What procedures must an employer follow if it needs to cut employees' pay?

An employer can cut employees' pay if they consent to the change to their contracts. Employees may agree to such a change if it is clear that cuts are needed and the alternative would be redundancies.

If the employees do not consent to the cut in pay, the employer has the option of dismissing them and re-engaging them on new contracts, with the lower rate of pay. The employer will need to show that there is a genuine business need for the change, and that there has been genuine consultation with the employees with regard to the change. The employer should give the employees the required contractual notice of dismissal and then re-engage them immediately after expiry of the notice.

The termination of the original contract will be a dismissal and there is a risk that the employee may challenge the termination as unfair. The employer will rely on "some other substantial reason" under s.98(1)(b) of the Employment Rights Act 1996, as being the potentially fair reason for dismissal. The reason for making the change and the consultation process will be factors in determining the fairness of the dismissal.

If the employer is to dismiss and re-engage 20 or more employees it must follow the statutory consultation procedures for collective redundancies (this is because the relevant definition of redundancy for the purpose of collective consultation is a "dismissal for a reason not related to the individual concerned").