The roar of the Celtic Tiger has been well and truly silenced, leaving employers with little option but to cut their costs and/or streamline their businesses in order to remain competitive. Employers are now considering drastic cost-saving measures which may have seemed unthinkable twelve months ago, of which redundancy is one of the more obvious. These are alternatives to redundancy, which employers may consider to be viable long term solutions to sustaining their business. So what are these options, how practical are they and could they give rise to a legal challenge?
Reduction in salary/benefits of employees
An employer’s most significant overhead is often the salaries of its employees. It will, therefore, come as no surprise that, although perhaps the most controversial cost reduction measure for employees, short of redundancy, it is one of the most attractive to employers.
But are reductions in salary/benefits legal, and what are the risks? It is a basic principle of contract law that one party to an agreement cannot unilaterally vary a term or condition of the contract to the detriment of the other, without the other’s consent. While some contracts of employment contain contractual provisions giving employers a wide discretion to vary the contract, it is very uncertain whether or not a Court would enforce this where to do so would mean that the employee would be at a significant disadvantage, which would clearly be the case in relation to a reduction in pay. In general, any discretion to vary a contract must be exercised reasonably and not arbitrarily or otherwise unfairly. Whilst therefore a reduction in pay/benefits may only be safely implemented with the consent of the employee concerned, such consent may be more forthcoming than in the past, if the only alternative is redundancy. This is obviously due to the fact that fewer jobs are available in the market place and unemployment is at its highest level for many years.
The most effective and efficient manner in which to introduce a pay cut is by notifying the employees of the commercial need to reduce salaries and engaging in consultation with them, or their representatives, in order to obtain their consent to the proposed change. Obviously, it is best practice to obtain such consent in writing, and indeed failure to secure this may give rise to liabilities under the Payment of Wages Act, 1991(“the 1991 Act”). There should be clear communication with the employees or their representatives so that the employees cannot argue at a later stage that they were not fully aware of the impact of the proposal. Depending on the circumstances, the proposal may be accompanied by an undertaking to restore wages to previous levels, in the event that business improves to a sufficient level.
Any unilateral pay cut could lead to potential actions such as constructive dismissal, breach of contract, or a claim for unlawful deductions under the 1991 Act. Insofar as any employees are trade union members, there may also be potential for industrial action. However, recent trends suggest that many employees have been willing to cooperate with their employers in an effort to avoid unemployment and such measures have been widely reported in the media. Proposal pay/benefit cuts will not, in all likelihood, be unexpected, however unwelcome to employees.
Layoff and Short Time
Rather than requiring an employee to do the same amount of work on reduced wages, some employers may find it more attractive to reduce the number of hours an employee is required to work, or to require them not to work at all for a temporary period. This is seen more frequently in factories where production orders are reduced and there is not the same volume of work available.
There are two statutory concepts outlined in the Redundancy Payments Acts 1967 to 2007 (the “RPA”) which deal with reducing employees’ working hours, namely “lay-off” and “short time”. Lay-off is essentially full suspension from work for a period of time and short time (as defined under the RPA) arises where the employees’ weekly remuneration is reduced by at least one half. Lay-off and short time, by their very nature, are temporary concepts and in this regard, where an employee has been laid off or kept on short time for a certain period, in circumstances where there is no prospect of a return to full-time work for the foreseeable future, the employee may give his or her employer notice in writing of his or her intention to claim a statutory redundancy payment. The employer, depending on the circumstances, may be able to serve a counter-notice to defeat the claim for redundancy, if it anticipates work will become available in the short term. When an employee does not give notice of their intention to claim redundancy, then arguably they could remain on short time or lay-off indefinitely.
Whilst short time is defined under the RPA, some employers may simply wish to reduce the working week from five to four days, or five to three days, which would not fall within the statutory definition. However, the employees would not be able to claim a redundancy payment after the statutory period of time in such circumstances. Such a reduction in hours is obviously attractive for employers with a reduced volume of orders or work available, and therefore, the statutory thresholds should be borne in mind if this is being considered. If implemented properly employers can do this with the employees’ agreement (obtained either in the contract of employment or when the proposal is made).
