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Client Alert

March 23, 2020

COVID-19 – Contingency Planning for Reducing Employment Costs

As the COVID-19 pandemic develops, employers will undoubtedly be formulating contingency plans to deal with the economic downturn and uncertain weeks, or months, ahead.

The unprecedented spread of COVID-19 has caused the UK, along with the rest of world, to batten down the hatches, with many businesses temporarily closing across the UK and throughout Europe. Before last week, the prospects of lockdowns, closures and job cuts were not on the radar (with the exception perhaps of the airline sector). At this stage, it is uncertain how the current situation will develop; the pandemic may mean mass redundancies, which both organisations and workers will be keen to avoid for as long as possible.

Employers can utilise alternative measures in the interim to get through the next few months with, hopefully, the long-term damage limited. These include:

Recruitment and retention strategies

  • Implement a recruitment freeze. Combined with natural attrition, this could assist in decreasing headcount. It could also mean redeployment opportunities are available to those employees eventually at risk of redundancy.
  • Reduce non-permanent staff to cut costs (for example, agency workers, self-employed consultants and casual staff). Alternatively, such contingent labour can be utilised wherever possible, with the advantage that such arrangements are generally flexible in terms of hours and notice periods.

 Remuneration policies

  • Implement a pay freeze and consider whether an employer can defer, decrease or withdraw bonus payments (depending on whether the bonus arrangements are discretionary or contractual). If the bonus arrangements are contractual, consent will be needed for any variation.
  • Access the UK Government’s Coronavirus Job Retention Scheme, announced on 20 March, 2020 by the Chancellor, Rishi Sunak, under which all UK employers are able to apply via HMRC for a grants covering up to 80% of the salary of workers furloughed rather than made redundant, up to a total of £2,500 per month, for an initial period of three months backdated to 1 March, 2020.
  • Propose across the board reduction in salaries, for which consent would need to be obtained (reversible as soon as possible). General pay cuts without a corresponding decrease in hours will be an even less attractive option to employees but may be possible for smaller businesses or start-ups if employees are offered a future incentive such as bonuses or equity.

Managing working hours and patterns

  • Impose short-time working (reduced hours) or temporary lay-offs, if the employment contract allows. Unless an employer has a contractual right to lay-off staff, an employer imposing such measures would face potential claims for unlawful deductions of wages, breach of contract and constructive dismissal. Failure to pay the contractual salary can also render any restrictive covenants contained in the employment contract void.
  • Seek volunteers for working reduced hours with a corresponding reduction in pay, for example 4 days a week or a 9-day fortnight. Working fewer hours may be an attractive option for those with childcare responsibilities in light of the announcement of school closures.
  • Reducing or banning non-contractual overtime.

Paid and unpaid leave, sabbaticals

  • Seek volunteers for unpaid leave or offer sabbaticals. Employee consent is required unless the employment contract contains a clause allowing the employer to place employees on unpaid leave.
  • Direct employees to take their annual holiday allowance during quiet times.
  • Offer the employees the opportunity to purchase extra annual leave in return for a salary sacrifice. While this may seem unappealing given the current travel restrictions, it may enable some ex-pat employees to return home or travel to unaffected regions during the pandemic.

Changing employment terms and conditions

  • Forced changes to terms and conditions (such as hours and pay), which will require collective consultation if 20 or more employees will be dismissed and rehired and is not without risk of claims.

Under normal circumstances, it is difficult to obtain employee consent to the above measures.  However, in the current climate and faced with the gloomy prospect of mass redundancies, employee attitudes may be more willing to explore alternatives (particularly on a temporary basis) to secure job stability.