Global HR Hot Topic—December 2013: How to Cut (or "Restructure") Employment Terms, Work Hours, Benefits and Pay Outside the United States
Employment-at-will offers American employers broad freedom to cut their staff's terms and conditions of employment, work hours, employee benefits—even compensation, bonuses, commissions and base pay. Indeed, American bosses exercise this freedom regularly. When recession hit in 2008, countless news articles reported on US employers rushing to cut employment terms, hours and pay. According to one article, rather than "slashing their work force[s]" with layoffs, US employers were "nipping and tucking [them] instead" with cuts to benefits and pay. (Matt Richtel, "More Companies Are Cutting Labor Costs Without Layoffs," New York Times, 21 Dec. 2008) Another article spotlighted the "3.7 million…Americans who have seen their full-time jobs chopped to part time." (Peter Goodman, "A Hidden Toll on Employment: Cut to Part Time," New York Times, 31 July 2008) Yet another article told of an American law firm imposing "across-the-board salary reductions for its associates, counsel, staff members, nonequity partners and equity partners." (Erin Marie Daly, “Sweeping Pay Cuts," Law 360, 29 June 2009)
News stories like these proliferate when the US economy slows, but even in healthier economic times American employers routinely tighten work rules, restructure workforces, downgrade job titles, transfer staff, discontinue benefit programs—and cut work hours, bonuses, commissions and pay. These cuts are perfectly legal as long as they comply with applicable employment contracts and ERISA, because—outside the 6 percent non‑government unionized sector—US law, even in California, imposes no doctrine of vested employment rights. Outside the United States, by contrast, laws impose vested (sometimes called implied or "acquired") rights that constrain employers from unilaterally cutting employment terms, conditions, work hours, benefits and pay. Vested rights restrict all sorts of workplace reductions, such as (as random examples), discontinuing a special bonus in Caracas, dropping a supplementary medical plan in London, taking back a company car in Frankfurt, imposing new sales quotas in Buenos Aires or transferring an engineer from Tokyo to Osaka.
Overseas vested rights become a particular challenge when they reach into the United States, when an American multinational decides to make some change across its regional or global workforces—for example, by implementing a global forced ranking system, by discontinuing its international executive stock option plan, by flattening its global reporting structure, by centralizing its European operations, or by trimming its Latin American sales commission rates. Whenever a multinational decides to implement some change that could cut employment terms, benefits, hours or pay across borders, headquarters needs to account for vested rights. A common mistake in cross-border workplace change projects is trying to manage vested rights from the bottom up—analyzing vested rights from the outset at the local-country level. The more efficient approach is top-down: Begin these projects by factoring in vested rights globally, at the project design phase. First, craft a global approach consistent with vested rights principles generally, then drill down to implement the template in each affected country and make local modifications or tweaks as necessary.
Here, we discuss three topics vital to a multinational launching a cross-border workplace change project that could reduce overseas staff's employment terms, conditions, hours, benefits or pay: (A) complying with vested rights outside the United States (B) five steps for cutting employment terms, work hours, benefits and pay across borders and (C) three extra steps for cutting compensation, bonuses, commissions and base pay.
A. Complying With Vested Rights Outside the United States
Perhaps every jurisdiction outside the United States imposes some sort of vested or implied employment rights rule. But because America has no vested rights doctrine (outside the 6 percent non-government unionized sector), US headquarters restructuring or realigning human resources offerings across borders risks underestimating the sweeping ramifications of foreign employees' vested employment rights.
America lacks a vested rights rule because of employment-at-will. We usually think of employment-at-will in the context of firings because we define employment-at-will as the employer's right to fire an employee for any reason or no reason except an illegal discriminatory or retaliatory reason—even on a "whim." (Peter Strelitz et al., International HR Journal, Summer 2008, at 16) But ramifications of employment-at-will extend well beyond firings because employment-at-will frees up bosses unilaterally to reduce employment terms, conditions, hours, benefits and pay. After all, how can an employee vulnerable to being fired at will complain about a mere cut in terms?
