My take is that this is two things: a) very bad employee relations, and b) probably a violation of the players' CBA.
a) yes, the Bummers could have cut him, and Lefors could have then signed with another team, although that's unlikely given his performance. That would've been the proper way to do it and it wouldn't make the rest of the team second guess themselves even more. My guess is that Kelly didn't want to get egg on his face by releasing the guy he anointed before the season was half over, but now he gets egg on his face anyway. Next free agent season you can bet that most will hesitate before signing with Krazy Kelly.
b) I'd be very surprised if the CBA allows a team to arbitrarily change the terms of a players contract during the term of the contract. Saskatchewan asked Kerry Joseph to take a cut and he refused, so they traded him. Lefors is untradeable at the moment though, so he actually keeps a paycheque in this case when he'd otherwise have none, but that's not really the point. Arbitrary pay cuts and job insecurity are a great way to lower your employee morale.