Reducing employment costs in a post COVID-19 world
An international consideration of the ways and means of saving costs across the employment lifecycle.
In light of the Coronavirus pandemic, we anticipate businesses needing to think carefully about ways of saving costs across their organisations. In the sections that follow, we set out a discussion of the measures which employers could consider taking to reduce employment costs, together with a consideration of the feasibility of these measures.
This publication covers the following jurisdictions:
UK
What changes could employers make to their recruitment practices to save costs?
Employers could consider reviewing their recruitment practices to save costs. Employers may consider:
putting in place a hiring freeze;
deferring graduate or internship schemes; and/or
not renewing fixed term contracts.
Please note that employees who have been on fixed term contracts for 2 years or more will have sufficient service to qualify for unfair dismissal protection – as a result a fair reason (i.e. redundancy) will be needed and a fair process must be followed.
What steps can employers take to reduce staffing costs (without making changes to employee terms and conditions)? (i.e. unilateral changes which can be put in place without employee agreement)
Employers would be advised to carry out a review of their standard contracts of employment to identify where there are any express rights to vary the terms of employment.
Employers could consider the following measures (subject to the terms of any individual contracts of employment):
not making any annual salary increases – most contracts of employment provide for employees to be considered for annual salary reviews, but there is usually no obligation on employers to make annual increases
suspension / deferral of discretionary bonuses – again most contracts of employment provide for employees to be considered for discretionary bonuses but there is no requirement to pay discretionary bonuses each year
check if there is a contractual right to lay-off or impose short-time working (discussed further below if no contractual right)
suspension of deficit reduction contributions for defined benefit pension schemes. For further details of ways of saving on UK pensions costs during the COVID-19 crisis please see here.
In the event that there is currently limited work for staff, employers could consider encouraging/requesting that staff take annual leave. This will seek to avoid a situation where a significant number of staff seek to take annual leave later in the year when business may have picked up.
Employers may also consider reviewing their travel / expenses policies for the coming year. It is likely that travel / in person client entertainment will be limited for some time in any event.
What changes can be made to employee terms and conditions to save costs? Do these require employee consent? How can these be put in place in practice (i.e. is consultation with employees / works council required)?
In the UK, there are three ways in which an employer can change the terms of a contract of employment:
seek express agreement from employees to the new terms (either on an individual basis or through collective agreement);
unilaterally impose the change and relying on the employee’s conduct to establish implied agreement to the change;
terminate the employee’s employment and offer re-engagement on new terms. It is worth noting that if 20 or more employees are in scope for a proposed change, employers will need to carry out a collective consultation process (please see further advice on this process below).
For any change involving a reduction of remuneration, it is particularly important for the employer to obtain the written consent of employees (if not dismissing and re-engaging). In normal circumstances, employers could expect significant resistance to any changes affecting pay, however, given the current situation, employees may be more willing to agree to changes provided that they remain in employment. This does not remove the risk of employees resigning and claiming constructive unfair dismissal in response to any of these measures but may reduce the likelihood of this happening in practice.
In the long-run significant employee turnover is a cost to the business. Considering the employee relations ramifications of any measures which are put in place to seek to achieve a stable employee population is likely to save costs in the long term.
Employers could consider the following measures:
Lay-offs (providing employees with no work (and no pay) for a period while retaining them as employees)
Short-time working (where working hours are reduced such that the employee’s weekly remuneration is less than a week’s pay)
Imposing (temporary or permanent) salary cuts. Employers may consider imposing a standard percentage reduction across all employees or staggered reductions (whereby the higher earners / more senior individuals in the organisation take a bigger cut than lower earners), or even limiting salary cuts to the highest earners. Before deciding to implement it would be worth modelling a few options and calculating the actual cost saving in each scenario.
If salary cuts are being proposed employers might consider whether this could correspond with a reduction in working hours for employees.
To the extent that any individuals have contractual rights to payment of bonuses, consent could be sought for these to be deferred and/or converted into alternative incentive arrangements (i.e. which vest in the longer term)
Employers could consider taking away some employee benefits (i.e. right to sell holiday at the end of the year / subsidies towards gym memberships)
Consider the introduction of salary sacrifice arrangements (i.e. as part of the introduction of a cycle to work scheme)
Reduction / suspension of benefits (including suspension/reduction in contributions to defined contribution schemes.
Are there any local measures which employers can use to save costs?
