How To: reduce staff pay

Many law firms face tough market conditions and need to reduce costs. This is not easy. Fixed costs such as property, IT and insurance are by their nature difficult to reduce in the short to medium term. Skimping on paper clips and biscuits can only have a limited impact, and in some cases may be counterproductive. Equity stakeholders may be prepared to make some sacrifices, but without reasonable profitability the business will ultimately become unsustainable. Inevitably, attention turns to employment costs.

Redundancy

Redundancy is the most obvious way of reducing employment costs, but it may not always provide a suitable or complete solution. Take a situation where the market has changed so that the price the firm can achieve for a particular area of work has reduced by 25%. Making redundancies will reduce ongoing costs. However, assuming that the employees concerned are reasonably well-utilised, making them redundant will also substantially reduce the firm’s income and the area of work is likely to remain unviable. The problem may not be too many employees, but employees who are paid at a rate that the market can no longer sustain.

Perhaps more often, the problem will be a combination of both issues: employees who are paid at an unsustainable rate; and too many of them.

In either situation, the firm should consider whether it wishes to continue to operate in that area of work. If it does not, there is a clear redundancy situation in that area. If it does wish to continue, but on a viable basis, in the absence of any other cost savings or efficiencies the firm will need to employ people at lower overall rates of pay.

Finding more efficient ways of employing people, such as through improving utilisation, changing working practices and/or more effective use of IT, is likely to be crucial in the longer term for the firm to remain viable in that area of work. However, it is unlikely to be achievable quickly.

The firm should not assume that its existing employees will refuse to accept reduced pay. A cut will obviously not be welcome. However, in the current market many people would prefer to be in work at a lower rate of pay than not be in work at all.

Drawing up proposals

First, the following should be carefully analysed:

• the levels of staffing, pay and benefits that can be sustained by the legal market;  
• the rates of pay and benefits currently available in the relevant jobs market;
• the firm’s current staffing, rates of pay and benefits in the relevant area; and
• the contracts of employment of the existing staff – some contracts give employers a degree of flexibility with regard to pay, but most only allow for increases rather than decreases in basic pay.

From that analysis, proposals should be drawn up, based on a clear strategy for the retention and development of that area of work in the firm. The pay proposals should be as fair as possible and should reflect the value of the work carried out by different levels of staff, including managers. A variable performance-based element could be included, under which the better performers should be able (at least to some extent) to make up for the reduction in basic pay. The strategy should include both short-term cost-cutting measures and longer-term measures to find ways of motivating people while employing them more efficiently and securing profitable new business.

Consultation

No decisions should be made at this stage. It is important that the language used in internal communications (including emails between partners or managers) is couched conditionally, in terms of proposals and aims rather than suggesting that anything has been set in concrete. This is because the proposals should be the subject of genuine consultation prior to any final decisions being made.

Law firm partners and managers can be surprisingly careless with supposedly private internal emails and notes, which may of course become disclosable documents in the event of a legal dispute. It may be because, as lawyers, we are so used to our communications being legally privileged that we are inclined to forget that there is no such protection when acting as the employer.

The line between internal legal advice and disclosable communications between partners or managers may also become blurred. If the firm is using in-house legal advice, the in-house lawyers giving the advice should be clearly identified and all communications with them for the purposes of taking legal advice should be clearly labelled as being privileged, confidential and for that purpose. At the risk of stating the blindingly obvious, the advice should be kept confidential, password-protected and not generally accessible through the firm’s IT systems.

The firm should be aware that if it looks as if, in any period of 90 days or less, 20 or more people will either have to be made redundant or will have to agree a change to their contracts such as a reduction in pay, the statutory collective consultation rules will be triggered. Recent case law suggests that the firm cannot be split up into separate ‘establishments’ for the purposes of this exercise. The rules require the firm to inform and consult with trade union or employee representatives for up to 30 days (45 days where there are 100 or more potentially affected employees). Specific information is required to be disclosed at the outset.

Where one or more trade unions are recognised in relation to the group of staff concerned, the requirement is to inform and consult with representatives of the recognised trade unions. In cases where there are currently no trade union or employee representatives, the employees should be given the opportunity to elect some representatives, with the assistance of the firm.

Ignoring the collective information and consultation requirements (or mishandling the process) can be expensive. Punitive protective awards of up to 90 days’ pay per affected employee may be made by an employment tribunal.

Whether or not the collective information and consultation requirements are triggered, consultation should take place with the potentially affected individuals. This is with a view to reducing the risks of claims and liabilities, particularly for unfair dismissal. Potentially affected employees should be given the opportunity to meet a suitable partner or manager, to discuss the position and their options.

Where reductions in both levels of pay and staffing are proposed, consultation should include consideration of reasonably objective proposed selection criteria, under which the firm would select employees for redundancy. Where cost-cutting is a business necessity, it will usually be considered fair to include non-acceptance of a carefully considered pay cut as one of the criteria.

Some employees will take the position that they cannot afford to take a cut, or to take as severe a cut as is being proposed. That is entirely understandable. However, the firm should make it clear that if that is the case, the employees’ jobs are more likely to be at risk.

Further pitfalls

There is an obvious risk that the more competent (and marketable) employees will be more able to secure jobs elsewhere and so may opt to leave or be made redundant, leaving the firm with the less competent employees. In an effort to reduce this risk, the firm should ensure that any proposed salary cuts are no greater than is necessary and take into account the relevant job market. Some form of incentive arrangement could also be put in place to enable better-performing individuals to earn more. In addition, the proposed strategy for the retention and development of that area of work in the firm should be clearly expressed.

The firm should respond in writing to comments and suggestions that it receives as part of the consultation process. If possible, some of the comments and suggestions should be accepted. For example, it may be possible to adjust the pay structure, to phase in the pay cuts over a period of time or to agree to review pay again at an agreed future stage.

Where, following consultation, it is decided that pay cuts should be implemented, employees should be given the choice to opt for a pay cut or not. Any necessary selection process should then be carried out.  

There is room for debate about whether dismissal for refusing to accept a pay cut would amount to redundancy for redundancy pay purposes. In some cases, it could be argued that there is no reduction in the requirements of the business for employees to carry out work of a particular kind, so that redundancy is not the reason for dismissal and no right to a redundancy payment arises. Such cases would fall within the catch-all (potentially fair) ‘some other substantial reason’ for the purposes of the unfair dismissal legislation. However, I would usually advise that statutory redundancy payments should be made, even where this point is arguable. Otherwise, disputes are more likely to arise.

The firm could consider whether to reduce the risks of claims by offering statutory settlement agreements to departing employees. It is usually necessary to offer terms that are at least slightly more generous than the employees’ contractual notice (or pay in lieu) plus a statutory redundancy payment to persuade them to sign. In addition, the firm will usually be expected to contribute a relatively small amount to cover the legal fees of the employee in relation to the agreement. Some firms may be prepared to incur these additional costs to avoid the costs and disruption of defending claims.

Those employees who opt to accept pay cuts should be required to sign fresh contracts of employment including the new terms.

Dealing with the impact on people’s lives can be hard for all concerned, but it may be a necessary part of facing up to the reality of new market conditions.

Robert McCreath is a partner in specialist employment firm Archon Solicitors Ltd