What’s the answer? Cost of living increase

Annie Hayes

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What’s the answer? Cost of living increase

By Annie Hayes

This week Nicholas Snowden, senior solicitor at Clarkslegal LLP and Helen Badger, employment law expert at Browne Jacobson present their ideas on whether a cost of living increase can be made the exclusive benefit of certain employees.

The question:
“If a company has agreed a cost of living increase (RPI) and everyone is entitled to it with the exception of people who have not been with the company a full year but nothing is written in the contract of employment or handbook stating that you need to be with the company for this period of time, can the company do this and is it up to company who has a cost of living increase and who doesn’t?”

Lindsay Wata

The answers:
Helen Badger is an employment law expert at Browne Jacobson

The answer depends on what is actually contained in the contract or handbook. If either states that employees will receive an annual cost of living increase, and makes no exception for employees with less than a years’ service, then all employees should receive the increase.

If, as you suggest, the contract and handbook are silent on the subject of pay rises, then it becomes a matter for employer’s discretion. There is no obligation to award pay increases, either on the basis of increased cost of living or on merit/performance.

Provided the employer exercises discretion in a way that may not be considered irrational or perverse, and would not amount to discrimination, then he or she is relatively free to act in whatever way is deemed appropriate.

It would seem that your company is therefore entitled to award pay increases only to those employees with year’s service, provided that there is no contrary provision in the contract or handbook, and that there has been no previous practice of awarding pay increases to those with less than 12 months’ service.

Any such previous policy could mean that the pay rise entitlement has become an implied term of employees’ contracts. This will depend on a number of factors, including how long the practice has gone on, whether it has been intermittent or ongoing, and how well known the practice was amongst employees.

Helen can be contacted at: hbadger@brownejacobson.com

Nicholas Snowden, senior solicitor at Clarkslegal LLP

The company should be able to decide what pay increases, if any, it will give to whom, unless it has restricted its own discretion in some way, or its decision is tainted by unlawful discrimination.

For example, an employer will not be able to pay no increase at all to some or all staff, if their contracts of employment state that their salaries will be reviewed upwards every year.

To help guard against equal pay and discrimination claims, the employer ought to document its reasons for the starting salaries it chooses to offer for different jobs and for all subsequent pay increases. Provided those reasons do not, in themselves, reveal unlawful discrimination, this documentation will be of value in dealing with any grievances or defending any claims, which may arise.

In the situation you have described, the fact that there is nothing in writing stating that there will be no cost of living increase for those employees who do not have a year’s service, does not mean that the company cannot apply this rule. Unless the company has restricted its freedom to act in this way, by reaching a prior written or verbal agreement to the contrary (i.e that the pay rise would apply to all employees), then the company can act as it proposes.

There may be staff retention issues as a result of such a policy and it may be a good idea for the company, if it wants to continue to operate the policy, to include it within the standard contract or staff handbook. In this way, new employees will be aware of the rule from the start of their employment relationship, which should hopefully lessen the negative effects of the rule on morale.