The Coronavirus Job Retention Scheme (“the Scheme”) allows employers to claim for 80% of their employees’ wages plus any employer National Insurance and pension contributions, where they have been on furlough because of coronavirus (COVID-19). For further details of this Scheme please see here.
Can employers make employees redundant? If so, what process needs to be followed?
Although the Scheme outlined above is designed to discourage employers from making staff redundant, there is nothing to prevent employers from making redundancies.
If an employer proposes to make 20 or more employees redundant at one establishment within a period of 90 days or less, collective consultation obligations will be triggered. We can provide more detailed advice on request but broadly this process requires:
Election of employee representative (if not already appointed);
Provision of statutory information to employee representatives;
Submission of HR1 form to Secretary of State;
Consultation with employee representatives (about means of avoiding the dismissals, reducing the number of dismissals and mitigating the consequences of the dismissals) – this will usually take the form of a series of meetings with representatives with follow-up questions / provision of information; and
Individual consultation with at risk employees
If an employer proposes to dismiss 20-99 employees in a 90 days period consultation must commence at least 30 days before the first dismissal takes effect. If an employer proposes to dismiss 100+ employees consultation must commence at least 45 days before the first dismissal takes effect.
It is worth noting that failure to comply with collective consultation requirements can give rise to the risk of a protected award being made to each affected employee of up to 90 days’ pay.
Italy
What changes could employers make to their recruitment practices to save costs?
Employers could consider reviewing their recruitment practices to save costs. Employers may consider:
putting in place a hiring freeze;
deferring graduate or internship schemes;
not renewing fixed term contracts;
not confirming apprentices;
not confirming that employees have passed their probationary period; and
not hiring / renewing contracts of temporary staff
What steps can employers take to reduce staffing costs (without making changes to employee terms and conditions)? (i.e. unilateral changes which can be put in place without employee agreement)
Employers could consider the following measures:
encouraging the use of annual leave and permits;
not making any annual salary increases;
suspension / deferral of discretionary bonuses;
imposing limits on business travel/expenses;
imposing limits on events and BD activities; and
suspension of benefits for employees who are working remotely (e.g. vouchers for restaurants)
What changes can be made to employee terms and conditions to save costs? Do these require employee consent? How can these be put in place in practice (i.e. is consultation with employees / works council required)?
The following changes can be made to terms and conditions with employee consent:
unpaid leave;
use of emergency Covid-19 leave partially paid by the state;
short-time working;
pay-cuts (temporary or permanent);
reduced working hours;
suspension of bonuses; and
reduction / suspension of benefits
Pay-cuts and other costs saving measure could be proposed to some categories of employees only (e.g. upper management) and/or over certain salary levels.
Are there any local measures which employers can use to save costs?
Employers may consider the following local measures:
Provided that employers engage in union consultation, they can use the national ‘furlough’ scheme (cassa integrazione ordinaria / assegno ordinario / cassa integrazione in deroga).
A collective working hours agreement, with union agreement.
Employers can suspend payment of social security contributions.
Can employers make employees redundant? If so, what process needs to be followed?
Both individual and collective redundancies are prohibited up to 17 August 2020. As alternatives:
an individual mutual termination agreement can be reached with the union at any time; and
employers could consider offering a voluntary exit plan
Belgium
What changes could employers make to their recruitment practices to save costs?
Employers could consider reviewing their recruitment practices to save costs. Employers may consider:
Putting in place a hiring freeze.
Deferral of graduate / internship schemes.
Not renewing fixed term contracts. In critical sectors, the possibility of working on short consecutive fixed-term contracts is allowed for a period of three months (between 1 April and 30 June 2020).
Students can temporarily strengthen the workforce in sectors that are understaffed. Students are cost-efficient. The hours a student works in the second quarter of 2020 are not taken into account for the calculation of their annual quota of 475 hours. This measure applies regardless of the sector in which the student is employed.
What steps can employers take to reduce staffing costs (without making changes to employee terms and conditions)? (i.e. unilateral changes which can be put in place without employee agreement)
Employers could consider the following measures:
Encouraging use of annual leave.
No salary increases / suspension / deferral of discretionary bonuses, as long as this does not qualify as a substantial unilateral modification of an essential element of the employment contract.
To determine whether a change is substantial, the economic interests of the employer have to be balanced against the personal interests of the employee(s).Depending on what has been agreed the employee’s consent may need to be obtained individually (by preparing an annex to the employment contract) or collectively (by putting in place a CBA at company level). Note that information (and consultation) of social bodies are applicable when measures have a collective impact on the employment conditions.
