Legal Insights

Paying for the pay rise: what are your options?

By Ross Jackson

• 14 May 2020 • 5 min read

The middle of the year is, in ordinary times, often when employees expect a pay review, and that their pay will increase as a result. But what if this year, the business simply cannot afford to increase what it pays its staff?

A review doesn’t mean an increase

As with most things, it all depends on the wording. The obligation to review salaries is often found in either a policy, or letter of appointment/contract. If the obligation is to be found in a policy, that policy may be subject to variation from time to time. You will need to check your enterprise agreement (if any) to check if any consultation obligations are engaged when you propose to change a policy.

Hopefully, your letters of appointment or contracts of employment make clear that policies are not contractual and can be changed from time to time. You should seek advice if you have any doubt about this.

If the obligation to review your employee’s salary is contractual, then the question is what did you agree to? What factors did you agree would be taken into account? Was it an exhaustive or indicative list? If you agreed to ‘review’ salaries, that may not mean that you have agreed to increase them every year. However, it all depends on the wording. You may have agreed that the ‘review’ cannot result in an employee’s salary being reduced – but it may not guarantee that it rises either.

That was then, this is now

What if you want to change the deal?

Contracts cannot be varied unilaterally. Of course, the parties to a contract can agree to vary its terms and many employees have been prepared to do just that, in order to save jobs that may otherwise disappear. For instance, we have seen employees agree to work fewer hours and/or take a pay cut in the hope that their jobs will be saved. Best practice suggests that variations to contracts should be set out in a Deed of Variation to an existing written contract, but at the very least, some form of written, signed documentation is essential.

But if the employee won’t agree (and trying to force the issue is fraught with danger) and the contract is otherwise valid, you will need advice on what your other options might be, as getting it wrong can be really costly.

Enterprise agreement increases

Enterprise agreements will almost always have clauses that say when employees are due for a pay increase, and by how much.

These cannot be unilaterally changed by employers.

If a business cannot pay the increase it had previously agreed to, then a variation to the agreement will need to be put to employees for consideration and approval by voting it up, in the same way an enterprise agreement is voted up.

The variation then needs to be approved by the Fair Work Commission. Controversially, the Federal Government recently reduced the period during which employees must be given access to any proposed variation to consider before they are asked to vote on it, from 7 days to 1 day. That step is under both legal and parliamentary challenge.

Bonuses

Again, the wording of what you have agreed to as employer is critical. Did you agree to pay a bonus at a certain time provided certain criteria were met? If so, have those criteria been met? Where is the source of this obligation? Is it in a contract? Or in an enterprise agreement?

Promotions

The end of financial year is also the time when employees look for a promotion. There is usually no obligation on an employer to promote a particular individual, but any decision not to do so needs to be referable to objective, reasonable and business-based criteria. In some instances, general protections and discrimination claims risks can exist. As with any action that is ‘adverse’ to an employee’s interest, it is important to be able to prove what the reasons were for the action, to the exclusion of any others – including prohibited reasons.

JobKeeper

If you qualify for the JobKeeper scheme as an employer, you may be able to make JobKeeper enabling directions with regards to matters such as stand down, duties, and location/hours of work.

However, the scheme includes an hourly rate of pay guarantee, so that the employee’s base rate of pay per hour must not be less for hours worked than what would have been applicable if no JobKeeper enabling direction had been given to the employee.

This means that under no circumstances can rates of pay fall below award rates (where applicable); or enterprise agreement rates (where applicable, unless and until a variation is approved by the Fair Work Commission) or contractually (unless and until a variation to the contract is agreed).

Finally…

In all circumstances, any variations to rates of pay or pay increases must be done in a way that is transparent, consistent and predictable and avoids any suggestion of a breach of the Fair Work Act’s general protections provisions, or discrimination laws more generally.

Maddocks has produced guides on legal issues raised by the coronavirus which may be of interest, and we encourage you to share these with colleagues who may also find them useful.

Need advice on conducting your pay review?

Contact the Employment, Remuneration & Benefits team

By Ross Jackson

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