Two ways to reduce wages when costs cuts are necessary
There are options to reducing wages — but it’s got to be fair to all players. Businesses looking to cut costs should consider options to manage employee wages and benefits before considering ways to reduce their workforce.
Ultimately, any changes to an employee’s contract can only be made either in accordance with the provisions of the contract, or by agreement.
But some skilful negotiating may achieve an outcome that leaves both parties happy.
There are two potential options; freezing or delaying wage rises or reducing them.
Let’s look at option one. If wage increases are guaranteed through employment contracts or enterprise agreements, employers would need to look for a provision which allows a temporary or indefinite freeze in wage increases and notify affected employees.
If there is no such provision in the contract or agreement, employers would need to seek permission to vary the worker’s contract.
Similarly, if a certain wage increase has been guaranteed through custom and practice, employers will need to seek agreement from affected individuals to implement a freeze.
If wage increases are generally offered annually but no set amount is guaranteed, or it is based on the performance of the company, employers should still take steps to manage employee wage expectations during this time.
Meetings may be held to update staff on the economy and the performance of the company, with a reminder that steps need to be taken to ensure the company’s ongoing sustainability.
Any wage freeze must also not result in wages falling below minimum wage obligations, otherwise significant back-payments and fines may be enforceable.
The second option is to reduce employee wages. But as this reflects a variation in contract, agreement must be obtained from employees.
Conversations should be approached in a sensitive manner and redundancies should not be used as a threat for non-agreement.
Agreement should then be sought on an individual basis. Caution should be used to ensure employers do not coerce or force employees to accept a variation to contract — additionally, reductions must not result in wages falling below the minimum wage.
If redundancies are considered, caution should be exercised to ensure that a decision to make someone redundant is not based on their refusal to decrease their wages.
This would constitute adverse action and may place the organisation at risk of a general protections claim.
If an employee who has refused a contract variation is eventually selected for redundancy, it is important to document the selection criteria that was considered (for example skills, qualifications and experience) to demonstrate that the selection was objective and not influenced by a perceived lack of co-operation on the part of the employee.
For employers covered by enterprise agreements and paying above legislative minimums, applications for variations to wages would need to go through a voting process with employees and an application to the Fair Work Commission.
When steps need to be taken to adapt to changes in the economy, it can be quite unsettling for all levels of the business.
It is important to strike a balance between effective communication with staff, and taking the necessary steps to implement change, while minimising the impact on the business and those affected.