Given the material reduction expected in profits as a result of the Covid-19 pandemic, employers are taking a number of measures to conserve cash, including implementing cost containment measures such as deferring bonuses and reducing wages. And while a certain degree of leniency will be provided to employers in light of the unique challenges presented by the pandemic, this article will seek to provide guidance on some of the key factors to consider when implementing these changes.
Bonus Points for Employers
1. Contract of employment and staff handbook: Employers should review existing contracts of employment and staff handbooks in respect of its bonus scheme to clarify the extent of the employees’ entitlement to be paid their bonus. Where bonuses are paid to employees on a consistent basis but are not referenced in their contract or the company handbook, such an entitlement will exist as an implied contractual term where it has been established by custom and practice.
2. Discretionary bonus: Most bonus schemes will usually refer to the payment of the bonus as discretionary in nature. Notwithstanding same, it has been firmly established through case law that this discretion must be exercised in a reasonable manner by the employer. What will be considered reasonable will vary according to the specific circumstances, including:
(i) The business rationale for deferring the bonus. While the Covid-19 pandemic is unprecedented, an employer should still be in a position to demonstrate that the cost-cutting measures are proportionate and necessary in the circumstances.
(ii) The notice provided to staff. Given the urgency of the current crisis, the reality is that employers may need to introduce such changes with relatively little notice to employees than would usually be considered reasonable. Where employers believe that they may need to defer bonuses, they should seek to provide notice to staff on the possibility of deferred bonuses as soon as possible.
(iii) Selection of employees affected. Any proposal to defer part of a bonus payment should be distributed across the workforce in a fair and equitable manner.
3. Performance bonus: Any kind of guaranteed bonus scheme is likely to form part of the terms and conditions of employment. As such, details regarding the proposal to defer payment of the bonus will need to be agreed prior to implementing these changes.
4. Communication: Communication will be vital when deferring bonuses. Employers should refer to the issues being faced by the business, consult and inform employees on the proposed changes and keep them briefed on any decisions made by the business. Such communication will also be important in circumstances where a custom and practice has developed in favour of paying bonuses.
5. Continuous review of the bonus scheme: In light of the fluid nature of the pandemic and government measures, it may be difficult to conclusively state when the deferred bonuses will eventually be paid. As such, this matter will need to be reviewed on a consistent basis and communicated with employees to provide the business with flexibility if required.
Pointers for Pay-Cuts
As is so often the case, pay reductions are aptly considered within the context of alternative and more drastic cost-saving measures such as redundancies and lay-offs. As such, employees will often be prepared to agree to temporary wages reductions to avoid any potential job losses or lay-offs. Notwithstanding this, it is important for employers to be cognisant of the legal risks when reducing wages and to understand that, even in the present circumstances, they will not be entitled to an automatic justification for a reduction in pay.
1. Review of existing contract of employment: Employers should review existing contracts to confirm whether they contain a provision which could allow for the reduction in wages. Even where, for example, a broad 'general variation' clause is included in the contract, caution should be exercised in relying on this for the purpose of reducing pay.
2. Seeking Consent: As pay is a fundamental term and condition of employment, it cannot be varied unilaterally. Therefore, to implement a valid reduction in pay, employers will need to obtain the express written agreement of each affected employee.
3. Communication: From a practical perspective, early and frequent communication buy-in (i.e. explaining that the rationale is to avoid/minimise lay-off and redundancies, etc.) may assist in obtaining employee agreement. If the reason for the reduction is explained, along with the consequences for the business and jobs if cuts are not made, employee consent may be obtained. It should be made clear that the same pay reduction is being applied consistently. Even where the employees don’t agree to the reduction, at the very least, it will demonstrate that you have tried to seek their agreement to avoid any potential redundancy that may ensue.
4. Record Keeping: Employers should ensure that they retain evidence of the financial and any other reasons for the pay reduction. For example, minutes of such discussions at Board level should reflect the necessity of the reduction, that the Board has considered alternative cost saving measures in lieu of pay reductions and why such alternatives were not pursued.
As a result of the crisis presented by the pandemic, cost saving mechanisms have become a commercial necessity to ensure the business remains viable. The success of these measures will be defined by the employer’s ability to reduce costs, while also maintaining morale and continuing to motivate key staff. These measures may also be considered as part of the Temporary Wage Subsidy Scheme, which has been introduced through the Emergency Measures in the Public Interest (Covid-19) Act 2020.
We are available to discuss any issues that may arise for you as a result of your evolving obligations as an employer during this time of uncertainty. For further information, please contact Bláthnaid Evans or Sheila Spokes, +353 1 639 3000 or visit www.leman.ie.