Reducing an Employee’s Pay or Hours

What does it mean when you reduce an employee's pay or hours?

The current pandemic has seen a lot of confusion for employers as well as for employees about what happens when hours or pay are reduced.

So, first things first, in general terms, an employer cannot reduce an employee’s pay or hours without first consulting with them and getting their agreement.

In this post, I want to cover what it means for payroll when you reduce pay or hours for an employee (with the employee’s agreement). It is not as straightforward as many employers and HR believe and it is impacting on the work we are doing in payroll.

Just to make it clear, the examples I am using are regarding minimum entitlement by law. The employer can always do better (if that’s possible in the current environment we are all facing).

I have had so many queries that start with “management has decided to pay 80% of what we usually pay our employees during lockdown”.  My first question is always has this been agreed by the employee and 50% of the time the answer is NO. It now means the employer is running around trying to get that agreement in place (after the fact).  And, if the employee does not agree, then the employer must pay what has been agreed. If there is no way this can be done, even if the wage subsidy is to be applied, it could mean the only option after everything else has been looked at is redundancy (there is a process to follow here).

Now for the other 50% of employers that did get agreement from employees to reduce pay and or hours, as this can be done several ways, there is a second question that needs to be asked: what have you agreed?  I will use an 80% reduction to explain this:

  • Have you agreed to reduce the employee’s pay by 80% only? 
  • Or, have you agreed to reduce the employee’s pay and hours by 80%? 

If you have agreed to reduce hours, what has been agreed?

  • The employee normally works 40 hours per week, Mon to Fri 8 hours per day and this is now reduced to 32 hours, Mon to Fri 6 hours per day. 
  • Or, the employee normally works 40 hours, Mon to Fri 8 hours per day and this is now reduced to 32 hours, Mon to Thurs 8 hours per day.

For payroll, if the employee is at home (lockdown) and cannot work and there is an agreement to pay 80% of what they normally would get paid (the wage subsidy can be used for this), this is straightforward as it is a clear reduction in pay and is not about changing hours.

If there is any agreed change to hours, then it is an issue for payroll because a week is by agreement and that means the week has now changed from the requirements of the Holidays Act.  

So, using the previous example, if the week has now been reduced to 80% (32 hours), then that means the week for annual holidays is now an agreed 32 hours per week.  For payroll, any entitlement earned (not accrual, 8%) would need to change to reflect the new week. So, 3 weeks of entitlement based on a 40-hour week (120 hours) would now become 3 weeks of 32 hours (96 hours).  

If the employee applies to take annual holiday (entitlement), or if the employer uses Section 19 to get the employee to take annual holiday entitlement (giving them not less than 14 days’ notice) after agreeing to the change in the week, this is the impact on the employee.  In payment terms, there should not be a real change as AWE will still be based on the week going back 52 weeks (the longer the change, the more impact there will be), but OWP Section 8(1) will now reflect the new agreed week.

Now, changing hours will not just affect annual holiday entitlement. If you change the day (hours in a day) or the days of the week, it will also create some issues for payroll. Using the example from before:

  • The employee normally works 40 hours, Mon to Fri 8 hours per day and is now working 32 hours, Mon to Fri 6 hours per day. 
  • Or, the employee normally works 40 hours, Mon to Fri 8 hours per day and is currently working 32 hours, Mon to Thurs 8 hours per day.

If the employee agrees to change from an 8-hour day to a 6-hour day, then that means if they go sick RDP is based on the 6-hour day and what would have been paid on that day.  This also has an impact if the day is a public holiday. And so if the employee is at home but can’t work, then the day will be a public holiday taken at RDP based on the 6-hour day. 

There have been a few lawyers stating as they are at home during the lockdown, they would not get the public holiday. I disagree based on what has been agreed between the employer and employee. If it has not been agreed upon, then I would always provide the benefit to the employee. (It is up to you whether to do this, but I do believe it is on the employer to clearly define the agreement and to then get the employee’s consent and not rely on the gray areas where lawyers live). 

Now, the other issue is when the days agreed have changed by agreement. Using the example above instead of 5 days, it is now agreed to reduce working to 4 days (instead of Mon to Fri, days worked are now Mon to Thurs).  For payroll, it means if there were a public holiday on a Friday that is no longer a working day for the employee, and they would not get paid for a public holiday taken.

In conclusion, it’s not that simple for payroll to hear that an employee will be getting paid less. Payroll needs to know what has been agreed with an employee and how it will be applied in payroll terms. However, the main issue is the people making the agreement for the employer have not taken payroll’s needs into account.  It is up to payroll to educate them on what we need to ensure the employee is paid correctly under the new agreed terms.

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