Sales are down, costs are up and the shareholders want expenses trimmed. The biggest line in the accounts is often payroll, so the question comes up: can we cut salaries, cut working days or withdraw benefits straight away? The answer is that, as a rule, an employer cannot cut unilaterally, and trying first and fixing later usually costs more than preparing properly. This guide is written for executives cutting costs: what to check, which tool is available, and when consent is needed.
If cost cutting reaches the point of cutting positions, see restructuring or reducing headcount and severance pay on termination. If the company has a serious liquidity problem, see options when a company is in financial distress.
The core answer
Start by collecting what conditions of employment each group of employees actually has, and only then choose a tool. Wages, working days and hours, and benefits given as a matter of practice are conditions of employment. Changing them to the employees' disadvantage needs their genuine consent, or the negotiation process under labor relations law. A temporary stop under Section 75 is a different tool: it is available only for a necessary cause, and you must still pay at least 75 percent.
The rule. Section 5 of the Labour Relations Act B.E. 2518 defines conditions of employment as covering matters such as working days and hours, wages, benefits and termination. Section 10 requires a workplace with 20 or more employees to have a written agreement on conditions of employment. Section 11 deems the work rules to be that agreement where none exists. Section 13 sets out the process of submitting demands and negotiating. Section 20 bars an employment contract from conflicting with the agreement unless it is more favourable to the employee. Under the Labour Protection Act B.E. 2541, Section 75 allows a temporary stop on specific conditions, Section 9 deals with interest and surcharge on unpaid money, and Section 118 deals with severance on dismissal.
Our practical view. Do not begin by drafting a pay-cut notice. Begin by checking which document your target figure is tied to, and then work out whether the saving outweighs the risk of claims for wages and severance. In many cases other measures, such as controlling overtime or slowing hiring, achieve a similar result at lower risk.
The running example in this guide is hypothetical. A building-materials manufacturer and distributor in Udon Thani has 60 employees, and sales have fallen for several quarters. Management proposes three things: a 10 percent salary cut for office staff; a move from a six-day to a five-day week with monthly pay reduced proportionately; and withdrawal of a diligence allowance and a lunch allowance paid for years. We call the company "the materials company".
1. Which documents should you check first?
An employee's conditions of employment are not found in one document. Collect them all before deciding.
| Document or source | What to check |
|---|---|
| Employment contract and offer letter | Agreed wage, position, working days and hours, stated benefits, any clause on amending the contract |
| Work rules | Working days and hours, holidays, payment of wages and benefits, under Section 108 of the Labour Protection Act |
| Agreement on conditions of employment (if 20 or more employees) | Under Sections 10 and 11 of the Labour Relations Act, whether the company ever made a written agreement and until when it runs |
| Agreements reached by negotiation with employees or a union | Their effect between employer and employee representatives, and how long they apply |
| Announcements, emails and internal notices that communicated benefits | The contract may be silent, but a company announcement can still bind |
| Consistent past practice | Diligence allowance, meal allowance and regularly paid bonuses that employees could expect to receive |
| Actual payroll data and payslips | Whether what is paid differs from the documents, and whether each item is wage or benefit |
An important point: a benefit paid for a long time and consistently, even if it is not written in the contract, can be argued to be a binding condition of employment. This depends on the facts of each case, especially regular payment, a fixed amount and the words the company used. Annual bonuses are covered separately in annual bonus versus performance bonus.
In the example, the materials company found that the contract specified salary and a six-day week, the work rules specified hours and holidays, and the diligence and lunch allowances were not in the contract but appeared on payslips every month for eight years and had been announced in the company chat group.
2. Why wages, working days and benefits cannot be cut unilaterally
Section 5 of the Labour Relations Act treats the terms of hiring or working, such as working days and hours, wages and benefits, as conditions of employment. The consequences are:
- An employment contract is a contract. Under the general law of contract, an employer cannot amend it to the employee's disadvantage without the employee's agreement.
- An agreement on conditions of employment binds more than the contract. Section 20 bars an employment contract from conflicting with the agreement unless it is more favourable to the employee. Having employees sign for pay below the agreement is therefore at risk of being ineffective.
- Work rules cannot be changed at will either. Where a workplace of 20 or more employees has no agreement, Section 11 deems the work rules to be one, so an employer must be careful before amending the rules to the employees' disadvantage.
