Navigating the state's wage subsidy scheme and an employer’s ability to reduce pay

As employers try to chart their route through the current and inescapable business continuity issues that the current Covid-19 crisis presents, management teams are searching for methods to reduce cost.

Unfortunately, the first overhead under the microscope for decision-makers is often employee pay.

Notwithstanding that all employers will hope for a motivated and supporting staff throughout this crisis, reducing pay across the workforce may be inevitable, and while undoubtedly a serious burden on employees, it is a desirable alternative to short time, lay-offs and redundancies.

Thankfully, on 24 March last the Government announced a suite of economic stimulus packages to provide financial support to employees, the self-employed and welfare recipients, including an emergency 12-week wage subsidy scheme aimed at employers, costing an estimated €3.7 billion.

The purpose of the emergency subsidy scheme is to support employers in retaining staff, avoid pay reductions and discount any proposals to apply short time, lay-offs or redundancies within a business, in the hope that employment relationships can endure at least for 12 weeks to facilitate an immediate “bounce back” of the economy.

Employers are encouraged to facilitate employees by making best efforts to maintain as close as possible to 100% of employee’s income, for the period of the scheme.

To qualify for support under the emergency scheme, employers will have to demonstrate a reduction in turnover of at least 25%, but the exact details of how such demonstration shall be evidenced have been criticised.

Further, the scheme does not apply to all employees equally but instead is structured as a tiered system where the top earners will not be supported. Employers are encouraged to “top-up” employees pay beyond the caps set out below.

The tiers of the scheme have been briefly detailed by Government under which the Exchequer will pay employers:

• 70% of the employee’s net weekly pay to a maximum of €410 per week where the average net weekly pay is less than or equal to €586;
• A maximum of €350 per week where the average net weekly pay is greater than €586 and less than or equal to €960; or
• Nil where the net weekly wage of that employee is in excess of €960 per week.

In terms of the small print, Revenue has set out specifics of the scheme which are important for employers to note but not specifically mentioned by Minister on Tuesday:

• This scheme replaces the previously announced Employer Refund Scheme;
• Employers shall make this special support payment through their normal payroll process;
• Employers will then be reimbursed for amounts paid to employees and notified to Revenue via the payroll process;
• The reimbursement will, in general, be made within two working days after receipt of the payroll submission; and
• Employers PRSI will not apply to the subsidy and will be reduced from 11.5% to 0.5% on any top-up payment.

Notwithstanding the Government’s proactive approach to addressing the likelihood of employee pay reductions, some employers may still need to reduce costs further to survive.

So can an employer, specifically when faced with a global economic downturn, reduce the pay of employees?

In short, without the agreement of the affected employee or the employee’s contract of employment allowing for such a reduction, there is considerable risk that the employer will be in breach of the Payment of Wages Act 1991 and the employment contract itself.

In any event, should an employer decide to reduce an employee’s pay, the following steps are suggested to mitigate risk:

• Demonstrate that all alternatives (short time, lay-offs, redundancies and even closure) have been considered but that to protect the future of the business a reduction in pay is the most reasonable option. The reduction should be discussed and approved at board or management level with a detailed paper trail evidencing the reasons for the decision and why alternatives were not chosen;
• Review the contract of employment for each affected employee and identify if the employer has the right to reduce pay (or at least vary the terms of employment) in accordance with the terms set out;
• Consult with the affected employees and seek their consent to the reduction of pay or an amendment of their employment terms. It’s important to remember that transparency will be appreciated by employees. If management can demonstrate the potentially catastrophic consequences of failing to cut costs, it is often the case that employees will agree to a pay reduction, particularly where the alternatives are likely to be lay-off or redundancy;
• The employer must act reasonably in all the circumstances. This is a key point if the employer is subsequently faced with a claim from a disgruntled employee which will be heard by the Workplace Relations Commission. Documenting each step of the process is essential and while not a defence to a claim, a clear and carefully considered approach ideally incorporating the employee in the decision making process is important;
• Clearly communicating that, specifically in the context of this Covid-19 crisis, the proposed reduction of pay is temporary and by working together the aim is to protect the future of the business for everyone’s benefit; and
• Management participating in, at least, the same level of pay reduction as a sign of intent that the entire business is contributing to the salvage strategy.

The unprecedented situation facing society is said to be the challenge of our generation and the consequences for employers and employees are yet to unfold.

A temporary reduction of pay may be an extremely difficult decision for employers to make but when faced with the alternatives of reducing staff numbers for an indefinite period it may be the most “reasonable” choice.

The emergency wage subsidy scheme should see a decrease in the number of employers affecting pay reductions, short time, lay-offs or redundancies but it remains to be seen if employers will “top-up” the scheme to protect employee wages at 100% as intended by Government.

Shane Costelloe is an associate solicitor in Holmes O’Malley Sexton‘s corporate and commercial department.

Get our Daily Briefing with the morning’s most important headlines for innovative Irish businesses.