The economic downturn is international, and it is hitting US-based multinationals in their operations not only in the United States but also in many markets abroad.
When a US-headquartered employer suffers economic difficulties and needs to cut back its human resources costs, the first strategies that will likely come to mind are US-style retrenchments like restructurings, pay-cuts, and reductions-in-force. Because the US is (virtually uniquely) an employment-at-will jurisdiction, implementing a restructuring, pay-cut, or reduction-in-force within the US, although inevitably tricky, tends to be less regulated, by international standards. Outside the US, where so-called “indefinite employment law” systems impose the concept of “vested and acquired” rights, laws regulate workplace restructurings and pay- cuts rather more extensively than in the US—and they regulate reductions-in-force substantially more extensively.
This “toolkit” addresses how American-based multinationals can project-manage a cross-border human resources retrenchment across operations outside the US. To address what you need to know to project-manage cross-border restructurings, pay-cuts, and reductions-in-force, our discussion breaks into three parts: (A) “vested/acquired” rights restrictions on restructurings outside the US (B) restrictions specific to pay-cuts outside the US and (C) project-managing cross-border reductions-in-force.
A. “Vested/acquired” rights restrictions on restructurings outside the US
American employers are generally free to make sweeping workplace restructurings that result in material reductions in work terms, a freedom they exercise regularly. An article in The New York Times called “A Hidden Toll on Employment: Cut to Part Time” (July 31, 2008) reports on American employers unilaterally cutting hours, benefits and take-home pay. Another New York Times piece addresses the trend of American workers “being told to move abroad—or else.” According to that article, American employers transfer workers saying “I don’t care if your wife has to stay here, this is what you have to do.” “Leaving Wall St. for a Job Overseas” (August 12, 2008). American employers also regularly rewrite employee handbooks, discontinue human resources programs, integrate workforces, and downgrade employees’ jobs and job titles.
With the economic downturn, employers worldwide are increasingly restructuring workplace operations to impose cost savings. In February 2008 the Mexican human resources professional association AMEDRIH issued a press release that actively encourages employers in Mexico to make incremental HR cuts, in order to avoid large-scale layoffs. According to another New York Times article, one called “More Companies Are Cutting Labor Costs Without Layoffs” (Dec. 22, 2008), “employers have found an alternative to slashing their workforce. They are nipping and tucking it instead.” Indeed, multinationals trimming worldwide personnel costs often turn first to measures softer than lay-offs, such as: pay-cuts, benefits cuts, hours cuts, pay freezes, forced paid vacation, unpaid furloughs, and temporary shut-downs.
Domestically within the US, these unilateral reductions in work terms are regulated lightly, if at all, because the US has no doctrine of vested and acquired rights. American-style employment-at-will, which is unique in the world, remains good law in the states: “Despite dire predictions of the demise of [US] at-will employment in the early years of the 21st century, it appears…that ‘funeral arrangements’ may still be a bit premature.” “Employment-at-Will: Has the Death Knell Officially Sounded?” International HR Journal, Summer 2008, at 16, 21.
Americans usually think of employment-at-will in connection with employment terminations, because we define employment-at-will as the employer’s right to fire an employee for any reason or no reason except a discriminatory or retaliatory reason—even on a “whim.” Supra at 16. But employment-at-will is also what grants US employers their freedom to restructure and reduce employment terms in day-to-day human resources operations. After all, an employee who can be fired at will has no standing to complain about a reduction in work conditions less than a termination.
By contrast, outside the US the operative legal rule is “indefinite” employment—or, as it is known in the Philippines, the “security of tenure” doctrine. Indefinite-employment systems regulate, restrict or LLPprohibit employment terminations and grant to fired employees a cause of action (of one sort or another) for unfair dismissal.
An implicit corollary of any rule restricting no-cause terminations is that an employer barred from firing without cause also cannot constructively discharge. After all, if an indefinite-employment-system employer could constructively discharge, the prohibition against unfair dismissals would become meaningless if an employer, without legal cause, could “fire” workers simply by demoting, cutting pay, or assigning intolerable tasks until an unwanted employee quit.
Of course, any restriction on constructive discharges is the same as a restriction on unilaterally reducing material terms and conditions of employment. This is why workers outside the US are said to enjoy “vested” rights in their existing terms and conditions of employment. In indefinite-employment jurisdictions, employers generally cannot, without employee consent, make material workplace changes such as (for example) transferring a worker to a different city or discontinuing a benefit plan. Outside the US, employers acting unilaterally are usually free only to make immaterial tweaks to work conditions such as (for example) moving an employee’s office from one floor to another or changing a benefit plan from one provider to another.
- In a sense, the vested rights rule abroad works a lot like US law in the labor union context: Unionized US employers generally cannot unilaterally reduce material terms and conditions of employment until bargaining in good faith to impasse.
