Pay cut is fair
Labour & European Law Review Weekly Issue 235 15 September 2011
Section 98(4) of the Employment Rights Act 1996 states that having established a reason for dismissing someone, employers still have to show it was reasonable in all the circumstances. In Garside and Laycock Ltd v Booth, the Employment Appeal Tribunal (EAT) said that Tribunals must focus on the reasonableness of the employer’s decision to dismiss someone for refusing to accept a pay cut, not on whether it was reasonable for the employee to resist it.
In 2009, the company was in financial difficulty and decided to ask its employees to accept a pay cut of five percent with effect from May 2009.
The vast majority of the workforce agreed, but Mr Booth refused to accept the cut and the company sought to unilaterally impose it on him. After a number of meetings, the company dismissed him on 5 October 2009.
The Tribunal decided that although the company had a potentially fair reason to dismiss for “some other substantial reason”, it had not acted reasonably in all the circumstances as the pay cut was not “vital for the survival of the employers’ business”.
It concluded that “balancing the advantages and disadvantages of a pay cut and the refusal to accept it, .... it was reasonable for the Claimant to seek to maintain terms and conditions which he had enjoyed for many years and in particular not to agree to a significant reduction in pay in favour of an uncertain bonus scheme.”
The EAT disagreed, however. It said that the Tribunal had completely misunderstood the test in the case of Catamaran Cruisers Ltd v Williams and had adopted the very principle that had been rejected by the court.
The Tribunal had therefore applied the wrong test (that the employer had to be in a situation so desperate that the only way of saving the business was to propose stringent reductions in pay and conditions) to decide whether a dismissal for refusing a pay cut was fair.
The Tribunal was also wrong to focus on whether it was reasonable for Mr Booth to have refused the pay cut. Instead, it should have asked whether it was reasonable for the employer, having established "some other substantial reason", to have dismissed him for not accepting the reduction in pay.
It remitted the case to a fresh Tribunal and offered the following guidance on the correct approach to follow:
- In respect of the section 98(4) question, Tribunals have to consider whether, in all the circumstances, it was reasonable for the employer to rely on the refusal to accept a contractual variation to dismiss the employee.
- It must also decide that question “in accordance with equity”. For instance, it may not be fair to dismiss an employee who refused a pay cut when management only proposed a cut to the pay of non-managerial staff, but intended to retain the pay of managers.
- Reasonableness will also depend on the procedural aspects of a decision and how appropriate they were.
In the current economic climate employers often seek to change terms and conditions and sometimes to cut pay. If agreement cannot be reached then employers may try to dismiss employees who will not accept the new terms, often offering re-engagement on the new terms. This case is a reminder that such dismissals can be fair, even if the new terms are detrimental to the employees. It also emphasizes that it is the reasonableness of the employer’s decision that is relevant, not whether the employee is acting reasonably in rejecting the new terms.