Reducing an Employee’s Pay: What You Need to Know (2020 Update)
Reducing an employee's pay can be controversial. However, current circumstances may mean that it's necessary to retain jobs. Read more here.
Reducing an employee’s pay can be a risky move. Generally, reducing an employee’s wage is seen as unfair and unethical. If an employee’s pay is reduced illegally, you can face up to $12,000 in fines. However, there are circumstances where it is permissible to do this. Whether you’re thinking of reducing your employee’s pay, or it’s something your employer is attempting to do to you, this article will outline the instances where it’s legal to reduce an employee’s pay.
Reasons for reducing pay
If you’re going to be Reducing an Employee’s Pay, you must make sure the reasons are ethical. If your business needs to cost-cut, you can offer your employees benefits to make up for reducing their wage. For example, you can offer them reduced hours or increased annual leave entitlements. If you want to reduce an employee’s pay based on performance, it is recommended that you undertake a performance review and implement a performance management policy first.
Terms of the employment contract
As an employer, the first step when adjusting an employee’s pay is to review the employee’s contract. The contract will outline what the salary for the employee is, any benefits and how often payroll occurs.
Awards, enterprise agreements, The Fair Work Act (2009) and any annual performance review terms govern your capability to reduce an employee’s pay. This applies regardless of whether you have a contract in place. The reduced wage you offer your employee cannot be below the minimum wage.
Review of Pay
It may be wise to include a review of pay, or an annual performance review in your contracts when hiring a new employee. If your employee is not performing accordingly, an annual performance review can justify a reduction in pay.
Hiring an employee is at times a complex task, but it is important to consider these specific terms when drafting an Employment Agreement to ensure your rights as an employer are not limited in the future.
What Rules do I need to Follow?
S 324 of the Fair Work Act (2009) states that you are permitted to deduct an employee’s pay if it is:
Authorised in writing and is mainly for the employee’s benefit
It may seem bizarre that an employee would agree to this, but businesses often negotiate job security with a deduction of pay. For example, during the Global Financial Crisis many businesses employed various measures, such as flexible working arrangements, cutting hours, and decreasing payment, to retain as many jobs as possible. This is also something that we are seeing now with COVID-19 and its negative impacts on the economy. Many businesses are reducing salaries and employee hours to retain jobs.
It is important to note that any variation in the amount of the deduction must be authorised in writing by the employee. This must specify the amount of the deduction and may be withdrawn in writing by the employee at any time.
Authorised by an employee in accordance with an enterprise agreement
Enterprise agreements are made at an enterprise level between employers and employees about terms and conditions of employment. It sets out minimum employment conditions, and the National Employment Standards still apply. If an employer utilises a registered agreement, the award does not apply.
Authorised by modern award
National Awards stipulate not only minimum wages, but also minimum entitlements. Awards depend on the industry an employee works in, and the specific job they do in that business. Make sure you consider whether an industry award covers your employee, as your ability to alter an employee’s pay will depend on the type of award they are under.
It’s important that the remuneration you give an employee does not fall below the modern award.
Authorised under a law of the Commonwealth, a state or a territory or an order of a court
There are circumstances where it is perfectly legal for an employer to reduce an employee’s pay, for example, the following:
- Income tax deductions
- Salary sacrifice payments
- Deductions authorised by employees such as insurance premiums, union dues and loan instalments
Restrictions to Consider
Even if you and your employee agree to reduce their wage, there are still enforceable restrictions as follows:
National Employment Standards (NES)
According to the Fair Work Act 2009 (Cth), an employment contract cannot remove employee entitlements provided for employees in the National Employment Standards (NES). This includes entitlements such as annual, sick and parental leave and penalty rates for working on public holidays.
The reduction cannot fall below the minimum pay rate. As of 1 July 2018, The Fair Work Commission has increased the minimum wage for employees over 21 years of age by 3.5% to$719.20 per week or$18.93 per hour for full or part time workers, and $21.61 an hour for casual workers. This of course varies depending on an employee’s age, experience and position in your business.
Sharlene is a paralegal at Lawpath that works on our content team, which aims to provide free legal guides to facilitate public access to legal resources. In accordance to her belief that the law should be accessible by all, her writing focuses on trending topics in both the legal and technological spheres.