Outside the US, an employer that violates the vested rights rule and unilaterally makes changes that materially reduce terms and conditions of employment risks having employees quit, sue for constructive discharge, and demand full severance pay. In many countries the burden in these lawsuits shifts to the employer to prove the quit was not a constructive discharge. And in some countries such as Brazil, an employee may have standing to sue even without quitting.
So the question becomes: Can an employer operating under indefinite employment ever reduce terms or conditions of employment to account for new business realities? The answer is a very qualified “yes,” subject to five principles: Reduction, materiality, “red circle,” consultation, and consent:
Reduction: An employer in most countries outside the US cannot unilaterally reduce material terms/conditions of employment, such as via a workforce restructuring, a cut in hours/benefits/compensation, an employee transfer/reassignment/demotion, or a change in job titles where the change amounts to a demotion. But (outside a few jurisdictions like Chile), employers can usually make a unilateral change such as a pay raise or a new benefit that workers greet as an improvement.
Materiality: Outside the US, employers cannot unilaterally downgrade material terms or conditions of employment. But employers are generally free to impose truly de minimis cuts such as (perhaps) downgrading office equipment, discontinuing certain office supplies, or rephrasing a “Sales Director” title as “Director of Sales.”
“Red circle:” One alternative to employer unilaterally-imposed pay-cuts or demotions is for the employer to “red circle” employees, freezing pay and withholding future raises. Red-circling can be perfectly legal in indefinite employment countries unless it amounts to a unilateral discontinuance of an existing compensation/review practice of giving regular raises, or unless some statute or individual or collective agreement requires regular raises or good-faith merit-increase reviews.
Consultation: Just as with American domestic labor unions, where an overseas works council or trade union committee represents employees in a workplace, any material reduction in terms/conditions is likely to be a mandatory subject of bargaining/ information/consultation.
Consent: In most countries, an employer usually can reduce material work conditions if the affected employees or their representatives consent. However, in some countries individual employee consent is subject to challenge as inherently coerced, due to the imbalance in bargaining power. Union/works council consent will often be binding, but in some contexts or countries an employer reducing terms will need to collect both representatives’ and affected individual employees’ consents. Of course, employees will have little incentive to consent unless the employer pays consideration, and so cuts to work conditions are often possible only when structured as a buy-out.
Distinct from this concept of vested rights is the separate principle of acquired rights. Some indefinite employment jurisdictions are concerned that employers saddled with onerous vested rights obligations might sell out assets, or might outsource, to transfer away their vested employee rights obligations. To protect employees’ vested rights in a business transfer or outsourcing, many (but not all) indefinite employment countries impose so-called “transfer of undertakings” rules by which—as a matter of law—employees’ vested rights transfer over to an asset purchaser or outsource service provider. These employees’ vested rights are said to become acquired rights with the new employer.
B. Restrictions specific to pay-cuts outside the US
In discussing vested and acquired rights outside the United States we have focused generally on employers’ reductions of terms/conditions of employment. Of the various cost-cutting measures that an employer might make (such as benefits cuts, pay freezes, forced paid vacations, unpaid leaves, temporary shut-downs), pay-cuts in particular involve unique complexities. When considering a straight pay- cut (one that does not alter compensation structure), in most (but not all) jurisdictions a five-step analysis is necessary:
Step 1 Verify that pay-cuts are not flatly illegal (as in Italy and Panama) or against public policy (as in Brazil).
Step 2 Comply with minimum wage laws, statutory benefits mandates, and employment contracts: The pay-cut cannot push any employee’s pay below minimum wage or deny any statutory-benefits entitlements, and the pay-cut implementation must comply with applicable individual and collective employment agreements (unless the agreements get renegotiated and reformed).
Step 3 Articulate a demonstrable, genuine, and pressing economic need that justifies the pay-cut.
Step 4 Determine whether employee consent is necessary, and collect consents where it is: In most countries the vested rights principle empowers an employee whose pay is cut unilaterally (by a material amount) to sue for constructive discharge or breach-of-employment-contract. But in many (not all) countries a valid, uncoerced, and properly-executed consent, release, or employment-agreement-amendment extinguishes this potential claim. The human resources challenge is how to convince employees to consent. As to employees who withhold consent, have a backup plan—which sometimes has to be a layoff with full severance/notice pay.
Step 5 Follow the country-specific local procedures and rules that modify or add to the above four steps.
This final step, step 5, focuses on the local-country level. What are these country-specific local procedures and rules? Some examples:
- Brazil: Permanent pay-cuts violate public policy in Brazil and are effectively impossible. Temporary pay-cuts of up to three months are possible only if the employer demonstrates serious financial problems and wins buy-in from both the (mandatory) trade union and the local government labor authority (Delegacia Regional do Trabalho). Not surprisingly, employers in Brazil tend to bypass pay-cuts in favor of more locally-viable cost-cutting strategies such as temporary facility shut-downs (férias coletivas).
