Unilateral Pay Cuts and Constructive Dismissal

Pay cuts are never going to go down well with employees, though it’s typically one of few alternatives to redundancies in struggling businesses. However, unilateral pay cuts are unlawful and, as the Employment Appeal Tribunal has recently ruled, could well lead to a constructive dismissal claim.

Employers must have the employee’s consent if it proposes to cut their pay (or reduce their hours), otherwise the pay cut will be a breach of an express term of the contract of employment. In Mostyn v S and P Casuals Ltd [2018] UKEAT 0158_17_2202, the claimant (a salesman) brought a constructive dismissal claim against his employer who had unilaterally cut his salary to £25,000 – down from £45,000. The employer wanted to reduce his pay against the background of falling sales. However, it had already reduced the claimant’s salary from £65,000 to £45,000 in 2010, though he had reluctantly accepted that cut.

Following a meeting, the claimant wrote a letter and told the company he was unhappy with what he referred as a “disciplinary meeting”; stated that he considered his contract of employment had been breached, and rejected the pay cut offered for the clear reason that it was such a substantial amount. He was told his pay would be cut anyway.

He claimed constructive unfair dismissal on the basis that his employer’s behaviour had, without reasonable and proper cause, was calculated or likely to destroy or seriously damage the relationship of trust and confidence between it and the Claimant, in breach of the implied term of trust and confidence implied into every employment contract.

The claimant appealed the ruling of the Employment Tribunal that though the employer had breached an implied term, it had reasonable and probable cause for imposing the pay cut.

What did the Employment Appeal Tribunal say?
The EAT disagreed with the ET: the breach relied on was so significant a breach of an important express term – even though the implied term was relied on - that the ET had erred in law in asking itself whether the employer had reasonable and probable cause for repudiating the contract of employment.

It concluded: “No employer can have a reasonable and probable cause for repudiating the contract or for breaching the implied term where that breach consists of the unilateral imposition of a significant pay cut on an employee.” The breach of the implied term was also a breach of the important express term, and the contract had clearly been repudiated, therefore, the Claimant was constructively and wrongfully dismissed. Whether the employer had good reasons for seeking to impose a substantial pay cut was not relevant.

What does this mean?
Employers must exercise caution when considering pay cuts and other substantial changes to the express terms of an employment contract. If an employee does not agree to a proposed pay cut, particularly anything more than a minimal variation, and the effect of seeking to impose the change potentially breaches the implied duty of mutual trust and confidence, the employer could be on very stick ground. Legal advice is vital.



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