Rules differ around the globe for reducing employee compensation
By Anthony J. Oncidi and Jeremy M. Mittman
Proskauer Rose LLP
In response to the current economic crisis, and as an alternative or in addition to layoffs, many companies in the United States have begun instituting reductions in employees’ compensation. In fact, implementing such measures is a relatively simple process in the U.S. In other countries, such reductions in compensation can be more difficult to effect.
Absent the existence of a written employment contract or collective bargaining agreement, all jurisdictions in the U.S. permit employers to reduce prospectively the compensation of employees. Some U.S. states have stricter laws specifying the amount of advance notice that must be given to affected employees before changes can be made to their pay. Maryland, for example, requires at least one pay period’s advance notice before any changes can go into effect, while Missouri requires at least 30 days’ advance notice. Even in those jurisdictions in which there is no specific notice requirement, employers are advised to provide as much notice in writing as possible.
While the salaries of employees who are classified as exempt from overtime may be reduced in most instances, it is important to make sure that their compensation does not fall below the statutorily mandated minimum wage, so as not to jeopardize the employees’ exempt status. The U.S. Department of Labor takes the position that it is possible to reduce the hours of exempt employees and reduce their salaries by a corresponding amount (for example, by instituting a four-day work week and reducing salaries by 20%). On the other hand, California’s labor commissioner, for example, has expressly declined to follow the federal rule and has prohibited a partial work-week reduction in salary that is tied to a reduction in hours.
Reducing the compensation of employees in other countries can be more difficult. For instance, in Australia, in order to reduce an employee’s salary, an employer must first obtain the employee’s prior agreement to the change in writing. Unilaterally reducing compensation without prior agreement would be deemed a repudiation of the employment contract, permitting the employee to bring suit for damages for breach of contract.
In the United Kingdom, employees with one year or more of continuous employment may claim “unfair dismissal” if they do not agree to a change to the terms and conditions of their employment (such as a reduction in salary). Therefore, an employer that wishes to reduce the salary of a U.K. employee must carry out a special “consultation exercise” with the employee in which the company explains why the salary reduction is necessary for sound business reasons and considers the employee’s alternative suggestions. In the event the employee still refuses to agree to the reduction, the company may provide notice of dismissal and offer the employee a new contract to start immediately on termination of the old contract on the same terms (with the exception of the reduced compensation).
In France, an employer wishing to reduce an employee’s compensation must first inform the employee that the company intends to modify his or her contract, that the employee has one month to refuse the proposal, and should he or she refuse, the company may terminate the contract for a “valid economic reason.” If the employee does not respond, he or she is deemed to have accepted the change in salary; if the employee refuses to accept, however, the employment may be terminated on the ground that a valid economic reason for the termination exists. The employee, however, can challenge the termination, asserting that the “economic reason” is not a valid one under French law. As the global economic crisis continues to unfold, more multinationals will be looking for ways to cut their operating expenditures. Many companies already have reduced the number of workers they employ. An additional arrow in the quiver is the reduction of compensation, which is a further step companies may take with the assistance of counsel familiar with the varying jurisdictional limitations on such measures.