Can an employer ask employees to accept a wage sacrifice due to the corona crisis?
Unilateral changes to wages of employees are subject to very strict rules
A company which faces setbacks and gets into financial trouble will look for measures that can make the company financially healthy again.
A wage sacrifice by employees can be such a measure. However, if employees do not wish to participate in this, a change in working conditions is in many cases not possible to implement.
Employers have limited options for a unilateral change of the working conditions. Salary is the most important primary employment benefit for employees and probably the biggest expense for the company. In difficult times, an employer can therefore achieve the highest ‘profit’ by reducing the labour costs.
If an employer asks employees to make awage sacrifice, he is actually asking them to agree to a reduction in salary. Of course the employees won’t be enthusiastic.
If there are employees who – for whatever reason – agree to a wage sacrifice, the employer must record this in writing and keep it in their administration. Together the employer and employee have made a new agreement about the amount of the salary that replaces the old agreements.
If the employer wants a wage sacrifice, but the employee does not agree, the question is whether the employer can unilaterally reduce the wages. Two situations are possible if working conditions are amended unilaterally:
- the situation in which a unilateral amendment clause has been agreed in the original employment contract;
- the situation in which the employment contract does not contain a unilateral amendment clause.
Serious business interest
A unilateral amendment clause in an employment contract is not a free pass for the employer. It merely indicates that the employment contract already takes into account the possibility that the employer wants to change the working conditions unilaterally.
But then the employer is not there yet, because invoking that unilateral amendment clause can only be done if there is a serious business interest. The interest of the employer in adjusting the working conditions should then outweigh the interest of the employee in case of keeping the agreements unchanged. And that’s not going to be adopted by judges very quick.
Good employership and good employeeship
If no unilateral amendment clause is included at all, a unilateral change in working conditions will have to be assessed on the basis of good employership and good employeeship. In the case-law, this is made out in the court case Stoof/Mammoet. The so-called double reasonableness test was introduced.
This test means that a court must assess whether a proposal for unilateral changes in working conditions is linked to changed working circumstances.
There must therefore be something going on that will allow the employer to make a proposal to change working conditions. Only when that has been determined one can assess whether the offer is reasonable. All circumstances are taken into account.
Impact of the proposal
Finally, the question is asked whether rejection of the proposal by the employee is unacceptable by the standards of reasonableness and fairness. Consider the circumstances of the proposal, whether it is done to preserve the continuity of the company or just for profit. And what if nothing happens, will the company go bankrupt?
The judge is also looking at the impact of the proposal. He takes a closer look at the effect of the measure on the employee and to what extent this has also been addressed. Moreover, also relevant is whether the condition that is unilaterally changed is a primary condition of employment or ‘just’ a so-called secondary condition of employment. Wages are a primary condition of employment for employees and should not simply be revised downwards.
The legal bar for a unilateral pay cut is sky-high. The case-law shows that a proposal for a unilateral pay cut is not approved in most cases.
However, there are a number of points of interest that increase the chances of successfully applying wage reduction for the company. For example, wage reduction should be an extreme tool, focusing on the continuity of the company and not on (for example) improving profits. In the latter case, a judge is unlikely to have much sympathy for the employer’s position.
If the company has a workers council (OR), it is also advisable to involve the council in the process. Even better is if the OR understands that wage reduction is necessary and advises positively on this.
‘Substantial’ pay cut not approved
In January 2015, department store V&D announced that they wanted to reduce the working conditions of its employees by 5.8% in 2015, 2.1% in 2016 and a further 2.1% in 2017. In addition, accumulated senior days would be cancelled or frozen and the number of holidays would be cut. At least this was V&D’s intention.
The trade unions presented the unilateral reduction in wages to the courts. They argued that V&D had no legal basis for unilaterally reducing working conditions without the consent of the employees. V&D relied on the good employer and employee ship, a unilateral amendment clause in the employment contract, reasonableness and fairness and the unforeseen circumstances for the company. A cost reduction was necessary. There were no alternatives, according to V&D.
According to the court, the announced pay cut was a substantial reduction in pay. Salary is an essential primary condition of employment, which means that employees do not have to agree to a pay cut. The imposed unilateral pay reduction and adjustment of other working conditions were therefore not justified.
Amsterdam District Court, 23th February 2015
Inform employees transparently
What is also apparent from the case-law is that it is useful to inform employees transparently. The employer should involve them in the measures that have already been taken and the trade-offs that have been made. In the case of an equal distribution of the burden, employees are more likely to be willing to participate in a nasty measure such as a wage reduction. So the employer should look at the possibility of collectively arranging a wage reduction rather than arranging it within one specific target group.
It is useful to point out the alternative if action is not taken. To some extent, solidarity may be required, and this is clearly an appeal. Furthermore, it helps if the employer ensures a reasonable reduction scheme. If applicable, the employer must take a collective labour agreement (Cao) into account.
Don’t push through
All in all, a lot is involved before an employer’s request to employees for a wage sacrifice actually succeeds. Practice shows that in the vast majority of cases the employer should not push wage reduction at all costs. The judge will put a stop to that.
Lower pay due to positive attitude of the employees
You have read that – the now bankrupt – department store V&D lost their case in Court. However, sometimes employers can successfully implement a wage reduction. For example, in a case where there was an ailing organisation that had already been confronted with several reorganisations. That was not enough, there was another considerable need to intervene.
Wage offer requested
The employer would say goodbye to as many as 42 employees and measures had been taken in the area of housing. In addition, a wage offer of 6% was requested. The OR was involved by the employer and had advised positively. It was clear that doing nothing was not an option and it was also clear to the OR that the measures had been properly weighed.
Following the positive attitude of the OR, another poll was carried out among the employees, who voted in favour of the adjustment by 83%. Two employees declined to cooperate and approached the judge. The judge agreed with the employer. In the decision, the criteria of stoof/Mammoet were screened and the employer was allowed to unilaterally implement the wage reduction.
Central Netherlands Court, 13 December 2014