Redundancy: Is there an alternative?
The roar of the Celtic Tiger has been well and truly silenced, leaving employers considering drastic measures which may have seemed unthinkable 12 months ago. However, there are alternatives
17 April 2009
Salaries are often an employer’s most significant overhead.
It will therefore come as no surprise that, although controversial, it is one of the most attractive to employers.
But is it legal, so what are the risks?
1 Reduction in salary and/or benefits
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 discretion to vary the contract (sometimes unilaterally), it is arguable 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 technically a reduction in pay/benefits may only be implemented with the consent of the employee concerned, such consent may be more forthcoming than in the past, especially if the only alternative is redundancy.
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.
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.
The implementation of this type of proposal is not without risk. 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.
2 Lay-off and short time
Reducing the hours of an employee, or requiring them not to work at all for a temporary period, can pose an attractive alternative. 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, which deal with reducing employees’ working hours, namely "lay-off" and "short time". Lay-off means full suspension from work for a period of time and short time 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 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 was either an express or implied term in the contract permitting the reduction of pay. It could also be considered an unlawful deduction of 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.
In an effort to make this a more attractive solution to employees, they should be reminded that they may be entitled to claim social welfare benefits due to the reduction in hours.
3 Job share and 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.
4 Career breaks
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 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.
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 or experience needs 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.
5 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. In Ireland the Organisation of Working Time Act 1997 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.
Therefore, an employee could argue that he or she does not have to take the annual leave in these circumstances, and could refuse. Thus, this may be a less straightforward measure to implement in practice.
Where none of the above are commercially viable options it may be the case that an employer has no choice but to implement redundancies. However, redundancy should be considered only as a last resort. Prior to implementation, other cost-cutting measures and suitable alternative employment should both be considered by the employer.
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 agreeable to such proposals in the current economic climate.
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, and in some cases, the consequences for employees in default of agreement. Therefore, a carefully planned process is always advisable to avoid potential claims.