Reduction in salary in the face of COVID-19

The coronavirus/COVID-19 has claimed a number of big and brand name scalps as organisations start to reduce salaries.  PWC, Channel Seven, KPMG and even the AFL as at the time of writing started salary cuts and reduction in salary – so for Employers the question is – can you do it?

New changes introduced by the Federal Government and the Fair Work Commission recently has changed the landscape somewhat.  One major part of this is the “Jobkeeper Payments”.  Jobkeeper Payments is generally speaking a wage subsidy of $1,500 per fortnight paid to the Employer to supplement the income of an employee.  Some key points to get across in regards to salary and salary reductions:

  • The payment is a wage subsidy and is provided to the Employer to help pay employee wages
  • Directions can be made to stand down or reduce hours
  • The wage subsidy really helps with the payment of wages and does not allow an Employer to reduce the hourly rate of pay
  • Superannuation accrual is optional on the Jobkeeper Payment portion
  • Those on parental leave pay will not be eligible unless they are on parental leave paid by their Employer (exclusive of the Government scheme)
  • Those on Workcover or Workers compensation will not be eligible unless they are working some hours for the Employer
  • Leave such as personal/carers leave (if approved) will be payable by the employer

Employers will also be required to apply for the Jobkeeper payment and there are eligibility criteria.

Conservative View – Salary Reduction

The prevailing and conservative view is that of the salary reduction. A reduction in salary with consent of both parties has always been acceptable, with the Coronavirus impact this does not change subject to a Jobkeeper Payment acceptance.  In some respects, such a request made to an employee will not really hinge on any legal problem but moreso, the delivery and explanation to the effected employee.

Of course, any reduction in salary done unilaterally or by way of a direction by an Employer is a little more problematic.

The conservative view is that an Employer cannot lawfully direct or force an employee to take a salary reduction – such a reduction would constitute a repudiation of the employment contract. 

Further, if the reduction was extensive to the point it would fall below minimum rates of pay set out in the Federal Minimum Wage, a modern award or an EBA there is a significant risk of underpayment of wages.

There are a couple of other options to consider in this context namely, reducing the hours of an employee (and of course the subsequent salary paid) keeping in mind the consultation provisions in a modern award or EBA that will apply as well as any notice required to do so.  Another option is to utilise a formal review under an employment contract to discuss reductions in salary in the context of the impact of COVID-19.

In many respects, the conservative view provides more certainty but is also quite limited in scope – which is why many organisations are utilising redundancies or even stand downs as a cause of action to act swiftly in the face of the Coronavirus.

Also keep in mind that certain awards such as the Hospitality Award and Clerks Award are providing some flexibility including the ability to direct staff take annual leave and temporarily reducing the hours of full time workers.  There is also the implementation of the new “Schedule X” with unpaid pandemic leave and annual leave at half pay which can be directed of an employee.

An Alternative view – Permitted Deductions

There is an alternative view, and depending on the case or industry may be feasible.

s 324 of the Fair Work Act 2009 (Cth) (FW Act) sets out the requirements for permitted deductions in detail:

(1)  An employer may deduct an amount from an amount payable to an employee in accordance with subsection 323(1) if:

  • the deduction is authorised in writing by the employee and is principally for the employee’s benefit; or
  • the deduction is authorised by the employee in accordance with an enterprise agreement; or
  • the deduction is authorised by or under a modern award or an FWC order; or
  • the deduction is authorised by or under a law of the Commonwealth, a State or a Territory, or an order of a court.

(2)  An authorisation for the purposes of paragraph (1)(a):

  • must specify the amount of the deduction; and
  • may be withdrawn in writing by the employee at any time.

[emphasis added]

In this regard, there is an alternative view that an Employer may reduce the pay (by way of a permitted deduction) of an employee as long as the employee agrees in writing to the proposed deduction. There is no requirement for a deduction in salary to correspond to a reduction in hours but rather it must be principally for the employees benefit. Arguably, if an Employer has, for example, terminated the employment of 100 or so staff already, the benefit of having job security in a tough job market may be principally for the employees benefit.

It could be argued that instead of making an employee’s position the redundant or even stood down that a reduction in salary by way of a deduction is of principal benefit.  The key is the employee is still being paid the same salary but a deduction is in place as a permitted deduction.  Arguably, a permitted deduction may be quite substantial.

Directing an employee to accept a deduction (depending on the approach taken) may well be construed as exerting undue influence or pressure on an employee to agree to a deduction. Section 344 of the FW Act specifies:

 An employer must not exert undue influence or undue pressure on an employee in relation to a decision by the employee to:

(e)  agree, or not agree, to a deduction from amounts payable to the employee in relation to the performance of work.

[emphasis added]

The issue still stands, that an employee may well still disagree to the deduction, there does not seem to be a solution to direct an employee to take a “pay cut”.

This is a considerably difficult question to answer and for some Employers getting proper advice on their employees and in the context of their circumstances is essential. No doubt we will see a number of post COVID-19 cases around this issue.  At the moment we are seeing a number of “sunset clauses” with aspirational end dates.  Unfortunately the danger and spread of COVID-19 does not really care about these sunset clauses and time limitations.

The above is to provide alternative views on how this will be handled – but ultimately what view is taken should be viewed on a case by case basis.  All Employers, Executives, HR and Managers need to get assistance and clarity on this before steps are taken. If steps have already been taken get in touch so that risk can be alleviated.

For all Employers we offer an obligation free consultation – please call +61 (07) 3876 5111

Written By

Jonathan Mamaril 
NB Lawyers – Lawyers for Employers 

[email protected]  

+61 (07) 3876 5111

About the Author

Jonathan Mamaril  leads a team of handpicked experts in the areas of employment law and commercial law who focus on educating clients to avoid headaches, provide advice on issues before they fester and when action needs to be taken and there is a problem mitigate risk and liability.