As COVID-19 spreads its way around the world it is anticipated that more and more businesses will begin to feel the pain of a slowdown in the global economy. Inevitably, this will lead to employers taking a close look at how to cut costs.

Often one of the largest costs for employers is staffing. As such, any cost-cutting review will almost certainly involve a consideration of whether to cut staff costs and if so then how. This update briefly considers the different steps an employer can take to reduce staff costs and certain issues that may flow from them. Future updates will examine the options in more detail.

1. Redundancies or lay offs

Redundancies involve the permanent separation of employees by an employer. Making an employee redundant is a "valid reason" for termination for the purposes of Hong Kong's Employment Ordinance. An employer is obliged to pay a redundant employee termination payments determined in accordance with the Employment Ordinance and the appropriate contract of employment.

Point to note: Care should be taken in determining which employees should be made redundant. In particular, employers must ensure that whatever methodology is used does not breach any of Hong Kong's anti-discrimination ordinances.

2. Salary cuts or benefit restrictions

The level of an employee's salary and benefits is normally a contractual right. As such, any proposal to reduce the salary or benefits of an employee will normally require the express consent of the employee. Generally speaking, an employee will only consent to a reduction of his or her contractual benefits if the employee is incentivised to do so. Such incentives may include an assurance of future increases (for example, when the business environment improves) or a threat of possible redundancy should it not be possible to reduce costs through a salary/benefit reduction.

Point to note: Occasionally a contract of employment may give an employer a wide power to vary the terms of the contract without the consent of the employee. Such a unilateral power of variation is not unfettered and must not be exercised "capriciously".

3. Voluntary leave arrangements

An increasing number of employers are offering employees the opportunity to take voluntary unpaid leave in times of material business disruption. From a legal perspective this will be an agreed variation of contract. As such the issues are similar to those in 2 above. Voluntary leave schemes can take multiple different forms. For example, an employee may agree to:

  • A 25% reduction of monthly wages for two months in return for two additional weeks' leave that he or she can take any time in the next 6 months, or
  • Take an immediate two weeks of unpaid leave, in which case it will be just the month in which the leave is taken where the payroll will be reduced.

Points to note: Any period of unpaid leave will have an impact on the calculation of an employee's wage-based entitlements, e.g. statutory holiday pay and annual leave pay. As such, it is important to ensure that appropriate payroll adjustments are made.

4. Mandatory leave

Most employment contracts give an employer influence over when an employee should take annual leave. It may make sense for an employer to look to exercise such influence to require employees to take their annual leave when business is slow and then require them to be at work when business picks up.

Points to note: Be careful to check the employment contract to identify whether and when an employer can require an employee to take leave.

March 03 2020

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This article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein. Please also read the JSM legal publications Disclaimer.