in the retail industry and regularly provides advice on workplace matters to find solutions for clients.