Cost-cutting and the alternatives to redundancy
First published in The Bermuda Chamber Of Commerce Newsletter (Chamber Insider), October 2020
Even as Bermuda acclimatises to the ‘new normal’, it is clear that the economic effects of the pandemic are likely to be substantial and enduring, meaning that many employers will be feeling the pressure to reduce costs. As an immediate reaction, some chose to cut operating costs by laying off staff without pay. Many of those employees were able to take advantage of the government’s new Unemployment Benefit, however the scheme has now been wound up.
Under the Employment Act 2000 (the Act), employees laid off for 4 continuous months are deemed to be terminated for redundancy and are entitled to statutory severance allowance. Even though the Act has recently been amended so that the 3 months from 1 April to 30 June 2020 are discounted for these purposes, employers who laid off staff may soon need to decide whether to bring them back to work or be forced to pay severance.
Passive headcount reductions, by choosing not to replace staff who leave or deciding not to renew expiring work permits, may not be sufficient to meet the company’s needs. In the circumstances, it is unavoidable that many companies will be considering redundancies. However, there are various other cost-cutting measures that employers could look at before making permanent headcount reductions, particularly those who wish to avoid making potentially costly severance payments.
Reducing hours and overtime
Reducing an employee’s assigned hours or banning overtime will help to reduce costs, but employment contracts will need to be checked to see whether the employer has the ability to make these changes unilaterally. Otherwise, changes to contractual hours will require the employee’s consent.
Reduce employee benefits
Companies could consider reducing or stopping discretionary employee benefits, either permanently or temporarily. In this case, it will be necessary to review employment contracts, benefit documents, Handbooks and policies to establish whether a benefit is non-contractual and can be changed as a matter of the employer’s discretion.
Reduce salaries
Employment contracts are highly unlikely to allow the employer to reduce wages unilaterally, so doing so involves a high risk of claims for constructive dismissal and breach of contract. Nonetheless, some employers have successfully imposed temporary salary reductions, feeling that this approach is worth the risk in the current circumstances. This is a delicate issue where strategic considerations – such as whether all employees will suffer the same decrease and whether employees will be consulted on the proposals – will be as important as the legal issues.
Pay rise and bonus freeze
Although it will be important to check the terms and conditions, it is highly unlikely that employment contracts will guarantee pay rises. Employers will therefore be at liberty to stop salary increases, but the employee relations implications may need managing. Employers should also check the contractual terms to understand their obligations in relation to bonuses; guaranteed bonuses will still need to be paid, but companies have greater flexibility when it comes to discretionary awards.
Rescind job offers
If an offer of employment has been made but not yet accepted then the company is free to revoke it. However, if the employee has accepted the offer then the employer will need to give notice to terminate in accordance with the contract or minimum statutory notice requirements. Depending on whether the notice duration overlaps the agreed start date, the company may also be under an obligation to pay the employee’s salary for some or all of the notice period.
Make use of probation periods
Under the Act, either party can terminate the employment for any reason and without notice during probation. Employers wishing to terminate should still review employment contracts, as they often contain provisions relating to probationary periods which will need to be taken into account.
Sabbaticals and or additional leave
Employers could consider offering employees the chance to take a sabbatical, or extended period of unpaid leave. As an alternative, companies could consider introducing a policy allowing employees to ‘buy’ additional vacation, in return for a corresponding reduction in pay.
Early retirement
Depending on the rules of the company pension scheme, the company could publicise to their staff the possibility of taking early retirement.
Any or all of these options could be suitable for employers looking to cut costs while avoiding redundancies. Although it will be important to consider the legal risks in each case, non-legal considerations could be equally if not more important in determining the right approach for a particular business; strategic issues such as staff morale, internal politics, messaging and communication are all important when looking to implement changes in the workplace which could be received negatively. As to the legal risks, employers would be well-advised to take expert legal advice before deploying any of the measures discussed above.
