In the current economic climate, it is an unfortunate fact of life that employees are facing numerous constraints concerning pay and benefits. Pay freezes are commonplace and several councils have made the news by requiring employees to accept pay cuts or face dismissal. As a general principle, the unilateral imposition of material contract variations which are detrimental to employees can entitle the affected employees to resign and claim breach of contract and constructive unfair dismissal.

In a decision which will be welcomed by employers, the EAT has recently clarified that when deciding whether or not dismissal of an employee for refusing to accept a pay cut does constitute “unfair dismissal”, the question to be considered is NOT the reasonableness of the stance adopted by the employee. Rather it is whether the employer acted reasonably in dismissing the employee for refusing to do so.

In the case (Garside and Laycock Ltd v Booth, EAT on 27 May 2011) Garside and Laycock Ltd (“G & L”), providers of building and maintenance services, warned staff of financial difficulties and asked them to accept a pay cut to avoid possible further redundancies. A Mr Booth refused. After discussion, G & L offered him a new contract which maintained his terms and conditions save for pay, although it provided for the possibility of bonuses which his previous contract had not done. Mr Booth declined the new contract. Accordingly G & L dismissed him.

Before an employment tribunal Mr Booth won a claim of unfair dismissal. However, G & L appealed to the EAT and won, in that the EAT remitted the case for rehearing by a fresh tribunal.

The important point was that the EAT ruled that the required approach in a case like this was exactly the same as in all ordinary unfair dismissal cases. The tribunal is required to determine whether, in all the circumstances, the employer had acted fairly in dismissing the employee. Here the original tribunal had made an error of law, because it had concentrated instead on whether it was reasonable for Mr Booth to refuse to accept the terms offered. Having decided that it was, it instantly made the leap of concluding that the dismissal was therefore unfair.

In the EAT the experienced and well respected judge, Mr Justice Langstaff, concluded that the original tribunal had concentrated on the wrong issue. So far as relevant here the statutory provision (Employment Rights Act 1996 s.98(1)(b)) provides that, in determining whether dismissal of an employee is fair or unfair, it is for the employer to show that it was for a “… substantial reason of a kind such as to justify the dismissal …”.

The original tribunal should have been focussing on the reasonableness of the employer’s actions, as the statutory wording requires. The two questions to answer were:

  1. 1. Was it reasonable for G & L to propose a pay cut? For this to be so there is no rule that the employer must be in such a desperate situation that imposing a pay cut is the only way of saving the business. The statute requires that the reason for the employer’s action must have been a “substantial reason”, and so clearly (to use the words of a judge in a different case) it must be more than “whimsical, unworthy or trivial”, but that is all. The employer does not have to show, for example, that his business would collapse if pay cuts were not accepted.
  2. 2. Was it reasonable for G & L to dismiss an employee who refused to accept it? Whether Mr Booth was reasonable in so refusing was really neither here nor there.

    The distinction might seem subtle, but as Langstaffe J said:-

    It may well be … that the decision of an employer, in order to be reasonable, will take account of whether the employee himself affected by the decision regards it as reasonable or unreasonable; but that is very different from saying that the decision depends upon what the employee thinks is reasonable or unreasonable.

    In other words, the law is that even if it is reasonable for an employee to refuse to accept a proposed pay cut, it does not follow that it is unfair for his or her employer to dismiss that employee.

    In our experience this is a common issue and although the guidance from the EAT is undoubtedly helpful, we advise all our subscribers to contact us for advice specific to the particular circumstances whenever pay cuts are contemplated.