- France: A multinational trying to cut French employees’ pay must demonstrate “real and serious” economic need at two levels, the French affiliate and the “group” (parent and subsidiaries in same line of business). Even an employer able to make this case must then follow strict procedures: Write affected employees a letter in French proposing the reduction and explaining the economic need; mail the letter by registered mail with return receipt inside France; give employees one month to decide whether to accept the reduction. Employees cannot be terminated for refusing, which of course gives them little incentive to consent. In 2009 France took steps toward implementing government programs to compensate employees for so-called “partial unemployment” (reduced hours).
- Hong Kong: Only the process above (steps 2-4) is necessary in Hong Kong.
- Italy: Italy flatly prohibits reducing pay, even with consent of the employee or trade union. Italy Sup. Ct. Dec’n 11362 (May 8, 2008) interpreting civil code § 2103. As such, pay-cuts are considered impossible.
- Japan: Lay-offs are extremely difficult in Japan, a last resort. Pay-cuts are a second-to-last resort. To cut pay, only the process above (steps 2-4) is necessary, but is subject to strict scrutiny: An employer must demonstrate real financial necessity and show cost-cutting steps already taken. Employees who refuse consent can sue, challenging the employer’s economic justification. If they win, the remedy is reinstatement at the old wage rate plus back pay.
- Panama: Panama effectively prohibits reducing remuneration, and so even an employee consent to a pay-cut is not necessarily enforceable. However, a Panamanian has only a two-month statute of limitations window to sue contesting a pay-cut. Employees who do consent (preferably in writing) should not be able to challenge the cut after two months.
- Peru: Only the process above (steps 2-4) is necessary in Peru. The employee consent document itself should specify an “objective cause” for the reduction.
- Singapore: Only step 2 above is necessary in Singapore; employee consent is not even necessary, as long as after announcing but before implementing the pay-cut, the employer waits out each employee’s contractual pre-termination notice period.
- Spain: Collective agreements commonly set minimum wages for specific positions higher than the statutory minimum wage; a pay-cut cannot dip below the contractual rate. Memorialize employee consents by amending individual employment agreements.
- UK: Avoid announcing a pay-cut in the U.K. as a fait acompli. Invite each employee to a meeting and explain the economic need for the pay-cut and why the cut is the mildest of more severe options. Seek signed consents. Make clear the date and rate on any proposed cut. Employees who refuse a cut might leave, claim constructive dismissal and seek dismissal notice/pay. If an employee will not accept the pay-cut, then the only sure route is "termination and reengagement" on the lesser terms.
Pay-cuts can be a less-disruptive alternative to layoffs—indeed, some governments (Germany’s, for example) actually pay generous “partial unemployment” or “short-time work subsidies” to employees subject to hours/pay-cuts. But worldwide, implementing pay- cuts requires careful attention to local law, and the taking of appropriate steps.
C. Project-managing cross-border reductions-in-force
We have addressed cuts to terms/conditions/compensation that do not result in job losses. Yet employers in economic crisis often have no alternative but to do a reduction-in-force. This is certainly true domestically within the US: A recent article says that reductions-in-force are “so ubiquitous in the American corporate landscape” because “[t]here are few options when business levels no longer support the size and scope of company operations.” “Your Next Reduction in Force: The Dirty Little Secret,” Employment Law 360, Aug 11, 2008. The article cautions that US RIFs:
- “cost money rather than save money in the short run”
- “monopolize scarce management resources and cause significant hardship”
- “in the worst circumstances” cause both “enormous legal liability” and “professional humiliation and financial ruin” for the “ responsible executives”
RIFs are this much of a problem in the states even though the US is an employment-at-will jurisdiction with few laws regulating layoffs, beyond W.A.R.N. (29 USC. Section 2101), state equivalents, and disparate-impact analysis under American discrimination laws. Jurisdictions outside the US, by contrast, regulate involuntary RIFs more comprehensively. Overseas, RIFs (called “redundancies” or “collective redundancies” in Europe, “retrenchments” in India and “termination, change and redundancies” in Australia) raise tough problems because, as we have seen (in part A), these other jurisdictions subscribe to “indefinite” employment. Because of their protective employment law regimes, countries outside the US impose up to five tiers of laws that affect a RIF:
1. Employment contracts: Any employment termination must comply with termination-specific clauses in individual employment contracts (which are often legally-mandated outside the US), collective agreements, and company-issued benefit plans and severance policies.
