Can Your Employer Cut Your Pay

Salary Cut

There is no general rule forbidding an employer proposing a pay cut. If imposed by the employer, however, it may equate to a constructive dismissal and entitle the employee to treat the employment as having been terminated. You should speak with an employment lawyer for clarification.

Constructive dismissal occurs when an employer unilaterally changes a fundamental term of an employment contract to the extent that the employee is entitled to treat the employment as having been terminated. An employee’s pay is a fundamental term of an employment contract. The employee faced with a constructive dismissal may claim common law reasonable notice

What kind of salary cut entitles an employee to claim constructive dismissal?

Where an employer unilaterally imposes a pay cut on an employee, we must assess extent and circumstance to identify if the employee may treat the unilateral change as a constructive dismissal.

The same applies to a bonus cut. Where an employer unilaterally cuts a bonus, we must assess extent, relative to total compensation, and circumstance to identify if the employee may treat the unilateral change as a constructive dismissal.

The law of when constructive dismissal is triggered has been assessed by Canadian courts. Small reductions in pay, for example less than a 10 percent reduction, may not equate to a constructive dismissal. Large reductions in pay, for example, more than a 20 percent reduction, will very likely equate to a constructive dismissal.

In Pavlis v HSBC Canada, the B.C. Supreme Court, in reviewing cases across Canada, stated as follows:

Comparing the case law establishes that the failure to pay an employee up to approximately 9-10% of his or her average salary without more does not amount to a fundamental breach… A failure to pay between 14-17% can amount to a fundamental breach, but only in conjunction with some other significant unilateral change to the employment contract… A reduction in remuneration amounting to anywhere between 20-46% (and presumably anything greater) by itself has been held to amount to a fundamental breach

A compensation cut of 11 percent or greater carries some risk of triggering constructive dismissal, especially when combined with another change such as change in work responsibilities, hours or benefits. A compensation cut of 16 percent or greater will carry significant risk of triggering constructive dismissal. A compensation cut of 20 percent or greater will very likely trigger constructive dismissal.

The circumstances of a compensation cut also matter. If, at the beginning of an employment, an employee insisted s/he would only join the employer upon the employer providing a particular salary, to which the employer agreed, and then the employer cut the salary below the agreed level, the employee should contact an employment lawyer regardless of the percentage of the cut.

Remember the following: 

  • An employer may propose a pay-cut. An employee may accept a pay-cut. If a change is agreed consensually by both parties and complies with minimum legal standards, there is no dispute.
  • The law sets minimum standards, including a minimum wage. No employer can cut compensation below the minimum wage.
  • The law does not allow for discrimination in the workplace. No employer can discriminate based on citizenship, race, place of origin, ethnic origin, colour, ancestry, disability, age, creed, sex/pregnancy, family status, marital status, sexual orientation, gender identity, gender expression or record of offences when cutting compensation. Also, if your compensation is cut, but others with the same job in your workplace do not face the same, you should contact an employment lawyer