What does reduction of pay mean?
You are able to reduce an employee’s pay if they agree to do so. Even in time’s of extraordinary circumstance like COVID-19, you and your employee must reach an agreement regarding the reduction, and you’ll need to get that agreement in writing. If an employee’s pay is reduced illegally, you can face up to $12,000 in fines.
Reasons for reducing pay.
If you’re going to reduce an employee’s pay, you must make sure the reasons are ethical. If your business needs to cost-cut due to a business downturn related to COVID-19, that would be seen as absolutely reasonable – especially if the reduction is only temporary.
Considerations when determining how much to reduce pay by.
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.
It’s importnat to remember that Awards, enterprise agreements, The Fair Work Act (2009) and any annual performance review terms govern your capability to reduce an employee’s pay, even in these extraordinary times.
What Rules do you 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 pandemic’s like we are experiencing, many businesses are expected to employ various measures, such as flexible working arrangements, cutting hours, and decreasing payment, to retain as many jobs as possible.
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 This must specify the amount of the deduction and may be withdrawn in writing by the employee at any time.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 minimum wages and minimum entitlements. Awards are dependant upon the industry an employee works in, and the specific job they do in your 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.