If you are facing cash flow and profitability issues, you may be wondering what steps you can take to address the problem. For example, you may have considered reducing your staff’s work hours or the amount you pay them. However, as a business owner, you cannot unilaterally reduce your staff’s pay without their agreement. Otherwise, you risk facing an underpayment claim and civil penalties under the Fair Work Act 2009 (Cth) (‘Fair Work Act’). Nevertheless, you may have options to do so depending on the staff member’s Modern Award (‘Award’) coverage or employment contract. This article will outline your legal obligations regarding the payment of work performed and guide the steps to review pay arrangements.
As an employer, understand your essential employment obligations with this free LegalVision factsheet.
Ensure Pay Does Not Fall Short of the Minimum Wage
As an employer, before considering any changes to salary or wages, you must be aware of your staff’s minimum entitlements. You should review any applicable Modern Award or Enterprise Agreement, as they set out the minimum pay entitlements for particular industries and occupations. If a Modern Award or Enterprise Agreement does not cover your staff, you must pay them the National Minimum Wage.
Review Your Employee’s Employment Contract
The next step you can take is to review your employee’s employment contract. If there is no contractual right to review or reduce your employee’s pay, you could ask for their agreement to do so temporarily or permanently. Whilst it is unlikely your employees will be willing to agree at first, you may stand a better chance if you remain transparent about your financial position or legitimate business reasons.
To illustrate, many businesses took a variety of measures during the Covid-19 pandemic to reduce costs and payroll by:
- making staff redundant;
- adopting flexible working arrangements;
- shifting staff from full-time to part-time employment, cutting hours of work (e.g. staff taking half days);
- cutting days of work (e.g. staff working four days instead of 5 per week); and
- freezing salary or wage increases with the agreement of their employees.
Review of Pay Conditions in Award
If an Award covers your employee, it may not matter what is in their employment contract or whether they agree to a reduction in pay. The relevant Award will generally mandate the rate of pay that must be paid to each of your employees and the entitlements you owe them (for example, penalty rates, overtime, breaks and allowances).
If your employees are not covered by an Award or some other form of workplace agreement, you cannot reduce their pay if it would result in them receiving less than the National Minimum Wage. As of July 2023, the National Minimum Wage is $23.23 per hour or $882.80 per week. Minimum wages vary significantly depending on your employee’s age, disability status and employment type. For example, your employees under 21 and those undertaking an apprenticeship or traineeship are entitled to be paid a percentage of the applicable pay rate, absent any specific junior pay provisions within an Award.
Key Takeaways
Making unauthorised reductions to your staff’s pay can amount to a breach of contract and the law. To mitigate the risk of significant penalties or an employment claim, you must know your employee’s minimum entitlements and that unilateral action is not taken. Therefore, it would be best practice and prudent to seek your employee’s agreement before changing their working conditions and recording this in writing, ideally via a letter of variation signed by the employee.
If you need assistance understanding your options in reducing your staff’s pay, our experienced employment lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
Before taking any steps to reduce your employee’s pay, you should have a conversation with them and ask for their consent. If your employee agrees to the reduction, you should put this in writing and confirm that the employment agreement is varied.
The Fair Work Commission reviews minimum pay rates yearly, and any changes generally begin on the first entire pay period on or after 1 July.
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