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Are you considering a pay freeze?

Published Nov 25, 2022

Many organisations are struggling in the current climate, and some employers are even considering the difficult decision to implement pay freezes to avoid redundancies or avoid their businesses going under.

How would you handle this situation?

  • Consider your reasons for a pay freeze
  • Check individual employment contracts to determine if employees have the right to receive an increase each year
  • Consider how the pay freeze will be applied to employees and whether there are alternatives to freezing pay for all employees
  • Assess employee motivation levels and consider ways to offset the freeze

Most organisations conduct a pay review each year, but the result might not necessarily be a pay rise for all employees.

As a result of the recession at the end of 2008, pay freezes became a prominent feature. At least one-third of pay reviews in 2009 and 2010 resulted in pay freezes. In 2019, this fell to 7.3% which is close to the long-term average of around 5%.

Deciding on a pay freeze

An employer may decide to freeze pay rates at the annual pay review in order to:

  • save money
  • reduce or remove the need to make redundancies
  • remove the need to reduce employees’ working hours
  • to bring pay rates in line with the market and / or
  • due to the poor performance of individual employees

It is wise to go through the initial stages of the pay review process: looking at the budget, calculating the costs of any rise and looking at inflation levels and forecasts.

Pay will typically be frozen for a specific period of time, usually for 12 months or until the next annual pay review. Pay could be frozen for a shorter period, e.g. six months, before an increase is applied.

Alternatives to pay freezes

Applying a pay freeze to all employees in the organisation can result in significant savings. However, employers that are proposing a pay freeze for all employees may wish first to consider the alternatives before taking this course of action. These include:

  • Freezing the pay of only some employees e.g. those at or above a certain job level or salary, or offering a lower increase to employees above a certain level
  • Using a pay matrix that results in a pay freeze for the lowest-ranking employees by performance and / or those high in their pay range
  • Awarding progression increases but no general pay rise or withholding progression increases
  • Looking at other areas of the salary budget e.g. overtime payments or volumes of overtime worked, bonus arrangements, pay-related allowances and other allowances
  • Carrying out an employee benefits review with a view to ensuring that the organisation is getting value for money from its benefits spent

Employees often view a pay freeze as a more preferable option than redundancy or a temporary reduction in working hours.

Pay increases worth less than inflation are in real terms a pay cut for employees since they are based on inflation at the time. A pay freeze may feel like a pay cut to employees.

Employee engagement

Employees may react differently to a pay freeze. Information shared about the reasons for a pay freeze may increase acceptance. However, be aware this could lead to a dip in employee motivation and / or productivity and may affect your retention and recruitment. If an employer is forced to freeze pay, they may consider other changes to the pay and benefits field such as:

  • improving the benefits package
  • introducing an employee recognition scheme
  • awarding one-off bonuses

Legal issues to be aware of if implementing a pay freeze

  • Only freezing the pay of some employees may result in unlawful discrimination on the basis of sex, race, disability or age
  • Fixed term and part-time employees should not be treated less favourably in a pay review
  • Ensure that no employee’s rate of pay falls below the national minimum wage at the time of the pay freeze or in the April following the pay freeze

Notifying employees

The pay freeze should be communicated to employees in the same way that an annual pay review results in a raise. Explaining to employees the reason for the pay freeze may increase their likelihood of understanding and accepting the freeze. Other organisations’ pay freezes may influence employee attitudes – if other employers are freezing pay, they are more likely to accept that they will be no better off elsewhere.

Source: Gavin Parrott