Overseas this plays out differently. Jurisdictions abroad subscribe to what we call "indefinite" employment (in the Philippines, "security of tenure"). Indefinite employment systems regulate, restrict or prohibit no-cause terminations by granting fired employees a claim for unfair or wrongful dismissal, and usually also a right to pre-termination notice. (See our Global HR Hot Topic of May 2013) A corollary of the indefinite employment rule is the doctrine of vested rights: Any system that restricts or regulates no-cause terminations necessarily has to restrict employers from constructively discharging staff. After all, if employers in these countries could constructively discharge, then legal restrictions against no-cause dismissals would become meaningless: Employers could push workers out with no notice or severance pay simply by demoting them, cutting their pay or assigning intolerable tasks until they quit. Constructive discharges would swallow up rules against no-cause dismissals. To stop this, indefinite employment regimes confer vested employment rights to restrict employers from constructively discharging by unilaterally cutting terms, conditions, hours, benefits and pay.
Constructive discharge aside, sometimes vested rights are explained as a simple matter of implied contract. According to a summary of Japanese employment law by the Anderson Mori & Tomotsune law firm: "If a certain term between an employer and employee is treated the same way repeatedly and continuously for a long period of time, that term may be implied into employment contracts as 'common labour practice' or as an 'implied agreement.'"
- Distinguishing acquired rights: A different legal concept often gets conflated and confused with vested rights: the separate principle of "acquired rights." Some indefinite employment jurisdictions worry that employers saddled with vested rights obligations might sell their business assets or outsource their employment relationships, offloading their vested employment rights and stranding staff without recourse. To protect vested rights in business asset sales and outsourcings, many (but by no means all) jurisdictions impose "transfer of undertaking" rules, also called "TUPE" or acquired rights rules. Under these, vested employment rights transfer, by operation of law, to an asset buyer or outsource services provider when a business-asset sale or outsourcing deal closes. Vested rights become acquired rights. (See our Global HR Hot Topic of May and June 2010) Acquired rights, therefore, are a species of vested rights. They are not the same thing.
How do vested rights affect a multinational that wants to cut employment terms abroad? In a word, profoundly. Vested rights can restrict even benign workplace tweaks that Americans would deem too inconsequential to justify litigation—for example, discontinuing an annual Christmas party, hiking prices in an employee cafeteria, changing internal reporting structures and job titles, even neglecting to repair a broken air conditioner. Indeed, in many countries—Honduras is a prime example—vested rights prohibit downgrading work spaces, such as by moving someone from a corner office to a cornerless office or from a windowless office to a carrel. The same goes for downgrading job tasks: Workers overseas enjoy vested rights in what they do, so employers cannot unilaterally assign more, or less-desirable, work. In Denmark, an employer cannot even assign an executive non-managerial work while he serves out a short pre-dismissal "lame duck" notice period. (Danish Western High Court case no. B-0835-11 (2 Feb. 2012))
Vested rights also reach job transfers. In the United States, job transfers are so common that America has an entire industry facilitating them (corporate relocation services) and entire White & Case 3 communities, usually outer-ring suburbs, housing corporate transferees. American employers even require international job transfers, telling staff "to move abroad—or else" and saying "I don't care if your wife has to stay here, this is what you have to do." (Louise Story, "Leaving Wall St. for a Job Overseas," New York Times, 11 Aug. 2008) By contrast, vested rights jurisdictions can stop employers from moving an unconsenting employee merely across town. In England, Switzerland and elsewhere, employees who live close to the office enjoy vested rights in their short commutes.
What happens when an employer overseas flouts vested rights and unilaterally cuts employment terms, work hours, benefits or pay? The employee can usually quit, sue for constructive discharge, and demand full severance pay or reinstatement plus back pay. The burden of proof often shifts to the employer to prove the quit was not a constructive discharge. In Brazil and elsewhere, a still-working employee has standing to sue without even quitting and in Chile, Japan and elsewhere, an employee can sue for "breach of implied contract" without even making a constructive discharge case. Further, some countries' laws spell out explicit remedies for breaches of vested rights. Consider Germany's detailed rules explicating what happens when an employer revokes a company car:
"If the employer demands the return of a company car without justification (e.g., if the employment contract does not contain a valid right of revocation or if the required notice period for revocation is not observed), the employee is entitled to compensation pursuant to Sections 280(1) and 283 of the Civil Code. As a rule, compensation for loss of use is based on the tax value of the right to private use. Therefore, the employer must pay compensation of 1 percent per month of the gross list price of the car at the time when it was first registered." (CMS Hasche Sigle law firm newsletter, "Revoking the Right to Use a Company Car," 5 Dec. 2012)
Vested rights get particularly complex in the international context when multinational headquarters launches a cross-border project that might reduce employment terms, work hours, benefits or pay across more than one country. In those projects, the multinational needs to take five steps—plus three extra steps if the cuts will reduce compensation.