Limits to business travel/expenses.
Temporary unemployment due to the Covid-19/force majeure (until 30 June 2020). A company can apply for temporary unemployment as a result of which the employment contracts with that company’s employees are suspended. Companies facing a substantial drop in production, turnover or orders can invoke the system of economic unemployment.
What changes can be made to employee terms and conditions to save costs? Do these require employee consent? How can these be put in place in practice (i.e. is consultation with employees / works council required)?
Employers may consider the following:
Using unpaid leave. This must be taken by mutual agreement.
Using annual leave - it is not possible to require employees to take annual leave unless (i) the holidays have been requested and accepted and (ii) collective holiday is determined at company level or by the joint committee. In regard to “extra-legal” holidays it must be checked what is agreed at company- or industry level, but usually they are taken by “mutual agreement”.
Non payment/postponement of variable pay (temporary or permanent). As long as this does not qualify as a substantial unilateral modification of an essential element of the employment contract, no written consent of the employee is required.
Note that information (and consultation) of social bodies are applicable when measures have a collective impact on the employment conditions.
In principle, the average weekly working time in Belgium is 38 hours per week and 8 hours per day.
- The “small flexibility” provides a solution for companies having a changing but foreseeable need of personnel. Companies having a peak period, can for example work 45 hours per week during the summer months and 35 hours per week in the calmer months.
However, the normal average working time (in principle 38 hours per week) must be respected over a reference period of 12 months.
- The “big flexibility” provides most flexibility and allows deviations from the normal weekly and daily working time as long as the daily working time does not exceed 12 hours. The new working regimes do not explicitly provide for a maximum weekly working time, but given the daily limit of 12 hours, the weekly working time can in principle be brought up to maximum 84 hours (12*7). The normal weekly working time must however be respected over a certain reference period (in principle 12 months).
Note that information (and consultation) of social bodies are applicable when a measure has a collective impact on the employment conditions.
Suspension of bonuses. As long as this does not qualify as a substantial unilateral modification of an essential element of the employment contract no written consent of the employee is required.
Note that information (and consultation) of social bodies are applicable when a measure has a collective impact on the employment conditions.Reduction / suspension of benefits as long as this suspension does not qualify as a substantial unilateral modification of an essential element of the employment contract. Note that information (and consultation) of social bodies are applicable when measures haves a collective impact on the employment conditions.
Are there any local measures which employers can use to save costs?
Temporary unemployment due to the Covid-19/force majeure (until 30 June 2020). A company can apply for temporary unemployment as a result of which employment contracts with company employees are suspended.
Corona parental leave. Corona parental leave allows employees, who are bound by an employment contract with the employer for at least 1 month, to agree, with employee consent, to reduce their work performance by 1/5 or 1/2 for a child who has not yet reached the age of 12 years (or 21 years in case of a disability).
Flexible labour measures in critical sectors such as the possibility of concluding successive fixed-term employment contracts, increase in the number of voluntary overtime hours, posting of employees and temporary employment in vital sectors.
Can employers make employees redundant? If so, what process needs to be followed?
Until now there are no restrictions under Belgian Labour law on making redundancies due to Covid-19.
An individual employment contract can be terminated by giving notice or by paying an indemnity in lieu of notice. The notice period is calculated on the basis of the seniority of the employee. A difference should be made between employees who commenced employment before 1 January 2014 and after 1 January 2014.
There is a concept of collective dismissal under Belgian law. If an employer intends to proceed with a minimum number of dismissals at the level of the technical business unit or at the level of a division in a period of 60 consecutive calendar days. The collective dismissal procedure is an administrative and rather burdensome procedure where authorities, trade unions, sub-regional employment offices, works council (if any) and other instances are informed.
Note that a bill was adopted in the Chamber suspending the notice period of the employee during the period of temporary unemployment due to the COVID-19/force majeure if the employment contract was terminated by the employer.
An exception to this principle will be made for notice periods that started before 1 March 2020. In this case, the notice period will not be suspended but the employer will have to pay a supplement on top of the unemployment benefit granted to the employee.
This Act enters into force on the day of its publication in the Belgian Official Gazette, but will also apply retroactively to employees whose notice period started as from 1 March 2020 and is still running on 5 May 2020.
Hong Kong
What changes could employers make to their recruitment practices to save costs?
