Furlough scheme makes pay cuts the norm

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​UK employers have slashed pay rise budgets and reduced the size of their workforce as a result of the coronavirus pandemic, according to Willis Towers Watson.

One-in-five (19%) businesses in the UK have already taken steps to reduce their workforce, while a further 37% are either planning to or considering cuts.

Sixty per cent of employers have also implemented or considering unpaid leave policies that are either voluntary or mandatory.

Its latest Salary Budget Planning Report, which covers 15,000 employers across 132 countries, found UK employers were budgeting for an average 3% pay rise, but the economic impact of the pandemic meant employers have had to revise pay budgets to 2.7% for this year.

Katie Maguire, partner at law firm Devonshires, predicts there will be thousands more permanent salary reductions introduced once the furlough scheme ends.

She said: “It used to be the case that there was a stigma attached to cutting pay. However, the furlough scheme has changed that. For many employees and workers who have been furloughed they have had their salary cut by 20%, albeit on a temporary basis.

“As a result, it will be easier for employers to ask their staff to take a salary reduction on a permanent basis as the furlough scheme has made cutting pay more socially acceptable. Especially where financial savings need to be made and a pay cut is seen to be the lesser of two evils opposed to the alternative being potential redundancy.”

The worst hit sectors for pay freezes or postponed pay rises in 2020 were retail, media, leisure and hospitality, manufacturing and automotive.

The industries least affected were insurance, banking, personal and household services, chemicals and financial services.

Maguire added: “This is the first time that I have seen pay cuts used by employers in this way. In the last recession employers either looked to make people redundant or reduced the working week down to 4 days, meaning that a 20% pay cut was implemented, but with an equivalent reduction in working hours.”

Keith Coull, senior director in Willis Towers Watson’s Global Data Services business, said many changes are still yet to be made.

He said: “The full extent of the economic impact of the pandemic is yet to play out as some companies froze pay this year to shore up cash flows, whereas others had already announced pay rises before the pandemic hit, so may feel more of an impact next year.”

Pay rise projections for 2021 are more optimistic as UK employers anticipate pay budgets will bounce back closer to pre-COVID levels, at 2.9%.

However, the proportion of companies planning a salary freeze next year is still six times higher now than before the pandemic (12% now vs 2% before).

The UK has followed a similar pattern to most other G8 economies with the exception being the US where pay rises are expected to remain at 3%.

Further reading:

Post-pandemic pay cuts on the horizon, bosses warn

UK accountancy firms avoid furlough by offering sabbaticals

Chancellor details plans to end furlough scheme

Tax cuts and traineeships build Treasury’s coronavirus recovery kickstart scheme

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