- A change in the employees' favour is always possible. The problem is the change that goes the other way.
The same principle applies to reducing working days. If days are cut and monthly-paid employees are paid proportionately, they receive less, so wages and working time are both changed. All three of the materials company's proposals are therefore changes to conditions of employment that are less favourable to employees.
3. Individual consent versus group agreement, and the risk of coerced consent
There are two proper routes.
A. Individual consent. Each employee agrees in writing. This suits a small group or a case where employees accept that the company has a real problem. Make the consent meaningful:
- Explain the reasons and the relevant figures candidly.
- State what is reduced, by how much, from when, until when, and when it will be restored.
- Give employees time to consider and tell them they may refuse.
- Do not threaten dismissal or a poor appraisal for not signing.
- Give the employee a copy.
B. Group agreement through the labor relations process. Where an agreement on conditions of employment already exists, or the change affects a whole group, the change must follow the demand and negotiation process under Section 13. The employer may also submit demands, and once an agreement is reached it must be made in writing, signed and carried through the steps the law requires, such as notification and posting. Check the current law for the detailed steps and time limits before starting.
The risk of coerced consent. Consent obtained when the employee has no real choice, for example "sign or leave", may be challenged later, both as not voluntary and as an agreement that conflicts with the agreement on conditions of employment under Section 20. A court looks at the circumstances as a whole. Executives should not treat a signature as the end of the matter.
Sample consent letter (an example; adapt to the facts and have a lawyer review it before use)
Re: Request for consent to a temporary adjustment of conditions of employment
Dear ____
The company's sales have fallen steadily since ____. We therefore propose a temporary adjustment as follows:
1) Item adjusted: ____ (from ____ to ____)
2) Period: from ____ to ____, and the company will review it every ____ months
3) At the end of the period the original conditions are restored automatically unless we agree otherwise in writing
4) This agreement does not affect any other right you have under the law
5) You have until ____ to consider and are free to decline; the company will not dismiss or penalise you for declining
I have read and understood this letter and agree voluntarily.
Signed ____ Date ____
Item 5 must be true as written. If employees who do not sign are in practice pressured, this wording will not protect the company.
4. Temporary stop under Section 75: a separate tool
Section 75 of the Labour Protection Act does not give a right to cut wages. It lets an employer stop all or part of the business temporarily where:
- an important cause that affects the business makes it necessary to stop, so that the business cannot operate normally, and the cause is not force majeure;
- the employer pays employees at least 75 percent of the wages for working days that they received before the stop, for as long as they are not given work; and
- the employer gives the employees and the labour inspector written notice at least 3 working days before the stop begins.
Executives often overlook two limits. The business must really stop; it is not enough to run normally and pay 75 percent. And the cause must carry weight: a modest sales decline or a wish to save money may not qualify. Keep evidence of the cause, such as falling purchase orders, a shortage of raw materials or an external order to stop. In the example, if the materials company has to stop one production line temporarily for lack of raw materials, Section 75 can be used for the employees on that line if its conditions are met, but the office staff who work every day do not fall within it.
5. What if the company has already cut without a proper basis?
- Claim for the shortfall. Employees may claim the difference under the original contract or agreement, by complaining to a labour inspector or suing in the Labour Court. See unpaid wages and overtime.
- Interest and surcharge. Section 9 of the Labour Protection Act makes an employer who fails to pay money due as specified pay interest at 15 percent per year, and if it wilfully fails to pay without reasonable cause, a surcharge of 15 percent of the unpaid amount for every 7-day period after the first 7 days from the due date. Whether the unpaid money falls within the items Section 9 lists must be checked case by case.
- Resignation followed by a claim of dismissal. If a cut is significant and improper, some employees may resign and argue that the employer forced them out. A court will decide on the facts whether this amounts to a dismissal. If it does, severance under Section 118, pay in lieu of notice, and compensation for unfair dismissal under Section 49 of the Labour Court Establishment and Procedure Act B.E. 2522 may be claimed. See severance pay on termination.
- Group risk. When many employees are cut at the same time, disputes tend to arise together and the damage to morale is high.
The outcome of each case depends on the evidence and the court's judgment, and we cannot promise a result in advance, but well-organised consent documents greatly reduce the risk.