Employers could consider reviewing their recruitment practices to save costs. Employers may consider:
putting in place a hiring freeze;
deferring graduate or internship schemes; and/or
not renewing fixed term contracts.
What steps can employers take to reduce staffing costs (without making changes to employee terms and conditions)? (i.e. unilateral changes which can be put in place without employee agreement)
Employers would be advised to carry out a review of their standard contracts of employment to identify whether there are any express rights to vary the terms of employment.
Employers could consider the following measures (subject to the terms of any individual contracts of employment):
not making any annual salary increases – most contracts of employment provide for employees to be considered for annual salary reviews, but there is no obligation on employers to make annual increases;
suspension / deferral of discretionary bonuses – again most contracts of employment provide for employees to be considered for discretionary bonuses but there is no requirement to pay discretionary bonuses each year;
check if there is a contractual right to lay-off or impose reduced working hours (discussed further below if there is no such contractual right);
check if there is a contractual right to suspend or reduce voluntary contributions for local provident fund schemes.
In the event that there is currently limited work for staff, employers could consider encouraging / requesting that staff take annual leave. This will seek to avoid a situation where a significant number of staff seek to take annual leave later in the year when business may have picked up.
Employers may also consider reviewing their travel / expenses policies for the coming year. It is likely that travel / in person client entertainment will be limited for some time in any event.
What changes can be made to employee terms and conditions to save costs? Do these require employee consent? How can these be put in place in practice (i.e. is consultation with employees / works council required)?
In Hong Kong, there are three ways in which an employer can change the terms of a contract of employment:
seek express agreement from employees to the new terms;
unilaterally impose the change and relying on the employee’s conduct to establish implied agreement to the change;
terminate the employee’s employment and offering re-employment on new terms.
For any change involving a reduction of remuneration, it is in our view particularly important for the employer to obtain the written consent of employees (if not dismissing and re-engaging). In normal circumstances, employers could expect significant resistance to any changes affecting pay; however, given the current situation, employees may be more willing to agree to changes provided that they remain in employment. This does not remove the risk of employees resigning and claiming constructive dismissal in response to such measure but may reduce the likelihood of this happening in practice.
In the long run, significant employee turnover is a cost to the business. Considering the employee relations ramifications of any measures which are put in place to seek to achieve a stable employee population is likely to save costs in the long term.
Employers could consider the following measures:
unpaid suspension (providing employees with no work (and no pay) for a period while retaining them as employees);
shortening working days / hours, with a corresponding reduction in pay (see below);
imposing (temporary or permanent) salary cuts. Employers may consider imposing a standard percentage reduction across all employees or staggered reductions (whereby the higher earners / more senior individuals in the organisation take a bigger cut than lower earners), or even limiting salary cuts to the highest earners. Before deciding to implement, it would be worth modelling a few options and calculating the actual cost saving in each scenario. If salary cuts are being proposed, employers might consider whether this could correspond with a reduction in working hours for employees;
to the extent that any individuals have contractual rights to payment of bonuses, consent could be sought for these to be deferred and/or converted into alternative incentive arrangements (i.e. which vest in the longer term);
taking away certain employee benefits (allowances or subsidies);
suspension / reduction in voluntary contributions to local provident fund schemes (local pension scheme).
Are there any local measures which employers can use to save costs?
The Employment Support Scheme (the “Scheme”) provides wage subsidies to employers for the six months consisting of two three-month periods, of June to August and September to November (2020). The Scheme will grant up to HK$54,000 (equivalent to around £5,650) for each employee registered in the Mandatory Provident Fund scheme (known as “MPF scheme”, also including MPF-exempt ORSO schemes) as at 31 March 2020. For further details of this Scheme, please see here.
Can employers make employees redundant? If so, what process needs to be followed?
Employers are free to implement redundancies, subject to the statutory prohibitions on dismissal and the restriction under the Scheme (if the employer takes part in the Scheme).
To implement redundancies, an employer will need to give notice (or make a payment in lieu) and ensure that all other statutory and contractual entitlements are paid out. If an employee has been employed for at least 24 months (taking into account the notice period) under a continuous contract (i.e. working for 18 hours or more per week for a period of four consecutive weeks or more) and is made redundant, s/he will be entitled to receive (among other things) a statutory severance payment, which is calculated at two-thirds of the lower of the employee’s last month wages and HK$22,500,multiplied by number of years of service, currently capped at HK$390,000. An employer has the option of offsetting a departing employee’s severance payment against the value of employer’s MPF contributions.
