Professional Services Focus: Is your hibernation plan exposing you to more pain?

23 April 2020

The overwhelming sentiment of businesses in the current environment is one of cautious optimism. An optimism that there will be light at the end of the tunnel, and we need to hold on in the meantime. Many of us have asked a question that humans have not had to ask for hundreds if not thousands of years: how do we hibernate? The hibernation we are contemplating is very different to that of our ancestors. It contemplates sustaining cash flow, retaining employees and pivoting to generate income. The most publicised of these hibernation levers has been retaining employees.

Over the last month we have seen businesses make very tough decisions as they swiftly seek to rationalise their workforces during hibernation. Ashurst’s have reduced partner and staff pay by 20%, Deloitte are moving forward with an average 8% pay cut across the firm, EY cut partner and staff pay and hours by at least 20%, PwC reduced hours of some staff by up to 40% and KPMG have asked all staff to take a 20% pay cut.

These decisions have been made to allow the professional services firms to ride out the storm, but what are the unintended consequences of these decisions?

On 1 March 2020, the Fair Work Ombudsman implemented changes to the Clerks Award impacting all professional services firms. The changes increased the obligations for employers with staff under annualised salaries, requiring more rigour around record keeping of hours and strengthening the obligation to “top up” pays where employees work more hours than those covered by their salary (read more here). With many professional services firms moving away from the billable hour and a lack of requirement from non-billing professional to record time, some firms may find themselves struggling to ensure they comply.

The timing of these changes is key in the context of COVID-19 and the associated responses to staffing and remuneration arrangements. These conditions need to continue to be met during this time.

Despite the difficult conditions, professional services firms still need to be vigilant to avoid penalties or regulatory action.

Below we go through the common scenarios we have seen and their unintended consequences:

  • Reduction in hours: a reduction in hours and equivalent reduction in pay has been the most common response by firms. In this scenario, firms need to ensure that employees caught by the Clerks Award are not being underpaid based on the actual hours they are working. Firms should be paying particular attention to any overtime being performed under the new arrangement, as there is a risk of unintentional underpayment where employees are performing overtime equivalent to their old working week.
  • Reduction in partner pay: many firms have made aggressive cuts to partner pays. Typically, partners fall outside the scope of the Clerks Award as they are qualified professionals and therefore the test they need to meet is to ensure they are still being paid above the National Minimum Wage.
  • Reduction in staff pay: a reduction in pay without an equivalent reduction in hours presents employers with a significant risk of underpayment for their junior and administrative staff. For example, where an employee has taken a 20% pay cut and they are only being paid for 30 hours despite continuing to work 38 hours a week. Firms that have chosen this approach should be monitoring the actual hours worked by employees and the effect on their hourly pay rate. Firms should be paying close attention to whether there is sufficient buffer in the salaries for the junior and administrative employees covered by the Clerks Award to ensure they are not unintentionally being underpaid.

The Fair Work Ombudsman have indicated that they will not be letting businesses off the hook of these obligations during the pandemic, so pleading ignorance or blaming the tough times will not provide relief. The spotlight has already been shone on professional services prior to the the pandemic and firms will continue to be investigated.

At PKF, we understand that times are tough and we are here to help you with this. Get in touch today and let us take the worry away.