Companies state the stark choice: sacrifice salary or jobs will go

Chris Menon reports on the legal position of workers when recession-hit employers make the case for a pay cut

It's a stark choice: take a pay cut or face losing your job. And it's one that more and more Britons may have to confront as recession grips the country.

Employees at JCB, the construction-equipment manufacturer, were one of the first groups forced to make this choice in the light of the credit crunch. In effect they have taken pay cuts of approximately £200 a week by reducing the hours they work, in an attempt to stave off redundancies.

Gordon Richardson, on-site convener for the GMB trade union at JCB, explains: "Back in August 2008 we had our overtime cut, then in October we agreed to cut the basic working week from 39 to 34 hours, starting in November. We did this as the company needed to reduce costs by 19 per cent or make massive redundancies. By taking a temporary pay cut until the end of March, we reduced the num- ber of redundancies from 510 to 178."

Late last year, CLSA, the brokerage arm of Crédit Agricole bank, asked its 500 top staff to say whether they would accept a 15, 20 or 25 per cent salary cut in 2009. Similarly, accountancy giant KPMG recently wrote to all UK staff inviting them to apply for a four-day week with the fifth day unpaid, or extended leave with a 30 per cent cut in their remuneration.

According to a recent survey of employees, carried out by the Chartered Institute of Personnel and Development (CIPD), 9 per cent of construction staff, 6 per cent working in finance and 5 per cent in the hospitality field have either had their hours reduced or their pay cut, or both. Meanwhile, a British Chambers of Commerce (BCC) survey has shown that 9 per cent of firms are gearing up to reduce pay.

Charles Cotton of the CIPD believes worse lies ahead for employee remuneration: "Companies will cut salaries to head off redundancies. Another, even more likely option is to freeze pay altogether [in effect a pay cut when inflation is taken into account]."

Even if you escape any damage to your wallet, the days of an almost automatic upgrading of worker salary may be drawing to a close, particularly as inflation – to which many pay rises are pegged – is predicted to move to zero later this year. No wonder the BCC found that 43 per cent of companies don't envisage approving a staff pay increase this year.

Meanwhile, Acas, the independent conciliation service, reports a dramatic increase in queries from both employers and workers on changes to contracts of employment, many relating to reductions in working time as an alternative to redundancy.

So what are your rights as a worker if faced with the prospect of a pay cut?

According to the legal firm Thompsons Solicitors, an employer cannot unilaterally impose a pay cut. Rakesh Patel, its head of employment rights, explains: "If they did, it would amount to a breach of contract and would also potentially amount to an unlawful deduction of wages under the Employment Rights Act 1996. Deductions may be made only if authorised by a relevant provision in the worker's employment contract itself or by a statutory provision, or if the worker has agreed in writing to the making of the deduction. In the event of an unlawful deduction, a worker can take the employer to tribunal."

Of course, it is far more likely that an employer will seek to persuade a staff member that a pay sacrifice is required in order to safeguard their job. Mr Patel advises: "If it is clear that without the workforce taking a pay cut, employees stand to lose their jobs, it may be sensible to agree a reduction but ask for something in writing – that the cut is only temporary and for a fixed period and, most important, that the reduced pay does not amount to a permanent variation of contract but only for the fixed period."

Still, employment solicitor Graham Darwood of City firm LLG Law explains that should a company threaten you directly with redundancy unless you take a pay cut, it won't be acting lawfully since "an employer either makes a post redundant or not". He adds: "This could also raise other issues such as constructive dismissal and, possibly, discrimination."

There are alternative ways in which an employer can reduce staff costs – outside a pay reduction.

"I have seen an explosion in employers cutting back or withdrawing benefits such as bonuses, share options, share-save schemes, private medical cover and life assurance. This could be viewed as an indirect pay cut," Mr Darwood explains.

"Generally, an employer cannot do this if the benefit entitlements are contractual. But beware, because benefits such as medical insurance and life insurance are usually subject to the terms of these schemes, and employers often renegotiate less favourable terms with the providers. In these circumstances, there is often little that can be done."

The balance of power clearly lies with employers, as Stephen Overell, associate director of The Work Foundation, an independent research consultancy, points out: "Employers have seldom been quite so free to call the shots in the workplace without being challenged. While unions can rarely stop job cuts, they can negotiate about the circumstances and terms in which redundancies are made. This influence also extends to negotiations over pay and benefits. In the current economic situation, that certainly makes things easier for employers."

However, Mr Overell adds that companies which do take advantage of workers during this downturn run the risk of seeing them walk out of the door when the economy improves.

'I've had my pay cut by £200 a week'

Craig Burton, 46, works as an engineer at JCB's plant in Rocester, Staffordshire.

"The factory was booming last year and the year before, and I was getting paid for 55 hours a week," he says. "But since August I've had my pay cut by £200 a week due to the loss of overtime and the reduction in the working week from 39 to 34 hours. This has meant a drop in my weekly income of 25 per cent."

As might be expected from such a high cut in take-home pay, things are tight, and Craig is "just keeping my head above water at the moment". And he has substantial commitments. He pays maintenance to an ex-wife and had to take out a big mortgage following the split in order to provide a lump sum. He remarried recently and now has two stepchildren to support.

Craig points out that some colleagues have been hit even harder, having their weekly wages reduced by 40 per cent. "Many don't have any savings to speak of and are experiencing genuine hardship."

Still, the real fear is unemployment. Since the workforce agreed to the pay cut, there have been two rounds of redundancies.

"You can see the economy is in trouble and many are losing their jobs," adds Craig. "People here think that at least they have still got a job, but we're all fearful about the future."

He is also worried that two of his grown-up children, who are also employed at the JCB plant, may be made redundant.