If an employee falls within one of the very few statutory prohibitions on dismissal – i.e. is pregnant or on maternity leave, is on statutory sick leave, or has suffered a workplace injury which is pending assessment by the Labour Department – s/he cannot be made redundant until the relevant restriction is lifted. In such circumstances, the employer will either have to negotiate a mutual separation, or delay the dismissal until the relevant prohibition ceases to apply.
In addition, if an employer participates in the Scheme, it is required to undertake not to effect redundancies during the period of the Scheme. For further details of the relevant undertaking and the consequences for breach, please see here.
Singapore
What changes could employers make to their recruitment practices to save costs?
Employers could consider reviewing their recruitment practices to save costs. Employers may consider:
- putting in place a hiring freeze;
- deferring graduate or internship schemes; and/or
- not renewing fixed term contracts.
What steps can employers take to reduce staffing costs (without making changes to employee terms and conditions)? (i.e. unilateral changes which can be put in place without employee agreement)
Employers would be advised to carry out a review of their standard contracts of employment to identify whether there are any express rights to vary the terms of employment.
Employers could consider the following measures (subject to the terms of any individual contracts of employment):
not making any annual salary increases – most contracts of employment provide for employees to be considered for annual salary reviews, but there is no obligation on employers to make annual increases;
suspension / deferral of discretionary bonuses – again most contracts of employment provide for employees to be considered for discretionary bonuses but there is no requirement to pay discretionary bonuses each year;
check if there is a contractual right to lay-off or impose reduced working hours (discussed further below if there is no such contractual right).
In the event that there is currently limited work for staff, employers could consider encouraging/requesting that staff take annual leave. This will seek to avoid a situation where a significant number of staff seek to take annual leave later in the year when business may have picked up. This is expressly recognised by Singapore’s Tripartite Advisory on Managing Excess Manpower and Responsible Retrenchment (“TA”) as an alternative to a redundancy.
Employers may also consider reviewing their travel / expenses policies for the coming year. It is likely that travel / in person client entertainment will be limited for some time in any event.
What changes can be made to employee terms and conditions to save costs? Do these require employee consent? How can these be put in place in practice (i.e. is consultation with employees / works council required)?
In Singapore, there are three ways in which an employer can change the terms of a contract of employment:
seek express agreement from employees to the new terms (either on an individual basis or through collective agreement);
unilaterally impose the change and relying on the employee’s conduct to establish implied agreement to the change;
terminate the employee’s employment and offering re-employment on new terms.
For any change involving a reduction of remuneration, it is in our view particularly important for the employer to obtain the written consent of employees (if not dismissing and re-engaging). In normal circumstances, employers could expect significant resistance to any changes affecting pay; however, given the current situation, employees may be more willing to agree to changes provided that they remain in employment. This does not remove the risk of employees resigning and claiming constructive unfair dismissal in response to such measure but may reduce the likelihood of this happening in practice.
In the long run, significant employee turnover is a cost to the business. Considering the employee relations ramifications of any measures which are put in place to seek to achieve a stable employee population is likely to save costs in the long term.
Employers could consider the following measures, which are recognised by the TA as alternatives to a redundancy:
unpaid suspension (providing employees with no work (and no pay) for a period while retaining them as employees);
shortening working days / hours, with a corresponding reduction in pay (see below);
imposing (temporary or permanent) salary cuts. Employers may consider imposing a standard percentage reduction across all employees or staggered reductions (whereby the higher earners / more senior individuals in the organisation take a bigger cut than lower earners), or even limiting salary cuts to the highest earners. Before deciding to implement, it would be worth modelling a few options and calculating the actual cost saving in each scenario. If salary cuts are being proposed, employers might consider whether this could correspond with a reduction in working hours for employees;
to the extent that any individuals have contractual rights to payment of bonuses, consent could be sought for these to be deferred and/or converted into alternative incentive arrangements (i.e. which vest in the longer term);
taking away certain employee benefits (allowances or subsidies).
Are there any local measures which employers can use to save costs?
The Jobs Support Scheme (the “Scheme”) provides wage subsidies to employers by co-funding a portion of the first SGD4,600 paid to all Singapore citizens and permanent resident employees for the period October 2019 to August 2020 inclusive. The amount of co-funding ranges from 25% to 75%, depending on the sector under which the employer operates. Employers who do not make use of the Scheme to support employees’ salaries (for example, putting employees on no-pay leave or reducing their salaries) will receive lower pay-outs correspondingly. For further details of this Scheme, please see here.
