Following on from Dundas & Wilson's recent seminars on Redundancy and Rationalisation Procedures and Practical Routes Forward, Graham Paul, Employment Partner provides the following comments:
As the economy moves towards alleged stagnation, and businesses prepare themselves for the long haul of economic depression, many employers are still looking at ways of rationalising costs. The past 12 months have shown that many companies still need to become leaner.
In most sectors, it remains the case that staff cost is the biggest overhead. The bluntest instrument in terms of reducing employee costs is to reduce the number of employees i.e. make redundancies.
For many businesses, though, that won't be the best approach:-
- Even in these times of economic constraint, the negative
publicity generated by redundancies can be a cause for
concern: affecting the public image of a business's
short-term viability, scaring suppliers into being tougher on
credit terms or adversely impacting its future recruitment
strategy. Few businesses want the reputation of wielding the
knife too quickly in testing times.
- For some businesses it may be that the one-off hit on
cash-flow of making large-scale redundancies is not
possible.
We turn then to the practical and commercial routes available to businesses who need to look at making immediate and significant savings in remuneration without resorting to redundancies?
- Negotiating pay cuts or payment holidays with
their employees
This is probably the most drastic option, and in reality would only be seriously considered where redundancies were otherwise inevitable. Self-evidently any salary reductions require employees' consent, and the likelihood of that consent being forthcoming will depend on a myriad of factors:
- how, if at all, will the employees ever get back what
they forego (often there will be agreement that waived
salary will be paid as a bonus once cash-flow is back on
track, or shares in the business are awarded in lieu of
pay);
what are the prospects of the employee getting work elsewhere;
- how long is the cut proposed for, and how deep is it;
and
does the employee see a long-term future for the business.
- Overtime freeze and changes to shift
patterns
Few employees will have a contractual right to overtime, and so a temporary freeze on overtime is likely to be relatively unproblematic. Claims that employees have a right to overtime by reason of custom and practice are unlikely to succeed. Obviously in certain industries employees will rely on regular overtime as a significant part of their normal pay. Employee relations issues, rather than legal claims, will be the concern here. Again companies need to get the messaging correct – consultation with the employees from the outset is recommended – the more the employees understand, the better the option will be in their eyes.
Overtime freezes will often be considered in conjunction with shift pattern changes. A business needs to ensure that it is managing its required output without the overtime. If its output falls, any savings on overtime payments are lost in reduced sales income. Shift pattern changes can be more difficult to implement legally:-
- Even if there is a contractual right to vary shift
patterns, that right must be exercised reasonably in order
to reduce the risk of breach of contract and constructive
dismissal claims. In all cases, but most particularly where
any right to vary shift patterns has never as a matter of
fact been utilised, there should be prior consultation with
employees before effecting the change. Even if that
consultation process involves one mass meeting.
Where there is no express contractual right to vary shift patterns, a greater degree of care should be taken on the consultation exercise. Ideally employees should agree to the change in shifts: so the consultation should be a selling exercise for the Company. If agreement cannot be reached with employees there are essentially two options: (i) go down the route of terminating employees' existing contracts and offering new ones with the new shift patterns (this will necessitate collective consultation if more than 19 employees are affected), or (ii) taking the view that adhering to the new shift patterns is a reasonable instruction and disciplining staff who fail to do so.
Businesses need to be particularly sensitive to the impact of proposed changes on those with childcare responsibilities or religious beliefs that impact possible work patterns. Any enforced shift change would need to be objectively justified in the context of a discrimination claim. In the context of the justification defence, the company would effectively be required to show that there was no practical alternative to the enforced change.
- Sabbaticals
Withdrawing discretionary bonuses or benefits
Finally, businesses should look to see if discretionary benefits can be withdrawn from employees in order to make cost-savings. This does need, again, to be balanced against the impact on morale (and therefore, indirectly, on productivity). However if a benefit is genuinely discretionary in nature, provided that the decision to withdraw it or not to pay it is not irrational, then it is lawful. The one issue which will merit some consideration is whether or not the benefit is genuinely discretionary or, rather, has become contractual by reason of custom and practice. Any businesses considering the withdrawal of bonuses which could arguably have become contractual due to custom and practice, should assess the risk of claims of breach of contract at the outset and proceed with this route when that assessment has been undertaken only.
Graham Paul, Partner
Dundas & Wilson LLP
graham.paul@dundas-wilson.com
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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