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Employers Cannot Reduce An Employee's Salary Without Agreement

Published 14 Feb 2013

In a recent determination involving Two Degrees Mobile Limited (2degrees) and its founder Mr. Simon Edwards (Mr Edwards) the Employment Relations Authority (the Authority) determined that an Employer cannot unilaterally change an employee’s salary without his or her consent.

Mr. Edwards received an annual salary of $350,000 until early 2008 when, upon conducting a benchmarking exercise, 2degrees decided to reduce it to $200,000. Therefore, 2degrees drafted a new employment agreement which was then given to Mr Edwards to review and sign. The change was implemeted by mid 2008.

Mr Edwards did not sign or return the amended employment agreement, and when questioned by 2degrees, he said that he was not happy about the reduction in his salary. In spite of this, 2degrees implemented the new salary rate from mid 2008. Mr Edwards' raised no immediate concerns, and continued to receive the reduced salary for more than one pay period. However, in August 2008, Mr Edwards raised objections to accepting the terms of the new agreement and the reduced salary rate.

The Authority had to decide whether Mr Edwards' conduct in not immediately objecting to the new agreement, and by continuing to receive the salary at a reduced rate over a number of pay periods, amounted to consent to the new agreement.

The Authority determined that Mr Edwards’ conduct did not amount to consent. It was also determined that the fact that Mr Edwards refused to sign the agreement was in fact a significant factor. It was held that a reasonable person would consider that Mr Edwards' disagreement with the new terms was conveyed by his refusal. Further, 2degrees’ continuance to pay the lower salary did not create an agreement with Mr Edwards to the new terms.

Mr Edwards was entitled to his full salary of $350,000 (plus 5% interest) as a term of his employment with 2degrees. The Authority also ordered 2degrees to pay a $4000 penalty for breach of Mr Edwards' employment agreement.

It is therefore imperative for Employers not to unilaterally alter employment agreements. It is advised that employers go through a consultation process with the respective Employee(s), to discuss and agree on the change. This is naturally followed by a memorandum signed by both parties (a letter of variation) agreeing on the change. This is good practice on the Employer's behalf and enables them to keep accurate and up to date records.

We urge Employers contemplating any change to an Employee’s terms and conditions of employment to contact us on 0800 15 8000 to discuss the changes prior to approaching their Employee.