Can employers make employees redundant? If so, what process needs to be followed?
Employers can make employees redundant; the only formal requirement is that the affected employee must be provided with notice or a payment in lieu of notice. The applicable notice period will be the higher of (a) the statutory notice period and (b) the termination notice period provided for in the employee’s contract or other employment documents.
In addition, the notice must be in writing and should, ideally, make clear that the employee is terminated due to a redundancy. This is to reduce the likelihood of the employee alleging that his/her employment was terminated for other reasons and, potentially, bringing a claim alleging wrongful dismissal at the Employment Claims Tribunal.
Please note that the current position of the Singapore government is that a redundancy should only be carried out as a last resort – see the Tripartite Advisory on Managing Excess Manpower and Responsible Retrenchment. That said, although discouraged, there is no statutory bar on redundancy per se. Practically speaking, a redundancy is unlikely to be illegal if sufficient notice is provided and the retrenchment benefits of between two weeks’ to one month’s salary per year of service is paid to the affected employees.
In addition to notifying the affected employees, the employer must also notify the Ministry of Manpower if –
the employer has at least 10 employees prior to retrenchment; and
the employer notifies five employees of their retrenchment within any six month period.
Such notification must be made within five working days of the fifth employee being notified of his/her retrenchment, and can only be done online (here).
One final point to note is that the selection of employees for redundancy should be based on objective criteria and not on any of the protected grounds, i.e. the selection should not be based on age, race, gender, religion, marital status, family responsibility or disability.
PRC
What changes could employers make to their recruitment practices to save costs?
Employers could consider reviewing their recruitment practices to save costs. Employers may consider:
putting in place a hiring freeze;
deferring graduate or internship schemes;
not renewing fixed term contracts on expiry. (Please note, however, that employers are only permitted to have two fixed term contracts with employees. Thereafter, an open term contract is required by law. In Shanghai, this rule is interpreted to mean that an employer can unilaterally decide not to renew a fixed term contract at the end of either the first or second fixed term. In Beijing and most other cities, however, the employer can only decide unilaterally not to renew on expiry of the first fixed term – if the employee wishes to continue on expiry of the second fixed term, an open term contract must be given.)
What steps can employers take to reduce staffing costs (without making changes to employee terms and conditions)? (i.e. unilateral changes which can be put in place without employee agreement)
Employers could consider the following measures (unless otherwise agreed between employers and employees):
not making any annual salary increases – most contracts of employment provide for employees to be considered for annual salary reviews, but there is no obligation on employers to make annual increases;
suspension / deferral of discretionary benefits such as discretionary bonuses – again, most contracts of employment provide for employees to be considered for discretionary bonuses but there is no requirement to pay discretionary bonuses each year. (Please note, however, that if the bonus is a binding incentive to be paid based on agreed criteria such as a fixed performance bonus to be paid based on agreed objectives, even if it is in a policy separate from the employment contract, it can only be varied with employee consent.)
imposing limits on unnecessary expenses such as business travel, events or BD activities;
encouraging employees who have limited work currently to use annual leave. This will help to avoid a situation where a significant number of staff seek to take annual leave later in the year when business may have picked up.
If companies have fixed rules on these areas in their policies, the change of the fixed rules is subject to consultation with employees.
What changes can be made to employee terms and conditions to save costs? Do these require employee consent? How can these be put in place in practice (i.e. is consultation with employees / works council required)?
The following changes can be made to the terms and conditions with employee consent.
paid or unpaid leave;
(temporary or permanent) salary reduction;
reduced working hours;
suspension, reduction or removal of contractual benefits;
In general, companies in China may not unilaterally impose these actions. But in Shanghai and Guangdong, new guidelines provide that if employers implement fair and reasonable changes, such employers will have a basis to defend claims brought by employees who do not agree. There is an implied assumption that a large number (or majority) of employees must have agreed to the changes.
Any agreed changes should be documented, regardless of which process the company goes through. We recommend that this should be done through an amendment letter/supplementing agreement to the employment contract. The amendment letter/supplementing agreement should state with clarity what the new terms are and provide that all other terms of the employment contract remain in full force and effect. As long as the employee provides his/her consent by signing the amendment agreement, the change(s) is permissible. Both the employee and the employer should each maintain an original amendment agreement.