6. Decision table: measure, legal basis, consent needed, risk
| Measure | Legal basis | Consent needed? | Main risk |
|---|---|---|---|
| Permanent pay cut | Labour Relations Act ss. 5, 10, 11, 13, 20 | Yes, or via the negotiation process | Claim for the difference, interest (s. 9), and claim of being forced out |
| Fewer working days with proportionate pay cut | Labour Relations Act ss. 5, 20 | Yes | Changes both working time and wages; equals a pay cut |
| Withdrawing a regularly paid benefit | Labour Relations Act ss. 5, 20 and past practice | Generally yes | Challenged as a binding condition of employment |
| Temporary stop of business | Labour Protection Act s. 75 | No, but conditions must be met and written notice given in advance | Using it outside the conditions, or paying less than 75 percent |
| Hiring freeze and not renewing expiring contracts | Employment contracts and general labor law | No | Heavier workload for remaining staff; check each contract before not renewing |
| Reducing or controlling overtime | Contract, work rules and Labour Protection Act | Generally no, if it was never fixed pay under the contract | If overtime is regular income under an agreement, it can amount to a pay cut |
| Voluntary leave (partly unpaid) | Contract and consent | Genuine voluntariness needed | If not genuinely voluntary, same problems as a pay cut |
| Voluntary separation scheme | Contract, agreement, and s. 118 if it is in substance a dismissal | Each employee agrees individually | If employees are pressed to join, it may be seen as dismissal |
| Restructuring or cutting positions | s. 118 and s. 49 of the Labour Court Act | Not a consent matter, but needs a genuine business reason and statutory severance | Unfair dismissal claim; see restructuring |
This table is only a starting frame. The legal outcome depends on the documents and facts of each business.
In the example, the materials company proceeded in sequence: it slowed hiring, controlled overtime, offered voluntary leave, and then proposed a temporary 10 percent pay reduction for 6 months to office staff by individual written consent, leaving the diligence and lunch allowances untouched.
7. When pay should follow performance
If the aim is to link pay to performance rather than cut everyone equally, do not use a pay cut as a penalty. Design performance bonuses from the start; see annual bonus versus performance bonus, and for employees who fall below standard see performance improvement plans and KPIs. Relocating the workplace is another kind of change to conditions of employment; see relocating employees' workplace.
8. Checklist before cutting wages, working days or benefits
Documents and information
- Collect the contracts, offer letters, work rules and any agreement on conditions of employment
- Check whether the company has 20 or more employees and whether it has an agreement or relies on the work rules
- Review benefits and allowances paid regularly, including announcements and messages sent to employees
- Compare the saving against the risk of claims for wages and severance
Choosing the tool
- Try measures that do not touch conditions of employment first, such as slowing hiring and controlling overtime
- If you do cut, decide between individual consent and the Section 13 process
- If you will stop the business, check there is a necessary cause under Section 75 and keep evidence of it
Carrying it out
- Prepare a consent letter stating the item, the period and when it is restored
- Give employees time to consider and avoid coercive language
- If using Section 75, give the employees and the labour inspector written notice at least 3 working days ahead and pay at least 75 percent
- Keep copies of the letters and proof of notice
Afterwards
- Set a review date and a date to restore the original terms if the measure is temporary
- Check payslips match what was agreed
- Prepare a plan for employees who refuse or resign
Further reading
- Restructuring or reducing headcount — when cost cutting means cutting positions
- Severance pay on termination — calculating severance under Section 118
- Unpaid wages and overtime — the consequences of paying less than agreed
- Labor compliance audit for employers — checking documents and work rules before changing conditions
- Relocating employees' workplace — another kind of change to conditions of employment
- Options when a company is in financial distress — when the problem is more than payroll
- Annual bonus versus performance bonus — flexible pay that follows performance
Before you cut anything, check whether it is a condition of employment, then choose the tool that fits the documents you have. Genuine consent and good paperwork reduce risk more than anything else.
We help review employment contracts and work rules, plan lower-risk staff cost reductions, draft consent letters and manage negotiations with employees. For an initial consultation, call +66 92 254 2045 or send us the details. See also labor compliance review and set-up.
This guide is published by Suwanvara Law Firm — a Khon Kaen law firm established in 1986. General information only, not legal advice on a specific matter.
