Pay cut or redundancy: which would you choose? It's a tough decision, but it's one that many employees are grappling with as the recession really starts to bite.
A recent survey of employees carried out by the Chartered Institute of Personnel and Development (CIPD) found 9% of construction workers, 6% of employees in finance and 5% in the hospitality industry are working fewer hours, have taken a pay cut or both. A British Chambers of Commerce (BCC) survey confirms the trend, showing 9% of firms are expecting to reduce pay.
Workers at Honda's factory in Swindon, for example, are being asked to vote in favour of a plan to sacrifice pay to safeguard 490 jobs. Under the deal, employees will take a 3% cut in earnings for 10 months. Managers will suffer a bigger hit of 5%. In return, workers will receive a bonus of six additional days of paid leave. The results of the ballot are due by the end of the week.
Would you rather take a pay cut or risk redundancy?
The car industry has been hit especially hard by the recession. Staff at the UK factories of carmaker Toyota agreed on April 1 to a 10% reduction in pay and working hours that will last for one year. Vauxhall employees are also accepting a cut in wages and hours as the parent company General Motors struggles to stave off redundancies.
Other industries, particularly manufacturing, are not immune. At the end of last year, thousands of workers at JCB's British assembly plants voted in favour of a pay cut to prevent 350 staff losing their jobs. Corus, the steel firm, is also in negotiations with staff over the possibility of fewer hours or pay cuts during these difficult economic times.
It's a similar story at Leggett's Transport, a Suffolk haulage company, where staff opted for a 10% pay cut in a bid to stave off the threat of redundancy.
Then there's Roger Bullivant, an engineering company, which has announced the loss of up to 95 more jobs. All staff have also been asked to take a 10% drop in earnings.
Are you at risk?
It's not just blue-collar workers who are affected. Staff at Bartle Bogle Hegarty, the advertising agency, are to take one day of unpaid leave a month, which works out as a 3.5% pay cut. Thomson Airways has also agreed with Balpa, the pilots' trade union, that employees will take a 5% pay cut to avoid any compulsory redundancies.
"Many employers have been looking at ways to cut employment costs, including freezing or cutting pay. By and large trade unions have been willing to support them, recognising that most people would prefer to stay in a job, even on reduced hours or pay," said Mike Emmott, employee relations adviser at the CIPD.
Of course, a pay cut is not always a guarantee of job security. Often, the reduction in salary will only limit or postpone redundancies rather than remove the threat entirely.
Make yourself redundancy-proof
What if it happens to you?
Would you agree to a drop in pay in the hope of safeguarding jobs? It's a tough decision. If, for example, your employer offers a generous redundancy package and you feel confident you would find another job, redundancy might be more attractive than a pay cut.
You might also consider the future prospects of the business. Do the proposed pay cuts signal worse to come? If there is a risk that the company might eventually go bust, it might be better to cut and run with your redundancy package.
But before you decide, you should know your rights.
Could you cope if you lost your job?
Do I have to accept a pay cut?
No. If a firm imposes a pay cut, it leaves itself open to claims for unlawful deductions from wages, breach of contract and constructive unfair dismissal. The employer should consult with staff about the proposal, explaining why it is necessary and the alternatives.
How long will the pay cut last?
There should be a limit. A typical time frame might be six months, but it could be as long as a year. Experts advise employees to agree a time limit at the outset and to get it in writing.
Will it affect my redundancy pay?
Redundancy pay is linked to earnings and there is a suspicion that some employers are keen to cut pay in order to cut their eventual redundancy bill. However, if a pay cut is temporary it should not affect any redundancy package. Just make sure this is agreed in writing.
What about my pension?
If you are a member of a final salary scheme your pension will typically be based on your salary at the time you retire or leave the firm. So, if you take a pay cut and then leave the company or retire, your pension will be smaller.
The same principle applies to money purchase pensions, where you, and often your employer, pay an agreed percentage of your salary into a pension fund. If your salary is lower, the percentage is lower, which obviously has an impact on your pension. Experts advise you should insist any pension contributions remain tied to your original salary before you agree to a pay cut.
Will a pay cut lead to a loss of benefits?
If the pay cut is linked to a reduction in hours, it could affect your entitlement to the Child Tax Credit or the Working Family Tax Credit. You should find out about any impact on your working hours and benefits before you agree to a pay cut. And if your hours go down, you should tell HM Revenue & Customs immediately.
You should also check with your employer about the possible effect of a pay cut on your death-in-service benefits.
The safest places to work during the recession
I have an income protection policy. Should I reduce the level of cover?
Income protection insurance is designed to pay out a regular income if you are unable to work due to sickness, injury or redundancy. It's probably unnecessary to alter your insurance because the money you would save would make it hardly worthwhile, especially if the pay cut is temporary.
You would also most likely be asked to take out a new policy, which would include a three-month moratorium when no claims would be paid. Any change might also alert the insurer to potential problems with your employer, which could affect your premiums or level of cover.
Will a pay cut affect my mortgage?
The drop in salary should not have any impact on an existing home loan, as long as you can still afford the monthly payments. If you take out a new mortgage after the pay cut has been agreed, it could reduce the amount you can borrow.
Can I take on a part-time job to plug the gap in my income?
You would have to ask permission from your employer. If you hold a senior or commercially sensitive role, it's unlikely they will agree.
If you need any further information or advice, contact your union or speak to Citizens Advice. If your case is particularly complicated, you might want to make an appointment with an employment lawyer.
10 ways to earn £100 more a month
Related links
Would you rather take a pay cut or risk redundancy?
Your rights if you are let go
Make yourself redundancy-proof
Could you cope if you lost your job?
Follow us on Twitter
