If you have been in the workforce for years, you might have had to deal with a reduction in pay. Sometimes, employers will justify cutting an employee’s pay rate by using that cut to avoid layoffs. But, on other occasions, a boss might not provide any explanation at all and reduce a pay rate without notice. 

Regardless of the reason, wage loss in an employee’s salary or hourly rate can be stressful. However, with so many employee and workplace protections in the modern labour climate, it’s fair to ask: Can an employer change your pay without notice?

What Is an Employee Pay Cut?

An employee pay cut is a decision that a company makes to reduce an employee’s earnings. 

On occasion, pay cuts can even include a demotion in workplace title or responsibilities. However, this mainly depends on whether or not the reduced pay reflects a perception of less-than-acceptable workplace performance or as a way to make ends meet. 

If not to reprimand an employee, a boss might choose to reduce someone’s pay if the company is not economically stable. For example, some companies might need to lay off a handful of employees or issue mass pay cuts to keep their business from falling into a financial crisis if income slowed beyond expectations. 

Depending on the reasons, an employee pay cut can be permanent or temporary.

Are Employee Pay Cuts Legal in Canada?

Unfortunately for employees, no written rule in Canada says an employer cannot suggest a reduction in a worker’s pay. However, if an employer is to act on that suggestion, especially if they do so without warning, it could be grounds for the employee to consider legal action. 

Canadian labour laws consider some instances of pay cuts that breach the terms of an employee’s contract to be constructive dismissal. Constructive dismissal is a term to describe an employer effectively terminating an employee by creating an unworkable environment or going back on an agreed-upon contract. 

The Ministry of Labour could consider a pay cut equivalent to wrongful termination, as an employee would no longer be working under their originally agreed-upon contract expectations. However, pay rate reductions are a grey area where legality varies from case to case.

When Are Pay Cuts Legal?

The easiest way to determine whether or not a pay cut is legal is by assessing the company’s steps to reduce an employee’s pay. An employer may propose a pay cut, and if they express that idea to the employee who agrees to a reduced salary, breach of contract does not exist, and the lowered pay is now legal. 

However, that is only an option for employees with specific contracts that have their salary expressly stated. For employees without a contract or those who don’t have their required pay mentioned in their contracts, a pay cut will always be considered legal if the new pay rate is at or above minimum wage. 

If an employee doesn’t have a contract, they are an ‘employee at will,’ meaning that their employer can reduce their pay or fire them at any time, without warning. 

Some small pay decreases are legal regardless of contract status, although it depends on the employee’s original salary.

When Are Pay Cuts Illegal?

Even though an employer may legally propose a pay reduction, employees who have contracts or are a part of their company’s collective bargaining agreement are under no obligation to accept that pay reduction.

The same rules apply to contract employees who have an employer impose a pay reduction on bonus pay. They can propose that reduction, but if the employee disagrees, they might have grounds to claim constructive dismissal if their employer decides to issue a substantial enough reduction. 

Additionally, all pay reductions that fall below the minimum wage of the business’s area are illegal. Therefore, even if both parties agree to the payment reduction, an employer cannot pay less than minimum wage.

Pavlis Vs HSBC Canada

Even though an employee has no legal obligation to agree to a reduction in pay, an employer still might try to enforce one that is below the terms stated in their contract. 

Since pay reduction isn’t a clearcut issue, some courts might not agree that a pay cut is enough to claim constructive dismissal if the employer has a justification and doesn’t reduce the employee’s salary by a significant amount. However, the British Columbia Supreme Court recently heard a case on pay cuts and constructive dismissal that might shape how the eyes of the law view the question, “Can an employer change your pay without notice?”

The case from 2009 saw the plaintiff, Marcia Pavlis, sue her former employer, HSBC Bank Canada, for failing to pay her a portion of her annual salary after she took a temporary disability leave. The courts dismissed the action, as did the British Columbia Court of Appeal when Pavlis sought to overturn the dismissal. 

Even though HSBC admitted to omitting a 2-5% portion of Pavlis’ salary, the court issued its dismissal and set an important precedent in determining the legality of workplace pay cuts. The British Columbia Supreme Court decided that a salary reduction of up to 10% of the initial pay rate is not a contract violation. On the other hand, any cut of 20% or greater is legally a contract breach. 

Anything between that 10-20% mark is a grey area but could be a violation if further contract terms should become breached, such as fluctuating work hours or reduced responsibilities.

How Union Agreements Factor into Pay Cuts

Establishing an employment contract with your company can set your minimum pay rate and make it difficult for your boss to legally reduce your salary below that minimum.  

Even if that reduction is anywhere between the 1-10% benchmark that would keep it from being considered constructive dismissal, choosing to reduce an employee’s pay after agreeing to it in a contract can be grounds for different legal action. 

Most employers will refrain from reducing your pay if you have a minimum established by a contract. However, if a union determines your base pay rate, it is more prone to fluctuation and potential cuts. Union negotiations with companies might result in pay cuts across the employee base if it means preventing mass layoffs or preserving everyone’s best interest.

Why Understanding Employee Rights Is Important

While it might be legal in some situations to reduce an employee’s pay, it is unlawful and even grounds for legal action in many instances. 

As an employee in Canada, you have a right to earn at least minimum wage at your job and have your base salary preserved if you’re a contracted worker. While salary reductions of less than 10% of your original working wage are not grounds for constructive dismissal in the eyes of the British Columbia Supreme Court, such a reduction could still be an illegal violation of your deserved payment for hours you worked as an employee. 

Understanding those rights, as well the laws under which an employer may legally change your salary without notice, can help you maintain your status as an adequately paid employee. 

Additionally, it is essential to remember that discrimination in the workplace is illegal, and pay reduction could be a sign of a discriminatory work environment. If you are the only employee in your office whose pay rate the employer reduced, and you have not received an adequate explanation of why, you are within your legal right to pursue action in court.

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All employees deserve to have workplace benefits that they can count on to keep their office and personal life stable. In addition to not needing to ask, “Can an employer change your pay without notice?” you need to trust that your employer has comprehensive insurance packages and employee benefits plans. 

Group Enroll can help bring those benefits plans to your business by comparing rates on popular insurance packages. Click here to receive a quote from Group Enroll. To learn more about Group Enroll, email our team at [email protected] or visit our office at 10 Great Gulf Drive, Unit 5, Vaughan, ON, L4K 0K7.