B. Five Steps for Cutting Employment Terms, Work Hours, Benefits and Pay Across Borders
A multinational that has to reduce terms and conditions of employment internationally, changing employment terms, hours, benefits or pay to account for new business realities in light of overseas vested rights, needs to account for five basic principles: reduction, materiality, justification, consultation and consent.
1. Reduction. While employers abroad may not be free unilaterally to reduce material work conditions, hours, benefits or pay, outside exceptional jurisdictions like Chile, employers overseas are largely free to make unilateral workforce changes that workers greet as neutral or as improvements. For example, employers usually can unilaterally grant extra vacation days, benefits and pay raises. Indeed, even in jurisdictions like Chile where employers in theory need consent even to give employees extra, push-back in this context is rare. Who complains when getting more? In one "exception that proves the rule" situation, years ago a Chilean employee actually did invoke vested rights to contest a unilaterally granted pay raise—but under that employee's particular divorce decree, the raise triggered a big hike in alimony.
So always check whether a proposed workplace change really is a cut, as opposed to being neutral or a raise. But, in assessing whether a proposed change is a cut, be honest. Analyze the change without being lulled by semantics. Multinationals like to label workforce "transformation" projects as global "restructurings" or "changes." These euphemisms confuse the legal analysis. Jargon like "transformation," "restructuring" and "change" often makes good sense for employee communications, but for legal analysis, always sharply distinguish which proposals that will be increases, which will be material decreases, and which will be genuinely neutral or de minimus.
Semantically, a "transformation," "restructuring" or "change" might possibly be an increase—a promotion, a raise, richer employment terms, more lavish benefits. If one of these projects actually were a complete plus for the entire workforce with no downside, then the employer would be free to implement it with little push-back and few vested rights hurdles. Of course, in the real world, what employers label as "transformations," "restructurings" and "changes" inevitably end up reducing or cutting employment terms, at least in some respects for some employees. It is those reductions that raise the legal issues. Indeed, where a proposed workforce "transformation," "restructuring" or "change" project offers staff both some upside and some downside, expect both the employees and the local legal system to isolate the downside—the reduction—while ignoring, and therefore not crediting or offsetting, the upside.
2. Materiality. The vested rights doctrine restricts employers from unilaterally downgrading material employment terms and conditions. But it generally leaves employers free to impose actual but de minimus cuts like, for example, substituting cheaper desks for better but older furniture, changing insurance providers or janitorial services where coverage cuts will be minimal, turning down the air conditioning without cutting it off entirely, moving staff to almost comparable offices within a building or across the street, or tweaking but not downgrading job titles. In many countries, employers are even free unilaterally to implement new or amended work rules, new human resources policies and new codes of conduct—as long as the new policies do not go so far that they materially reduce terms/ conditions or employment.
Of course, how material a given reduction is will get disputed. The employer may argue a cut as de minimus while employees insist it is material. But in those occasional situations where even the workforce has to concede a downgrade is no big deal, the employer can implement it unilaterally.
3. Justification. An employer is defenseless without some solid justification for a material cut to employment terms, work hours, benefits or pay. Always articulate a demonstrable, genuine and pressing need that justifies any proposed material cut. Use that justification consistently across borders, because employee representatives will look for hypocrisy. But be careful: As in the US union sector, in many jurisdictions an employer that invokes the justification of inability to pay triggers an obligation to turn over corroborating accounting documentation.