2. Collective bargaining obligations and the duty to inform/ consult/co-determine with worker representatives, trade unions, local works councils and any European Works Council: In Europe an employer that merely considers a RIF has to sit down and talk to workers before making any decision: The EU Collective Redundancy Directive (75/129/EEC; 92/56/EEC; 98/59/EC) requires “consulting” in good faith with employees with a view to reaching agreement—even if the employees have no union or organization—on “avoiding,” “reducing,” and “mitigating” a contemplated RIF that is not yet a fait accompli. (This European directive expressly rejects the argument that a RIF decision was made by higher-ups at an overseas headquarters, so it reaches right into US boardrooms.) In these “consultations” the employer must demonstrate so-called “economic, technical and organizational” reasons for the RIF, but worker groups and government officers may push back, challenging the business case for the proposed job cuts. In short, these consultations must be about the threshold decision to do a RIF, not merely the effects, and as such employee representatives actually get to review the RIF decision. Headquarters cannot decide alone. These consultations take time—up to 75 days or more, in Italy—and can be document-intensive. Enforcement of this obligation can be serious: Famously, Belgium once launched criminal proceedings against executives of an automaker who shut down a plant without talking to employees first. Other jurisdictions (beyond Europe) have similar rules, especially where “trade unions” are involved.
3. Duty to notify/negotiate with government bureaucracies or get court approval: In the Netherlands the government must approve a layoff; no approval means no RIF. Governments from Colombia and Venezuela to Japan, Korea and China can also block layoffs not blessed by government agencies or judges.
4. Individual severance pay requirements: Countries impose up to four forms of individual severance pay: pretermination notice obligation/pay in lieu; mandated severance payout/end-of-service “indemnity”; wrongful termination cause of action (or a so-called “severance indemnity” court award); and mandated “redundancy pay” (extra severance pay for a lack-of-work layoff, including enhanced notice pay, extra employer-funded “indemnities,” job training and outplacement). Each jurisdiction will have its own local rules. Sometimes a lack-of-work “redundancy” will be deemed good cause, meaning certain elements of individual severance pay may not be due.
5. RIF-specific laws regulating collective layoffs: Over and above severance pay for an individual dismissal, RIF-specific laws impose extra obligations for collective layoffs. This can include the enhanced notice or severance pay obligations as well as mandated selection procedures (who gets laid off) and a duty to sponsor a “social plan” (or equivalent) ameliorating effects of the layoff.
A US-based employer faced with having to project-manage a RIF outside the US not only must account for these five tiers of overseas severance laws, but will also need actively to jettison most of its US-honed RIF tools. Because redundancies abroad differ so radically from layoffs in the US, US-made RIF tools mostly get in the way abroad. Statistical adverse-impact-selection models and other nondiscriminatory US-style selection procedures, for example, are almost worthless in countries where RIF-selection laws affirmatively require factoring in age, marital status, number of children, or date of hire (such as last-in-first-out by job category). And unilaterally making a US-style W.A.R.N. announcement will be illegal in many countries.
In short, laws overseas demand tailored compliance tools, while US RIF tools are inappropriate for structuring an outside-US RIF. Therefore any multinational project-managing a RIF that simultaneously affects employee populations both in and outside the US should bifurcate its RIF plan into a dual US/rest-of-the-world model. Handle the US prong like any US RIF, but simultaneously engineer distinct, yet aligned, overseas strategies. A best practice is to come up with an overarching global RIF project plan with a US component plus separate local “field guides” aligned in format across countries, that include, for each affected country outside the US:
- Checklist of applicable local laws affecting RIFs
- Inventory of applicable local individual and collective employment agreements and company HR policies that touch on severance
- Local timetables and process (who must be consulted? when and how early? whose approval is required?)
- Local consultation strategy (how to confer with employees, representatives, government agencies?)
- Local selection criteria (account for selection rules in local law/local agreements)
- Severance pay and outplacement packages to be offered locally
- Global and local communications strategy (never announce a RIF as decided in countries that impose a duty to consult on the threshold RIF decision until consultation is finished).
- Alignment (synchronize each country field guide with the global project plan)
Large multi-country RIFs are always hugely expensive in the short run. Set-asides for “restructuring costs” can reach millions of dollars. RIF rules outside the US always seem to involve more costs, delays and problems than US management anticipates. To avoid a chaotic, reactive multi-country layoff fraught with compliance problems, manage the global RIF process in a proactive, well-informed, cross-country- aligned way. And consider alternatives: With all the procedures and costs of layoffs internationally, some multinationals reassess the need to do a RIF outside the US and, on occasion, opt for milder solutions, like incentivized voluntary RIFs, hiring freezes, or even pay-cuts (as discussed above at parts A and B).
An economic downturn forces US-based multinational employers to confront difficult human resources retrenchment decisions. While American employers understand the regulatory framework for doing restructurings, pay-cuts, and reductions-in-force inside the US, completely different—and inarguably more complex—sets of rules regulating these retrenchments apply outside the US. Any multinational launching any multi-country restructuring, pay-cut, or reduction-in-force needs to be proactive and strategic as it complies with all the various applicable laws.