Solicitor loses Covid-19 pay cut case

Just over one year ago today DKLM LLP, a solicitors firm, appointed Hilesh Chavda as its new Head of Private Client. The appointment would, according to the firm’s website announcement on 19 October 2019, “help capitalise on the firm’s successes with high net worth individuals and entrepreneurs in the UK and international markets.”

He was not to stay there long as it appears he obtained a new position just four month’s ago. Upon his departure he launched a unlawful deduction of wages case concerning the pay he would receive during his notice period. Somewhat astonishingly given the general delays within the employment tribunal within that timescale the claim has been submitted, defended, listed for hearing, heard, and decided since then and the present time. So, if nothing else HMCTS deserves credit for that swift conclusion to the case.

As a first tier employment tribunal case it has no particular authority and the judgement is a short one but given the case has been reported upon elsewhere I took a look at the judgement.

The facts of the case are relatively simple and are I am sure replicated across legal employers across the country. Covid-19 has had a significant impact upon the economy and many firms have struggled to remain viable enterprises. In the face of the financial impact upon the company all employee’s were asked(?) to accept a reduced salary of 80% of their normal salary. Mr Chavda was in fact agreed a 40% reduction but he alleged that when he gave in his notice his pay should have been for the full 100% – the employment judge disagreed.

At the beginning of April as the lockdown was in full swing the claimant was asked to reduce his salary by 40%, apparently because he was told if he did not he would be dismissed. He agreed. The employer wrote to the claimant on 3 April 2020 saying “I note you have agreed to accept a 40% reduction in salary …this is to take effect from 1/4/2020 until further notice and I would be obliged if you would acknowledge receipt of this email…” On 6 April 2020 the claimant responded making clear his agreement was only in respect for April only.

A clarification, but too late

Later on the decision concerns whether there was a timely review of the reduction and, if not, whether the employer could continue to rely upon the reduction if it had not done the review by the end of the month (when the firm knew what its financial position was). However, while harsh in its application it seems to me the case against Mr Chavda was simpler than that argued. It is of course well known that unless there is a contractual clause agreed by the employer upon contract formation allowing an employer to unilaterally adjust wages to the employee’s detriment) then there can be no change without consent of the employee. So, the employer could not change Mr Chavda’s salary unless he agreed. The proposed change was “until further notice” (and so with no firm end date) and this was, according to the judgement, agreed on 1 April 2020. It was only after that agreement, on 6 April 2020 that Mr Chavda added a caveat to that agreement that this was only for the month of April. The difficulty as I see it was by that time it was too late, there had already been a mutually agreed contractual variation and the subsequent caveat days later was an attempt to review a bargain that was already settled.  I was initially of the view that the decision was a both a harsh one and wrong but on the facts decided it seems to me the dismissal of the claim was ‘right’. The reason being that in an unlawful deduction claim a tribunal will often need to determine what sums are properly payable under the employment contract which will involve an contractual interpretation (see Delaney v Staples). If at 1 April 2020 there was a change of contract by agreement then it was that contract that determined what was properly payable. A clarification after the fact cannot amend an agreement made “until further notice” five days earlier. The tribunal findings also do not record that the agreement Mr Chavda entered into was subject to any term requiring monthly reviews (but, as we shall see, the tribunal decided the case on the basis there was a term of this sort).

There are I think some lessons here for union reps advising members but I will come onto these at the end of the post.

Interpreting contract through the lens of ‘business efficiency’ 

Mr Chavda continued to be paid at only 60% of his salary in May, . There was an agreement between the parties that there would be a monthly review which would determine whether the previous full salary could be re-activated. On 2 June 2020 the claimant gave notice to the employer, with an employment end date of 1 July 2020.  The essence of the claimant’s case was summarised in a email of 8 June 2020 objecting to the decision by the employer that in June his salary would remain at 60%: “I was told that I had a choice in April to accept a 40% reduction in salary or lose my job. I agreed to a 40% reduction in salary for April with a reduction in salary from my normal salary to be reviewed on a monthly basis. I subsequently agreed to a reduction in salary for the month of May. I was not advised of any review of my salary away from my full salary for the month of June.”

It was agreed that there had indeed been no review of the claimant’s salary in the month of May and the issue was whether this fact disentitled the respondent from continuing the 40% cut in June.

On this question the answer was no and, in making that finding, relied upon ‘business efficiency”:

Having regard to the previous practice of the parties and to give business efficacy to the arrangement, the Claimant did not have a contractual or other right to a review of the June pay before the end of May. It is clear that any review of pay going forward would wish to consider the whole month’s results.

For that reason the claim was dismissed.

Lessons Learned

I am certain that employers and employees across the length and breadth of the country are currently having difficulty with pay.

As explained at the outside the decision of the tribunal in Chavda v DKLM LLP is not binding (as I think one can tell from just reading the judgement!) but for employees facing these issues there are lessons to be learned.

First, in exceptional times an employee may well feel it is in their best interest to accept a pay reduction. However, if an employee intends that the acceptance is not for an indefinite period but time limited that it is vital that the acceptance of the reduction includes that condition in the acceptance itself – an email after the fact may, in legal terms, be too late to change the agreement meaning the contract has been changed. For this reason it is important not to be ‘bounced’ into an agreement and seek advice before agreeing to any change.

Had that approach been followed and the agreement to a change been expressly communicated to be for a set period of time in the agreement itself then any arguments about whether there had been timely reviews would have been irrelevant. This is because effectively, the ‘reviews,’ would be conducted by the employee, not the employer.

Alternatively, here the tribunal used ‘business efficiency’ to interpret the contract, as an employment judge is entitled to do if necessary. Now, here’s the thing – assessing business efficiency is never, going to result in a tribunal decision that is favourable to an employee. So, to the extent an employee can then any opportunity for such an interpretive lens to be used needs to be taken away from the judge. If there are conditions which an employer must meet in order to upon benefit from the employee’s agreement this must be set out at the outset clearly, precisely and in a unambiguously time limited way. Had the agreement in this case specified “the employer must have conducted and communicated a review by the last working day of every month” then with such clear terms the opportunity of a judge to utilise their renowned business acumen will be forfeited. That can only be for an employee’s benefit.