My Business is Suffering: Can I Change Employee Compensation Schemes in an Attempt to Save the Business?

| Wednesday, May 24th, 2017 | No Comments »

Employee compensation is one of the most fundamental aspects of an employment contract. In most cases, a fundamental change in an employment contract would result in damages if litigated by the employee. An employee subject to such changes could claim ‘constructive dismissal’, which means that the employee’s employment terms were altered substantially enough to force him/her to resign.  The employee can then seek damages for wrongful dismissal.

There are exceptions, however, that would not typically trigger a constructive dismissal. In an attempt to save the business, small changes to all employees under the business will normally not warrant a constructive dismissal and would therefore be legal. Such changes should align with the goal of saving the business. For instance, a change from profit sharing to commission for a large group of employees may allow a business to be more profitable, thus being consistent with the goal of saving the business. The change should be minimal and reasonably necessary to save a struggling business. To illustrate this, consider the case of Pullen v. John C. Preston Ltd (Preston Ltd).

Pullen was hired by Preston Ltd. in 1979 as a sales manager. His base salary was $30 000 per year plus some profit sharing. Preston Ltd. was experiencing significant financial difficulties during hard economic times. Preston Ltd. reduced Pullen’s base salary by $3 000 and changed Pullen’s profit sharing compensation to a commission based compensation scheme. Further, Preston Ltd. also changed Pullen’s job description, leaving Pullen to feel as though he was a salesman rather than a manager. Pullen left his employment and claimed constructive dismissal. The court ruled that this was not constructive dismissal. Not all of Pullen’s managerial duties were taken away, and the changes to Pullen’s compensation were viewed as genuinely necessary in light of Preston Ltd.’s financial struggles.

This case shows that changes to compensation can be made while a company faces financial difficulties. However, financial difficulties must be severe enough to require changes to employee compensation schemes in order to save a business. When dealing with a similar situation, employers must be careful as changes to compensation is a fundamental term of an employment contract. It is important to seek advice from an employment law expert, especially when seeking to implement such changes to a large group of employees. Whitten and Lublin Employment Lawyers have the employment law experts to assure you are in legal compliance and do not suffer additional hardships due to costly litigation during tough financial times.

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