Is it Legal to Reduce an Employee’s Salary?

For the last few months, businesses have said that ‘these are difficult times’. The words ‘reduce’ or ‘reduction’ usually follow after this phrase. One of the most common reductions we have seen is in an employee’s salary to mitigate a business’s financial burdens and deal with profitability issues. Indeed, we are in difficult circumstances, but before you seek to reduce your employee’s salary, you must do it legally. In this article, we will explain whether it is legal to do so and how. 

So, is it legal to reduce your employee’s salary?

Yes and no.

You must have a legitimate reason. COVID-19 has caused many businesses to reduce their employee’s wages and salaries to keep the business afloat. The Federal Circuit Court dealt with this scenario in a case involving Bluescope Steel (AIS) Pty Ltd this year. The court rejected the argument that an employer could unilaterally reduce its employees’ salaries at any given time. Instead, the court said that an employer could reduce an employee’s salary if it is part of a financial or salary review scheme, stated in the employment contract. In other words, the best way to reduce an employee’s salary is to mention the possibility of doing it in the employment contract.

How to reduce an employee’s salary?

Are you authorised by your employee, award, employment contract or legislation to reduce the salary?

Under section 324 of the Fair Work Act 2009 (Cth), an employer can deduct an amount from an employee’s salary or wage if there is an authorisation. A reduction is authorised if:

  • an employee has permitted it in writing, and it is principally for the employee’s benefit;
  • an enterprise agreement allows it;
  • a modern award or Fair Work Commission order authorises it; or
  • the Commonwealth, State or Territory laws permit it.

Suppose an employee has authorised the reduction of their salary. In that case, they may withdraw their authorisation at any time in writing (s 324(2) of the Fair Work Act 2009 (Cth)). 

What other factors must you consider?

1. Employment contract

An employer should review the terms and conditions of their employee’s contract. Sometimes, the contract may contain clauses that prohibit the employer from reducing an employee’s salary or does not state that the employer has a right to do so. If there is no right to reduce the employee’s salary, then the employer must seek authorisation from the employee. Generally, an employee is unlikely to agree to this. However, given the circumstances caused by COVID-19, the employee may comprise as opposed to potentially losing their job entirely. Yet, employers should not coerce or force their employees to authorise a reduction in their salary. 

2. Modern award or enterprise agreement

A modern award may protect an employee, but this depends on the award’s provisions. We recommend you check the award that applies to you, here. The awards will state a minimum rate of pay. Usually, an award or enterprise agreement will only cover the employee if there is no registered employment agreement. 

3. National Employment Standards (NES) and minimum wage

The Fair Work Act 2009 (Cth) establishes minimum standards and entitlements. Entitlements include penalty rates, sick, annual and parental leave. An employee is also entitled to a minimum wage. A minimum wage is the amount of pay before tax deduction. It is the lowest rate of payment that an employee can receive for the work that they are doing

This year, the Fair Work Commission announced a 1.75% increase to minimum wages. Therefore, employees who are not covered by awards or agreements are entitled to a minimum of $19.84/ hour or $753.80/ week. The rate is applied from the first full pay period starting on or after the 1st of July 2020.

When reducing an employee’s salary, the employer should ensure that the reduced rate is not below the minimum wage and still complies with the NES.

What if you reduce an employee’s salary without an authorisation?

An employer who reduces an employee’s salary without being entitled or authorised to do so can be liable for breach of the employment contract. Further, suppose the employee’s reduced salary rate leads to a breach of the NES. In that case, the employer may be liable for penalties. These include penalties of up to $66,600 for a corporation and $13,320 for an individual.

Need further assistance?

Reducing an employee’s salary is not illegal, but it has to be authorised. To do this, you should have a reason for reducing your employee’s salary. You should support your explanation with some form of authorisation given by the employee, the employment contract, award or enterprise agreement. If authorised, you must ensure that the reduced rate is not below any minimum standards outlined in the Fair Work Act or any other statute. Suppose you require further clarification on how to reduce your employee’s salary. In that case, we suggest you seek assistance from your employment lawyers.

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