4. Consultation. Where an overseas employee bargaining representative (works council, health and safety committee, ombudsman, trade union committee) represents employees, material cuts are often a mandatory subject of notice or information/consultation/bargaining. That means the employer must explain the cut to employee representatives as a mere proposal, not a fait acompli. Seek representatives' input and consider it in good faith. In some places (China, at least), employers actually have to engage in collective consultations even with employees who are not represented by a standing union or employee representative body. (Labour Contract Law of Peoples' Republic of China, 2008, arts. 4, 5, 35) Other jurisdictions impose notice or bargaining obligations with individual employees.
This said, complying with a mandatory bargaining or consultation obligation can actually help an employer: Where vested rights rules would stop an employer from unilaterally reducing terms or conditions of employment, local law often facilitates cuts after consultation and agreement or impasse with local employees or their collective bargaining representatives. The challenge, of course, is how to sell a proposed reduction—or how to reach a legally recognized impasse.
5. Consent. Often (though not always), a valid, uncoerced and properly executed employee consent, release or employment agreement—or a one-off collective consent agreed with a bargaining representative—extinguishes a vested rights claim. So employers can usually reduce material terms/conditions as soon as all affected individual employees or their representatives consent. That said, in some contexts or countries, an employer needs to collect both employee representative and affected individual employee consents.
Convincing 100 percent of a workforce to agree to cuts they are legally free to reject is always a challenge. But everyone has his price. An employer ready to pay enough can almost always buy consents or waivers from every single employee. The obvious economic challenge is that when the waivers are fairly priced, the cut nets the employer nothing—the fair cost of waivers necessarily equals the employer's savings, adjusted for inflation and present value. Further, in some countries (mostly in Northern Continental Europe), individual employee consents are subject to attack as inherently coerced because of the imbalance in bargaining power and the implicit threat that refusing to consent might jeopardize someone's job. To ensure consents are binding, be able to prove employees gave them freely and that they were genuinely free to say "no" without repercussions.
Often the best strategy for getting signed employee consents is to wait till the launch of some unrelated but popular new benefit or increase in something else—the next pay raise, bonus, benefit plan or discretionary stock option grant. Link the cut consents to the increase. In the words of one Canadian law firm: "Should it be necessary to change a provision in the employment agreement, plan the change to coincide with appropriate consideration including, for example, a wage increase, benefit increase, discretionary bonus payment or promotion." (Sherrard Kuzz LLP, Management Counsel, June 2008) Unfortunately, often a financially strapped employer that needs to make cuts to save money has no separate increase available for this "horse trading."
When seeking consents to cuts from an entire employee population, always have a backup plan ready for how to handle the stubborn employee who openly refuses (or passiveaggressively neglects) to consent. Sometimes the backup plan needs to be a no-cause layoff with full severance pay and notice.
Actually, there is one easy strategy for collecting employee consents to cuts. Unfortunately, by the time employers think of this strategy it is usually too late to use: Collect consents at "onboarding," at the time of hire. Employers can often (though not always) freely cut employment terms, work hours, benefits and even pay where each affected employee previously authorized the cut in a written employment agreement. So when drafting employment agreement templates, anticipate future cuts and include self-serving contractual clauses by which employees consent to anticipated cuts in advance. While no one has a crystal ball, sometimes this strategy is actually quite practical. For example, a common clause in UK employment agreements has employees consent, in advance, to office moves and transfers.
- Strategic Phrasing: That said, phrase these advance consents to cuts strategically. Jurisdictions will not enforce blunt consents to cuts that overreach ("I hereby consent to any and all future pay cuts."). Better to segregate the benefit susceptible to a future cut and label it a temporary extra. If a 10 percent pay cut is a future possibility, then hire staff at 90 percent of pay. In their contracts, mention a temporary discretionary incentive bonus of the extra 10 percent. Have contracts acknowledge the employer's freedom to revoke that extra bonus at any time with 30 days' notice.
