Every employee loves a raise. It’s one of the best ways to reward your hard-working staff. And it stops them from having their heads turned by businesses offering higher salaries.

But there may be times when you feel the need to retract a pay rise, either as a punishment or out of necessity.

So does the law allow you to do this?

While it’s not illegal, you need to have a good reason to revoke a pay rise. Here are the three most common situations where you might be tempted to do so…

1. Your employee is underperforming

More and more companies are linking pay rises to staff performance. The idea is that by doing so, you’ll be motivating your workers to be more efficient and effective. If one employee notices that another is being rewarded for his hard work, he’ll be more likely to up his game too.

But what happens if, after you’ve bumped up someone’s salary, they start slacking? Can you take their pay rise away from them because of poor performance?

You can, but it’s tricky because your employee’s salary is part of their contract. And like any other change to a contract, you have to negotiate it with your worker, who probably won’t be too happy their pay is going back to the old rate.

Instead of docking your employee’s pay straight away, try to find out what’s causing the drop in performance and whether you can do anything to bring it back up.

2. Your business is having a downturn

If your business is going through tough times, you need to cut costs to survive. While it’s not ideal, rescinding pay rises is one way to bring down your expenses.

Once again, your staff might feel angry that you’re taking away their pay rises. Explain to them that if you don’t take these measures, you might have to make some of them redundant.

This scenario is easier to justify than retracting pay rises because of poor performance since you have a clear and urgent business need.

3. Breach of confidentiality

Many businesses consider it unprofessional for employees to discuss their salaries and pay rises with each other. This is because it can create a toxic atmosphere of jealousy and resentment if one employee gets a pay rise and another doesn’t.

To discourage staff from talking about what you pay them, you could put a confidentiality clause in their contracts. This will give you the power to retract a pay rise if your employee is indiscreet.

4. Handle with care

Retracting a pay rise isn’t something you should do off-hand.

If you go about it the wrong way, retracting a pay rise could have a devastating effect on staff morale.

So whatever your reasons are, it’s vital that you communicate with your employees.

Be clear about why you want to take away their pay rise, and give them a chance to suggest alternatives.

You should also tell them in advance, rather than letting them find out when they look at their payslip.

To avoid expensive legal claims, retracting pay rises should always be a last resort.