31 Oct 2012
Unilateral Salary Cut Costly for Employer
A recent determination from the Employment Relations Authority has highlighted the risks of reducing an employee's salary without their agreement.
In Edwards v Two Degrees Mobile Limited, Simon 'Tex' Edwards, founder of 2degrees mobile, had been receiving a base salary of $350,000 per annum until early 2008, when a benchmarking exercise was undertaken and 2degrees mobile determined that a salary of no more than $200,000 was appropriate for someone in Mr Edwards' position. A new employment agreement was drafted and given to Mr Edwards to review and sign.
Mr Edwards never signed or returned the new employment agreement, and when questioned by 2degrees, he said that he was not happy about the reduction in salary.
Despite this, 2degrees implemented the new salary rate from June 2008. Mr Edwards' raised no immediate concerns with this, and received the reduced salary for three pay rounds. In August 2008, Mr Edwards said he was not prepared to accept the terms of the new agreement, especially the reduced salary.
The question for the Authority was whether Mr Edwards' conduct in not immediately raising particular objections to the new agreement, and by receiving the reduced salary over a number of pay periods, amounted to an assent to the new agreement.
The Authority found that there was no assent, and determined the fact that Mr Edwards refused to sign the agreement was significant. The Authority found that a reasonable person would consider that Mr Edwards' refusal conveyed his disagreement with the new terms. Further, the action of 2degrees continuing to pay the lower salary did not create an agreement with Mr Edwards to the new terms.
The Authority held that Mr Edwards was entitled to his full salary of $350,000 since 2007 (plus 5% interest) as a term of his employment with 2degrees. In addition, 2degrees was ordered to pay a $4000 penalty for breach of Mr Edwards' employment agreement.
This case serves as a timely reminder that employers cannot unilaterally alter terms of employment. Express consent to any variation of terms should be obtained from an employee before the variation is implemented.
The Authority's determination regarding Mr Edwards' salary reduction is separate to another dispute regarding 2degrees' proposal to disestablish Mr Edwards' position. On 1 August 2012, this claim was removed to the Employment Court, and it is anticipated it could be a test case in relation to whether the Employment Relations Authority and Court can look behind an employer's commercial decision to restructure for the purposes of s103A of the Employment Relations Act. We will keep you updated with all developments on this issue.