For salary reduction, there is another potential route or basis to achieve. If an employer further faces a production stoppage or other similar cessation of its business, it can negotiate with employees to reduce their salaries (potentially to the minimum wage). Normal salary must be made for the first payment cycle during the negotiation. In any event, after any agreed reduction, companies must make the payment no less than the minimum standards set out in local rules. For example, in Shanghai: local minimum salary standard RMB 2,480; in Beijing, 70% of local minimum salary standard RMB 1,540 (70%*2,200); in Guangdong, 80% of local minimum salary until resumption of production/business or employment termination.
Are there any local measures which employers can use to save costs?
From February 2020, small and medium-sized enterprises (SMEs*) are exempted from paying the companies’ part of mandatory pension, unemployment insurance, and work injury insurance until June 2020. Other companies (i.e. non-SMEs), can pay reduced company contributions (50% of the normal contributions) to these social insurance funds until the end of April 2020. Employers are notified by their local Social Insurance Centre through the normal fund systems regarding exemptions or reductions.
Employers which do not lay off staff or only dismiss a few employees (e.g., the rate of dismissal satisfies the requirement of the local government) during the COVID-19 period will be entitled to apply for a refund of 50% of the total unemployment insurance contributions (both the company and employee’ portions) made during the previous calendar year (i.e. 2019). There is a restriction on the use of the refunded unemployment insurance, i.e. it must be used for the purpose of (i) employee training, and/or (ii) payment of future contributions of social insurance contributions.
(*The definition of SME is complex and varies by sectors – for example, (i) for companies engaging in “commercial services” industry like consulting companies, an SME is a company with less than 300 staff or assets of less than RMB 1.2 billion (c. USD 170 million), (ii) for companies engaging in “wholesale” industry, the SME is a company with less than 200 staff or revenue of less than RMB 400 million (c. USD 56 million), (iii) for companies engaging in “retail” industry, the SME is a company with less than 300 staff or revenue of less than RMB 200 million (c. USD 28 million), (iv) for companies engaging in “software and information technology service” industries, the SME is a company with less than 300 staff or revenue of less than RMB 100 million (c. USD 14 million). )
Can employers make employees redundant? If so, what process needs to be followed?
Redundancies/layoffs are achievable, in principle, based on specific but limited legal grounds prescribed by law and subject to statutory protections against termination, although currently the government’s position is that companies should seek to avoid terminations.
The legal grounds to consider in the current situation would be either (i) mass lay-off due to serious financial or operational difficulties (Article 41 of the Labour Contract Law); or (ii) major change of circumstances which renders the contract unperformable (Article 40 of the Labour Contract Law). In either case, statutory severance would be payable.
For a mass lay-off the employer must have a threshold of at least 20 affected employees (or 10% of headcount if less than 20) to be terminated. It is necessary to notify all employees (not just those affected) of the proposed terminations and to go through a 30 day consultation process prior to termination. There is also a requirement to file a report with the local labour bureau outlining the seriousness of the financial or business issues giving rise to the mass lay-off. Technically this is not an approval process, but in practice the bureau can request changes to the arrangements / report, and may not issue the receipt until the company makes the requested changes.
Accordingly, this can be cumbersome process. There would likely be significant sensitivities if this ground were used in the current situation.
For the major change ground, 30 days’ notice is required (or payment in lieu). Local rules may have different interpretations on the definition and scope of major changes. For example, in Beijing, major changes, focus on objective and external conditions, include force majeure like earthquake, company’s relocation or asset transfer due to the change of laws and regulations etc., while in Shanghai, major changes include organizational changes. Companies are allowed to use the major change ground if they have solid and reasonable evidence proving that their staff structure change is necessary. In order to meet the procedural requirements for this ground, companies would need to first negotiate with employees to explain the major change and to attempt to reach an alternative solution like position change, for the contract to continue to be performed. Due to the different interpretation in practice, the major change ground is somewhat vague and often challenged by employees. As above, there would also likely be sensitivities to using this in the current situation.
Employees taking statutory medical treatment leave or who are pregnant, on maternity leave or within the one year nursing period (i.e. until the child is one year old) are protected against termination under the mass lay-off and major change grounds.
For completeness, termination of employees is permitted, with notice (or payment in lieu) and statutory severance, if a company is closed and liquidated.
See our Coronavirus (COVID-19) feature for more information generally on the possible legal implications of COVID-19.
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