Can I reduce an employee's hours or pay when business slows down?
When sales drop and costs keep rising, wages can become a real worry. You may be wondering whether reducing your team’s hours or pay could help keep the business going. In New Zealand, this can sometimes be an option. However, a downturn does not automatically give you the right to cut agreed hours, wages or salaries. Getting the process right can help you manage costs while protecting trust with your team.
When can you reduce hours or pay?
When the employee agrees
You can propose a temporary or permanent reduction in hours, an hourly rate or a salary. The employee must freely agree, and the change must remain lawful. For example, an employee might agree to work four days instead of five for eight weeks, with a matching reduction in weekly pay. Their hourly rate could stay the same.
Reducing a salary is a separate issue. Moving a salaried employee to fewer days does not automatically allow you to reduce their salary. Clearly agree on both the hours and the pay.
Be honest with your employees about why you are asking. Explain whether the aim is to cover a short quiet period or deal with a longer-term fall in work. Record any agreement in writing.
When the existing agreement allows some flexibility
An agreement may allow you to adjust working hours within stated limits. For example, it might guarantee 25 hours each week while allowing extra hours when needed. You may be able to stop offering those additional hours. You cannot assume this lets you go below the guaranteed minimum.
A clause allowing roster changes is also different from permission to reduce total hours or pay. Check the exact wording and how the arrangement has worked in practice. Even where a clause allows changes, you must act fairly and reasonably.
When employment is genuinely casual
Genuine casual employees have no guarantee or expectation of regular, ongoing work. You may therefore have fewer new shifts to offer during a downturn. However, calling someone “casual” does not settle their employment status. If they work a regular, ongoing pattern, they may have become a permanent employee.
Already agreed shifts also need separate consideration. Shift cancellation rules can require notice, compensation or payment for the full shift.
When can’t you reduce hours or pay?
You generally cannot cut agreed hours or pay simply because:
there is less work available,
cash flow is tight,
you have given employees notice of the change,
most of the team has agreed, but one employee has not, or
you think a temporary cut is better than redundancy.
You also cannot reduce pay for work already done at the agreed rate, or pay below the applicable minimum wage for hours worked. Minimum wage rules apply to salaried employees too.
If a collective agreement applies, involve the union and follow the proper process. An individual agreement cannot override the collective agreement’s terms.
Sending employees home without pay is not a simple solution either. Generally, employees who are ready, willing and able to work remain entitled to their agreed pay where you cannot provide work, unless a lawful provision applies.
How should you go about proposing a reduction?
Check your agreements and get advice
Review guaranteed hours, pay, roster flexibility, shift cancellation terms and any workplace change requirements. Do this before announcing a decision or changing payroll. A short conversation with an Employer Direct can help you understand what options are available.
Explain the business problem
Prepare a clear written proposal. Set out what has changed, why savings are needed and what you are proposing. Include the proposed hours or pay, who would be affected, the start date and how long the change would last. Share relevant information that supports your reasons, while handling genuinely confidential information appropriately. Avoid vague statements such as “we need everyone to help out”. Employees need enough detail to understand the proposal and its effect on them.
Give employees time to respond
Meet with affected employees and invite their ideas. Allow reasonable time to consider the proposal, seek advice and respond. They should be able to involve a representative or support person. Listen to alternatives. These might include reducing optional overtime, voluntary job sharing, changes to spending or agreed unpaid leave.
Good faith under the Employment Relations Act 2000 means being honest, communicating openly and keeping an open mind. Do not present a final decision as a proposal.
Consider the feedback
An employee may want to help but be unable to afford a pay cut. Others may suggest a workable arrangement you had not considered. Consider the feedback properly and explain your response. If you substantially change the proposal, further consultation may be needed.
Put agreed changes in writing
Use a written variation signed by both parties before the change starts. Include:
the new hours and pay,
whether the change is temporary or permanent,
the start and end dates,
when you will review it, and
how the original terms will be restored.
For a temporary change, a review date alone may leave uncertainty. Say clearly whether the original terms return automatically on a set date.
Update payroll and check how the change affects leave calculations. Make sure workloads match reduced hours.
What if an employee says no?
Their existing terms generally continue unless another lawful basis applies. If the business genuinely cannot sustain the current roles, you may need to consider restructuring. That requires a genuine business reason and the appropriate workplace change process, including consultation and consideration of alternatives and redeployment.
Redundancy must not be punishment for refusing a pay cut. Notice and any redundancy compensation depend on the employment agreement and applicable law. Get advice before taking this step.
Reducing hours or pay may help your business through a downturn, but clear communication and lawful agreements matter. Employer Direct can help you review your options, prepare a proposal and manage discussions with your employees. Practical support early can help you control costs and reduce the risk of a dispute. Contact Employer Direct to day for practical advice and tools to help.
Disclaimer: The information provided in this blog is for general informational purposes only and should not be considered legal advice. While we strive to keep the information accurate and up to date, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained on the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. For specific legal advice tailored to your situation, please contact a qualified legal professional.
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