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Reducing an Employee’s Pay: What You Need to Know (2021 Update)

Reducing an Employee’s Pay: What You Need to Know (2021 Update)

Reducing an employee's pay should only be done where it is absolutely necessary. Find out what the rules are here.

8th February 2021
Reading Time: 5 minutes

Reducing an employee’s pay can seem like an easy way to minimise your costs. However, it also carries the risk that you’ll be breaking the law by underpaying your employee or that your employee will leave. Generally speaking, reducing an employee’s wage is seen as unfair and unethical without proper justification. Further, 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 and justifiable. 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 (Cth) 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 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 (Cth) provides the limited circumstances where you can reduce your employee’s pay. These are:

  • Where it is authorised in writing and for the employee’s benefit
  • Agreed to by an employee as part of an Enterprise Agreement
  • Authorised by a Modern Award
  • Authorised under a law of the Commonwealth, state, territory or an order of a court

We will provide further detail on these circumstances below.

1. 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. 

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.

Example

Kiara runs an event management company. Due to COVID-19, virtual events have not been able to generate the same revenue as in-person one would do. Hence, she has had to cut back on how many hours she can pay her employees. Rafael, one of her employees, agrees to work fewer hours for job security and has authorised in writing his consent. Kiara can now reduce the hours he works, as long as it’s in accordance with modern awards.

2. Authorised by an employee in accordance with an Enterprise Agreement

Enterprise Agreements are made 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.

Example

Rodney runs a construction business. In January 2020, he entered into an Enterprise Agreement with his employees that covered topic such as terms when reducing an employee’s pay. In June, Rodney decides to reduce his employee’s pay rather than make them redundant as a reward for their loyalty. Instead of following the terms in the Construction Award, Rodney can use his registered agreement with the FWC to make this pay cut.

3. Authorised by a 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.

Example

James’ restaurant has been hit hard by COVID-19. As such, he’s decided to reduce his employee’s pay to keep his business afloat. George, his employee, is 22 years old and has agreed to go down to 2 days of work on the weekend. Despite the agreement, James must pay George the minimum wage $24.36/hour under the 2021 Australian Restaurant Award.

4. Authorised under a law of the Commonwealth, State, 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
  • Superannuation
  • Salary sacrifice payments
  • Deductions authorised by employees such as insurance premiums, union dues and loan instalments

Example

Samantha has just started working in her first full time job at 21. She is financially prudent and asks her employer to salary sacrifice an additional 5% of her yearly income into her Super. As a business, her employer is now authorised to “reduce” her pay as long as they oblige to deposit additional funds into her Super account before-tax.

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.

Minimum Wage

The reduction cannot fall below the minimum pay rate. As of 1 July 2020, The Fair Work Commission has increased the minimum wage for employees 21 years and older to $753.80 per week or $19.84 per hour for full or part time workers, and $24.80 an hour for casual workers. This of course varies depending on an employee’s age, experience and position in your business. If you’re still unsure about the best course of action for you and your business, contact an expert Employment Lawyer here.

Only reduce pay if it is absolutely necessary

Reducing an employee’s pay often goes hand in hand with reducing their working hours or demoting them. However, if there are other reasons you want to reduce their pay it is important to check that these are legal and justified. Further, redundancy can be an option if it is a position your business no longer needs, or you can stand down an employee if an intervening event has resulted in your business not being able to trade. For further information, it may be wise to consult with an employment lawyer.

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Author
Sharlene Han

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.