C. Three Extra Steps for Cutting Compensation, Bonuses, Commissions and Base Pay
Reducing terms and conditions of employment outside the United States under vested rights is tough enough, but the analysis gets yet more complex when an employer wants to cut pay—to reduce or restructure a bonus plan, a commission plan, base pay or total compensation. Often a multinational making cross-border pay cuts does a genuine compensation "restructuring" with both an upside and a downside—for example, a cut to base pay accompanied by a higher upside potential bonus or commission (reducing guaranteed compensation while increasing variable compensation). For vested rights analysis, employers in these situations inevitably argue they can offset the reduction by the amount of the increase. But as mentioned, employees and legal systems usually analyze vested rights by considering the most adversely affected employee who suffers the most downside, without offset by a separate upside. When cutting and restructuring pay across borders, account for three extra issues beyond the five just discussed:
6. Wage law compliance. In cutting pay, always comply with minimum wage laws, statutory benefits mandates and employment contract provisions. Remember that base pay is often set by contract, bonuses and commissions are often contractual and collective bargaining agreements often impose minimum wages above statutory minimums. Obviously pay cuts cannot legally push any employee's pay below minimum wage or deny "statutory entitlements" (mandatory benefits). Pay cuts and bonus cuts must also comply with any pay provisions in applicable individual and collective employment agreements—unless the employer actively renegotiates and reforms these agreements.
7. Local pay cut law compliance. Reducing compensation is a hot button, and so many jurisdictions specifically regulate pay cuts, mostly to stop employers from implementing them. So always verify that any contemplated pay cuts are legal in each affected jurisdiction. In some jurisdictions (for example, Brazil, Italy, Panama) pay cuts are illegal. And of course, unilateral pay cuts are illegal wherever an enforceable contract prohibits them.
That said, where local law would make pay cuts illegal, check whether some exception might apply. Exceptions are rare, but some exist. For example, under German law, an employer that has contractually committed to paying performance bonuses must pay them. But when a severe banking sector downturn hit Germany, the Federal Labor Court actually let banks withhold contractual performance bonuses. (Two decisions of 20 March 2013: 10 AZR 8/12 and 10 AZR 636/11)
Examples of pay cut–specific laws include:
- Brazil: Permanent pay cuts violate public policy in Brazil and are effectively impossible. Temporary pay cuts of up to just three months are possible only if the employer demonstrates serious financial problems and wins buy-in from both the mandatory trade union and the local government labor authority (Delegacia Regional do Trabalho). Because the procedural hassles of getting approval for a mere three-month pay cut almost always outweigh the savings, employers in Brazil tend to rule out temporary pay cuts in favor of more locally viable cost-cutting strategies like forcing employees to take accrued paid vacation or temporary facility shut-downs (férias coletivas).
- France: A multinational trying to cut French employees' pay must demonstrate "real and serious" economic need at both the French affiliate level and the "group" (parent and subsidiaries in same line of business) level. Even an employer that can make this case must follow strict procedures: Write affected employees a letter in French proposing the reduction and explaining the economic need. Mail the letter by registered mail with return receipt inside France. Give employees one month to decide whether to accept the reduction. The employer cannot fire employees for refusing— which of course gives staff little incentive to consent.
France sometimes offers government programs to compensate employees for so-called "partial unemployment" (reduced hours).
- Germany: Pay cuts can be difficult in Germany and will require consultations with employee representatives, but the German government offers an attractive alternative, a program that pays generous "partial unemployment" or "short-time work subsidies" (Kurzarbeitszeitmodell) to employees subject to hours/pay cuts. So employers in How to Cut (or "Restructure") Employment Terms, Work Hours, Benefits and Pay Outside the United States In this publication, White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies and entities. NY1113/ECBEL/N/09028_4 Germany often decide to bypass pay rate cuts in favor of cutting hours (and hence total pay), letting employees collect government benefits to make up much of the shortfall
- Italy: Italy flatly prohibits reducing pay—even with the express consent of both the employee and trade union. (Italy Supreme Court Decision 11362 of 8 May, 2008, interpreting civil code § 2103) So in Italy, find an alternative.
- Japan: Layoffs are extremely difficult in Japan, a last resort. Pay cuts are considered a second-to-last resort. To cut pay, an employer must demonstrate genuine financial necessity and must be ready to show that other cost-cutting steps already taken were not enough. Employees who refuse consent to get their pay cut can sue, challenging the employer's economic justification. If they win, the remedy is reinstatement at the old wage rate—plus back pay.
