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2020 08 31

Pandemic challenges: when can you reduce staff wages under pressure from the pandemic?

With autumn nearing, most companies are preparing for potential new challenges, and as the experience of lockdown demonstrated, businesses can survive under extreme conditions only by being flexible and capable of adapting. However, when talking about changes to wages or planned staff bonuses, there is only so much space for flexibility as the Labour Code offers, and thus, what possibilities do companies under duress have to change their staff wages or bonuses?
Jurgita Karvelė
Jurgita Karvelė

Wage changes – only on agreement with the employee

Employees and employers can always change wage conditions on the basis of mutual agreement. Of course, that is only if such an agreement does not clash with the norms of the Labour Code, and if the employee freely agrees to the pay cut. But what can be done if the employee does not agree to a decrease in wage or bonuses when the company is facing difficulties, or under any other conditions?

The employer cannot make any unilateral changes to wages as they are indicated in the work contract. As such, the only option available to the employer is to try and come to terms with the employee and change the work contract based on mutual agreement (it must be noted that during lockdown, many company employees had willingly accepted temporary pay cuts when their employers were facing difficulty). As maintaining good relations between employee and employer and mutual understanding are important to both sides, it is possible to reach an honest agreement that matches the interests of both sides. Experience shows that employers, who openly explain the situation to their staff and consult them, often are able to reach the agreements necessary for their companies.

Another measure, which a sizeable number of companies have employed during the lockdown, is the reduction in staff work time. This way, the agreed-upon wage remains unchanged, but it is paid on the basis of the reduced working hours. Instead of working full time, the employee switches to part-time, and their wage sees a respective decrease, and. once again, there must be a mutual agreement for the reduced working hours. With the employee refusing a smaller wage, such a disagreement cannot be the reason for dismissing them, but an employee’s refusal to take on reduced working hours could be the basis for terminating a work contract. Of course, in such a case, the employer must adhere to the warning deadline and pay the severance pay indicated in the Labour Code.

Bonus size can’t always be changed

A significant number of employees receive a sizeable part of their wage through various bonuses and add-ons to their fixed wage, and the possibilities for changing them primarily depend on the specific wording in the work contract. For example, in the contract, if the employer commits to paying a set wage bonus regardless of the employee’s results, this commitment must be upheld.

However, if the bonuses are linked to the results the employee presents, the company can change the goals set for the employee and hence reduce - or refuse to pay - the bonuses indicated in the contract. Furthermore, the company can always define its bonus payment procedures in its internal rules, and in the work, contract indicate that bonuses are paid based on procedures set unilaterally by the employer. The employer can change their internal procedures due to pertinent reasons in a way that the employees’ bonuses would decrease or not be paid at all. Only in such a case, it is always important to inform the employees ahead of time (often, the regulations themselves indicate the period of time that employees should be informed of regarding upcoming changes). Such cuts in bonuses will not be possible if the work contract indicates that the employer cannot unilaterally change the goals or bonus payment procedure for the employee.

Every detail counts

Sometimes, in order to reduce bonuses, even seemingly minor details or specific contract wording can become important. For example, there have been cases where the work contract indicated for the employee payment of an ‘up to 100 per cent bonus to their wage.’ For a long time, the employee received a bonus of this size, but when the employer decided to cut the bonus size to 50 per cent of the wage, the employee disagreed. When a dispute occurred, the employer tried to prove that the wording of ‘up to 100 per cent ’ means that this part can also be smaller, but the court ruled in favour of the employee. This case illustrates how carefully and precisely a work contract must define sections pertaining to wage and bonus payment wording.

It is far simpler when it comes to cases when the work contract indicates the possibility for the payment of bonuses, but no commitment is made to pay them. This presents the opportunity for the employer themselves to decide on bonus payment.

In certain cases, such as during a lockdown, the reduction of staff wage or bonuses could be the only way to not run out of working capital, and ensure continued operations. In preparation for a potential second wave of the coronavirus and new restrictions, companies should henceforth review their contracts and internal procedures, and if need be, adjust them to be more flexible.

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