Introduction to this document

Notification of pay freeze letter

If you need to implement a pay freeze because of economic conditions, use our notification of pay freeze letter to let your employees know there will be no increase to their current salary at annual pay review time. Be aware of the legal implications.

Contractual provisions

Before implementing a pay freeze, first check the terms of the employee’s contract of employment (including the job offer letter). Assuming there is a provision on pay reviews, the contract should distinguish between contractual and discretionary entitlement to pay reviews and increases. Normally, contracts provide for a right for the employee to receive an annual review of their salary, which is usually subject to the employer’s discretion, but not an automatic contractual right to a pay increase. This means you can review your employees’ salaries and exercise your discretion to decide there will be no change. As is usual with any exercise of your discretion, the discretion not to award a pay increase should be exercised fairly and in accordance with the implied term of mutual trust and confidence and not in bad faith, irrationally or arbitrarily. However, if the employee’s contract of employment contains an express contractual right to, or guarantee of, an annual salary increase, then it would amount to a breach of contract to implement a pay freeze without the employee’s agreement. So, you’ll need your employee’s consent not to give them anything. You probably wouldn’t get away either with just giving them a few quid as it’s probably implied that you will increase their pay in line with your previous custom and practice. On the plus side, if the employee’s contract isn’t subject to a specific contractual right to an annual pay increase, the courts will be reluctant to imply a right to an increase even where the employee has received such increases on a regular and consistent basis in the past.

Other issues

If a pay freeze is not to be applied to all of your categories of staff but only to selected employees, you must ensure you don’t unlawfully discriminate on grounds of sex, race, sexual orientation, gender reassignment, married or civil partnership status, pregnancy or maternity, disability, religion or belief or age. In addition, part-time workers or fixed-term employees should not be treated less favourably at pay review time than comparable full-time workers or permanent employees. So, be careful whom you select, for example by basing it on poorly-performing departments rather than individuals. If you do select particular individuals to receive nothing, ensure you have the evidence to justify exactly why they were chosen compared to other staff. There is still a legal duty on you to increase an employee’s pay where not to do so would mean that their rate of pay falls below the relevant national minimum wage level. Finally, consider whether there is a legal or practical need for you to undertake collective consultation with either a recognised trade union or your employee representatives when implementing a pay freeze, as this is a matter which affects staff pay.