Companies that are seeking to make wage cuts must inform their employees about the financial state of the business, writes GERALD FLYNN

WORKPLACE SECRECY is a major obstacle to putting in place measures to help private sector companies survive the recession.

Apart from strongly unionised firms, salaries, allowances and bonus payments are usually a guarded secret in the HR department. If employees suspect colleagues are earning more than them or that senior management’s idea of personal sacrifice is postponing replacing the company car by a year, it is hard to get buy-in for nominal wage cuts.

Another obstacle for securing employee engagement with cost and wage cuts is the lack of clarity on the true financial state of the business. This point was made by Trinity College economist Philip Lane at a recent workshop, Responding to the Crisis.

Bluntly, it is a case of “if they never bothered to tell us what was happening in the good times, why should we suddenly believe them now?” Senior managers are beginning to pay for the poor levels of effective workplace communication highlighted by the ESRI and National Centre for Partnership and Performance over four years ago.

In some ways, it is easier to secure wage cost savings in the public sector, where 370,000 employees’ salaries adhere to pay scales and increments, collectively negotiated by trade unions.

It is not nearly as clear-cut in the private sector for reputable firms that abide by the agreed “inability to pay” terms and procedures. This process was introduced in the 2003 Sustaining Progress national pay deal.

A panel of independent assessors examines the financial position of a business pleading inability to pay and provides a report to the Labour Relations Commission.

While these assessors may be appointed to look at other aspects of alleged breaches of the national wage agreements, their main rationale is to deal with “inability to pay” cases which are likely to increase significantly this year as employees seek the 3.5 per cent national level wage increase.

Up until a few months ago, the “inability to pay” clauses were on an “all or nothing” basis; firms either pay the 3.5 per cent or claim that they cannot pay it. Now they may claim that they can pay only part of it and also may seek “cost-offsetting measures” to help fund any pay rises. The attractive aspect, from an industrial relations perspective, is that the Labour Court usually accepts the assessor’s opinion on the firm’s ability to pay specific phases of the national agreement and the court’s decision is binding on both employer and employees. Of course in many workplaces, open and honest communication would often obviate the need to engage with third-party assessors.

Most employees are rational and sensible and know that slowing order books, declining sales or revenues and the recent weakness of sterling against the euro cannot sustain wage rises. Their priority is keeping their jobs rather than boosting their earnings in a period of low inflation and low interest rates.

Of course, some assessor reports may be wide of the mark. Industrial Relations News recently noted that, in 2007, an assessor’s report reluctantly rejected an inability to pay claim made by Waterford Crystal management as it related to an increase due in 2006 when the company was not in such a difficult trading position.

The 2 per cent pay increase secured by the employees then must be of little comfort as they try to salvage a portion of their pensions since the entire Waterford Wedgwood group went into receivership/administration with debts of €400 million.

Effectively, “inability to pay” assessment is a procedure confined to unionised employees – or only about one in five private sector employees. But the same issues apply to employee morale and buy-in in non-unionised workplaces where trust has to be built in good times to provide effective and prompt remedies in the bad times.

• Gerald Flynn is an employment specialist with Align Management Solutions