- Ontario, Canada: An Ontario employer cannot unilaterally cut contractual compensation and so needs to be ready to fire an unconsenting employee first—"termination and reengagement" on lesser terms.
A 2008 case graphically illustrates how this works. In that case, an Ontario employment agreement guaranteed an employee, if fired without cause, two years' severance pay—base pay plus bonus in lieu of notice. One day the employer decided two years' severance pay is just too much, and 30 weeks is more reasonable. Not surprisingly, the employee refused to agree to amend his employment contract to cut his own severance pay. So the employer unilaterally implemented the severance pay cut by serving the employee written notice of the cut effective a full two years later, corresponding to the two-year severance pay benefit. Two years passed and the hapless boss reminded the employee that now, if he got fired, he would get just 30 weeks' severance pay. The employee quit and sued, alleging constructive discharge—anticipatory breach of his two-year severance clause. He won two years' pay. (Wronko v. Western Inventory Svc. Ltd., 2008 ONCA 327 (Ont. Ct. App.))
- Panama: Panama effectively prohibits reducing compensation, so a pay cut is not necessarily enforceable even against an employee who consents. But Panama offers employees only a two-month statute of limitations to challenge a pay cut, so employees who agree to a cut (preferably in writing) likely lose standing to contest it after just two months: Panama appears to have no concept of ongoing (pay-check-to-pay-check) violations analogous to the US Lilly Ledbetter Fair Pay Act of 2009 concept of "an unlawful practice occur[ing]…each time wages, benefits, or other compensation is paid." (Ledbetter law, Pub. L. 111-2) Besides, even if Panama law had this concept, damages would likely reach back just two months.
- Peru: In implementing a pay cut and collecting consents in Peru, the employee consent document should specify an "objective cause" for the reduction.
- Singapore: Singapore makes cutting pay a lot easier than most countries. In fact (contrasting with Ontario), employee consent is not even necessary as long as the employer announces the pay cut and then, before implementing it, waits out each employee's contractual pre-termination notice period.
- Spain: A best practice when cutting pay in Spain is to memorialize employee consents by amending individual employment agreements. Spanish collective agreements commonly impose wage rates above statutory minimums, so check that the cut does not violate an applicable collective agreement.
- UK: Avoid announcing a pay cut in the UK as a fait accompli. Rather, invite each employee to a meeting to explain the need for the cut and why it is the mildest of more severe options. Communicate the effective date of the proposed cut. Seek signed consents. Employees who refuse a cut might quit, claim constructive dismissal and seek dismissal notice/pay. If an employee will not consent, then (as in Ontario) the only sure route is termination and reengagement on lesser terms.
8. Alternatives: We have seen that in some contexts and jurisdictions, certain proposed pay cuts are all but impossible. For example, pay cuts are strictly illegal in Italy, technically illegal in Panama and Brazil, and extremely challenging in France and Germany. When project managing an international pay cut, always retain the flexibility to take different, more culturally and legally appropriate approaches in countries where necessary. Alternatives to pay cuts include temporary shut-downs (common in Brazil), hours cuts (common in Germany), and "red circling"—freezing pay, benefits and titles while withholding future increases. Red circling is perfectly legal under vested rights unless it amounts to a unilateral discontinuance of an existing compensation "review" practice of giving regular raises, or unless it violates some statute or individual or collective agreement requiring regular raises, like the inflation adjustment laws of Latin America or contractual good-faith merit-increase review requirements.
Outside the United States, "transforming," "restructuring," "changing," reducing or cutting employment terms, work hours, benefits, compensation, bonuses, commissions or base pay is tough because jurisdictions impose vested rights. When reducing employment offerings abroad, proceed carefully and follow necessary steps.
This newsletter is provided for your convenience and does not constitute legal advice. It is prepared for the general information of our clients and other interested persons. This newsletter should not be acted upon in any specific situation without appropriate legal advice, and it may include links to websites other than the White & Case website. White & Case LLP has no responsibility for any websites other than its own, and does not endorse the information, content, presentation or accuracy, or make any warranty, express or implied, regarding any other website.
This newsletter is protected by copyright. Material appearing herein may be reproduced or translated with appropriate credit.
© 2013 White & Case LLP