The issue of a reduction of pay as compared to deductions from pay has been much disputed over recent years. In essence, it has been argued that the Payment of Wages Act only regulates “deductions” and therefore an employee cannot claim for wages owed under that Act where their pay has been “reduced”. This was the subject of a very important decision of the High Court this month which has brought some clarity to the area (Earagail Eisc Teoranta -v- Doherty & ors [2015] IEHC 347). Reductions -v- Deductions The Payment of Wages Act is quite clear when it states that it regulates “certain deductions made… by employers” and at no stage does it refer to “reductions”. If you were to take the ordinary meaning of “deduction” from pay then no doubt you would conclude that this related to a one-off deduction. If, however, you were to say that an employee’s pay was reduced then no doubt you would conclude that this was something more permanent rather than a one-off incident. Why was this Important? This issue became really important when the High Court in 2010, in a side comment, mentioned in the case of McKenzie -v- The Minister for Finance and Others [2010] IEHC 462 that the Payment of Wages Act “has no application to reductions as distinct from ‘deductions’.” This comment, which concerned a case where the employer had reduced motor travel and subsistence payments, was very significant in that it meant that employees may not be able to claim for monies owed under that Act where the employer reduced their pay. As such, employers could seek to reduce an employee’s pay by, for example, 10% and the employee could not claim for remuneration under the Act. Ultimately, this would mean that employees would have to take expensive civil court breach of contract claims instead. Indeed, the EAT applied the High Court’s comments in Santry Sports Clinic -v- 5 employees (PW251/2011) in deciding that employees could not claim remuneration after the employer had reduced their pay by 8% without agreement. Recent Developments: Earagail Eisc Teoranta -v- Doherty & ors [2015] IEHC 347 This issue came up for consideration recently in this case where the company had decided to implement a 10% pay cut in May 2011. The company had sought agreement from the employees and when this wasn’t forthcoming they introduced the pay cut anyway on the basis of a contractual policy which stated as follows: “From time to time these terms and conditions of employment may need to be revised, to take account of new circumstances. Such revisions may be brought about by legislation, employee request, or management’s requirements, and will be discussed with employees as necessary.” The employees took a claim to the EAT where it was decided that the company could not unilaterally reduce the employee’s pay on the basis of that contractual policy. The EAT went on to state that the Payment of Wages Act requires prior written consent from the employee and that this had not been secured and ultimately awarded compensation to the employees on the basis that the pay cut was an unlawful deduction. This may be deemed a surprising decision from the EAT considering that the same tribunal had determined the opposite in the Santry Sports Clinic case mentioned above where they stated that such a pay cut was a “reduction” and thus the employees could not claim compensation under the Act. High Court Appeal The employer appealed the EAT decision to the High Court and their decision is certainly worth noting by all employers. Firstly the High Court expressly determined that the previous McKenzie case only dealt with travel expenses and subsistence and that there was no reason why the Payment of Wages could not regulate pay reductions as compared to pay deductions. Therefore, the High Court has firmly closed the door on the argument that an employee cannot claim for compensation under the Payment of Wages Act on foot of a pay reduction. However, secondly the High Court went on to state that the EAT made an error in the law by stating that prior written consent was required for any pay reduction. The Court noted that the Act states that an employer may make a deduction where “(b) the deduction (or payment) is required or authorised to be made by virtue of a term of the employee's contract of employment included in the contract before, and in force at the time of, the deduction or payment, or (c) in the case of a deduction, the employee has given his prior consent in writing to it.” On the basis of this, the Court essentially stated that the Act permits an employer to deduct pay where it is authorised by a term of the employee’s contract “or” where the employee has consented to it. The word “or” is essential here as it means one or the other is sufficient to make the deduction and that you don’t require both. As such, the High Court noted that the company did have a policy which permitted changes to be made to contractual terms as noted above. What Will Happen from Here The High Court has sent the case back to the EAT to reconsider its decision in light of the above findings from the High Court. This will means as follows:
- That the EAT are correct in saying that the Act governs reductions and deductions;
- However, the EAT were incorrect in stating that prior employee consent was required;
- The EAT will now have to definitively consider whether or not the contractual term was sufficient to permit the pay cut to be made without agreement.
- The EAT may ultimately conclude that the reduction still wasn’t permitted but is also distinctly possible that they will find that the employer was permitted to make the reduction.
Conclusion and Learning Points It is difficult to determine where the case will go from here. Whilst the reduction -v- deduction argument has been firmly put to bed, it has opened up a new issue as to whether variation clauses in an employment contract are enough as of themselves to justify a unilateral pay cut. Employers are strongly advised to keep an eye out for updates in this respect. The EAT will issue a new decision on this matter which may again end up before the High Court. However, one thing is clear, once this case has run its course we will have very definitive findings as to when an employer can and cannot reduce an employee’s pay with or without employee agreement. If you have any questions on this article then please do not hesitate to contact our 24 Hour Advice Service on 01 855 50 50.
