Funding payroll can be challenging if sales have slowed. A redundancy exercise will be costly, so can you cut salaries instead? Are salary cuts legal in Kenya?
A struggling economy is usually reflected in the travails of businesses, such as slow sales and a suddenly bloated wage bill. Payroll costs can seriously strain a company that is not generating enough revenue.
Retrenching workers is usually a last resort because it is costly and disruptive. Reducing salaries is a less dramatic cost-cutting measure that will relieve the strain on your cash flow and allow you to recalibrate your business.
However, cutting salaries will not be easy. Labour and employment rights are a legal minefield that requires careful navigation.
The moment your staff gets wind of your intention to cut salaries, they are considering their legal options, firing the web browsers on their phones to search 'Can an employer reduce your salary in Kenya?'
This article considers the legal options for reducing workers' salaries for entrepreneurs struggling to pay workers and keep their heads above the water.
Are salary cuts legal in Kenya?
In Kenya, employers can lawfully reduce salaries if affected employees consent to the salary adjustments. Salary reductions are permissible only with the employees' explicit agreement.
Employees cannot be compelled to accept a salary reduction without their consent. Any decision to decrease salaries should follow constructive dialogue and mutual agreement between the employer and the employee.
If you unilaterally reduce salaries, employees may quit, citing a hostile working environment, and then sue you for constructive unfair dismissal.
So, while the law provides many protections for employers, it also has safeguards for protecting workers against the unfair reduction of wages and other forms of mistreatment at work.
When is a salary cut illegal?
Unless employees voluntarily agree to a wage reduction, employers cannot implement salary cuts, even in situations where the business is facing financial difficulties.
The inability to pay wages or even sustain operations is a reasonable excuse for reducing salaries, but it still requires the consent of your workers.
You will struggle to negotiate pay cuts with employees whose salaries are protected by collective bargaining agreements and employment contracts that specify guaranteed hours and pay.
Labour laws are most stringent against employers' unilateral actions. Some employers use their power to bully workers into accepting unfavourable conditions of service.
Below are some of the actions employers may use to illegally cut salaries that the law protects workers against:
1. Reducing salaries retroactively.
No matter the circumstances, reducing salaries for work already completed is both morally unfair and illegal. If both parties agree, any salary reduction can only apply to future work and cannot be retroactively applied.
2. Reducing salaries as punishment for protected activity.
Employers cannot lower employees' salaries out of spite. You cannot punish employees by reducing their pay, especially for engaging in a protected activity or exercising their rights.
For instance, it is illegal to reduce an employee's salary because they are taking an extended leave they are legally entitled to, like maternity or paternity leave. Another instance is where an employee is asserting their right to overtime pay.
3. Discriminatory pay reductions.
It is illegal to reduce pay for employees of a specific gender, race, religion, age, or ethnicity while keeping others doing the same work on the old salary. Such an action is discriminatory and, therefore, illegal.
4. Reducing salaries below the minimum wage.
You cannot reduce salaries below the lowest wage permitted by law, which in Kenya is 15,201 KES. Workers earning salaries below the minimum wage aren't gainfully employed as their salaries cannot meet their basic needs. It is an exploitative employment contract that the law cannot ratify.
What should you do if employees resist salary reductions?
Every employee looks forward to the day when their salary is reviewed upwards, not downwards. For obvious reasons, a salary cut is unpleasant, so your workers will not readily accept it.
However, if faced with redundancy and unemployment because the company cannot sustain operations, some employees will grudgingly accept a pay cut. But there will be holdouts who will dig in and resist any pay reductions.
If your proposals for pay cuts face resistance, there are several options you can consider. Let's explore those next:
i) Restructure or downside the business and eliminate some job roles.
If you cite inflation pressures, falling sales, and other economic factors beyond your control to justify pay reductions, consider restructuring or downsizing the business to eliminate unessential roles.
You can then offer the affected employees new roles with reduced responsibilities and—crucially—lower salaries. Employees are likely to accept the lower salaries if it is a genuine exercise to save the business from collapse.
ii) Propose a redundancy exercise.
Sometimes, business survival may come down to job or salary cuts. If that's how bad the situation is for you, sit down with your employees and lay your remaining options on the table. Most people would rather earn less than be unemployed.
iii) Terminate resisting employees.
One option you may be reluctant to take but may be forced to take is terminating employees who resist your proposed pay reductions.
However, this option could be costly, especially if the employees are on payment employment contracts.
In Kenya, the notice period for redundancy is one month, meaning you have to pay the employees one month's salary if you want to terminate them immediately. That's on top of their redundancy pay and any severance benefits they are entitled to under their contracts.
For employees whose contracts were set to expire, you can serve them their contractual notice. If you still need their services, you can offer them the same job at a reduced salary.
Build employee loyalty and reduce costs sustainably with efficient salary disbursements.
The business environment is dynamic. As it evolves, it often produces periods of difficulty that require collective belt-tightening. Therefore, it helps to build a culture where management and staff confront and solve challenges together.
If you and your employees mutually desire to see the business succeed, finding common ground with tough decisions like salary cuts is easier.
Building that culture of collective ownership and togetherness takes intentional efforts on your part as the employer. One of the key efforts in this regard is ensuring timely and accurate disbursement of salaries, which fosters trust and loyalty among your employees.
A salary disbursement solution like Intasend streamlines salary payments. For a business grappling with poor sales and unsustainable costs, an automated disbursement solution is crucial. It not only saves time but also reduces disbursement costs significantly.
Those savings add up, allowing you to make smaller salary cuts than you would have.
Sign up here to streamline payroll disbursement, save time and money, and boost employee morale with Intasend.