The RPA is silent on the issue of whether or not an employer is entitled to deduct wages from an employee who is laid off or kept on short time. Therefore, it must be remembered, that this alternative may only be an attractive one for an employer where it has retained the right to reduce pay in such circumstances, or by agreement. At common law, an employer is in breach of the contract of employment if it places an employee on short time or lay-off without pay, unless there is either an express or implied term in the contract permitting the reduction of pay. It could also be considered an unlawful deduction from wages and thus a breach of the 1991 Act. However, as discussed above, it is becoming more common for employees to be willing to agree to an employer’s request, given the more severe alternatives which could be implemented.
In an effort to reduce the impact of lay off/short time on employees, they should be reminded that they may be entitled to claim social welfare benefits due to the reduction in hours. This is generally a means tested benefit and will, therefore, depend on the employee’s personal circumstances.
Job Share / Part Time Work
Job sharing is akin to part-time working and is an arrangement to divide one full-time job, including its responsibilities and benefits, between two individuals. The job can be shared in a number of ways, for example, on the basis of a split week, a split day or on the basis of a “week on / week off” arrangement. Practically, the feasibility of a job sharing arrangement will depend on the nature of the work. In addition, good management and communication are essential for effective job sharing. While this is a matter of negotiation between the employees and the employer, the potential cost saving is attractive from an employer’s perspective.
Employers may also consider offering flexible working arrangements or part-time work to employees on a negotiated basis, in order to reduce costs. This may be a particularly attractive option for employees who wish to consider a reduction in their working hours and maintain a better work / life balance. Obviously any such agreement will depend on whether or not it is feasible from a business perspective and can only be introduced with mutual consent. However, it is certainly an option to consider for employers in appropriate circumstances.
Career breaks are being offered more frequently to staff to reduce salary costs. Although a career break may be considered by younger members of staff rather than more senior staff who have greater financial / family commitments, employers can use this voluntary measure as a means of reducing costs and with a view to retaining valuable employees over the long term. Obviously the employer will be hoping that on the expiry of the career break the economic conditions will have improved, such that a return to full-time employment can be accommodated.
Usually this arrangement works by offering an unpaid career break to all or a targeted section of staff (with the right to refuse the offer to particular employees if certain skills/experience need to be retained). However, some employers consider making a nominal payment to employees at the outset to entice them to take a career break, as there is a greater overall cost saving for them. The employer usually guarantees that the employee will be entitled to return to work at the end of the leave period, subject to them not entering into employment with a competitor during their leave and subject to the availability of a position at that time. They may not necessarily return to the same position in which they held previously. Obviously, such a measure is voluntary and can only be entered into with the employee’s agreement.
Temporary Shutdowns and Annual Leave
It is becoming more frequent to see employers implementing temporary shut-downs across their business and requesting employees to take their annual leave accordingly.
In Ireland the Organisation of Working Time Act 1997 (“OWTA”) sets out the statutory right of employees to annual leave. The OWTA vests a discretion in the employer as to when annual leave can be taken, having regard to its business requirements. This discretion is not unfettered and is subject to the employer taking into account the needs of the employee to reconcile work and any family responsibilities and the opportunities for rest and recreation available to the employee. The OWTA places an obligation on employers to avoid simply imposing a period within which annual leave must be taken, and instead the employer must engage in a degree of consultation (usually at least one month) prior to directing when the employee should take annual leave. In practice, many employers require employees to take their annual leave at specific times e.g. during the Christmas period. However, this is usually a custom and practice in the Company, rather than a “once-off” measure.
If this is not the current practice of an employer, an employee could argue that he or she does not have to take the annual leave in these circumstances. The employee would be expected to act reasonably in relation to any such request, however, arguably they could refuse and therefore, this may be a less straightforward measure to implement in practice, although difficult financial circumstances might arguably justify any such measure taken by the employer.
Redundancy as a Last Resort
Where none of the above are commercially viable options, it may be the case that an employer has no choice but to implement redundancies. Depending on the numbers involved this may trigger a collective redundancy situation and legal advice should be sought. However, it should be remembered that redundancy should be considered only as a last resort. Prior to implementing the redundancy, other cost-cutting measures and suitable alternative employment should be considered by the employer, where feasible.
While it is likely that implementing any of the above cost-cutting measures would cause some degree of unrest within a workplace, employees are becoming more receptive such proposals in the current economic climate, and are recognising the economic realities facing both them and their employer.
Employers should carefully consider the process of implementing any such changes and appropriate legal advice should be taken. Many of the proposals above would require an employee’s consent and the success of obtaining this will depend on the approach adopted by the employer. Therefore, a carefully planned process is always advisable to avoid potential claims.