Ashley Brown | Associate, London • Antoine Jouhet | Associate, Paris

Introduction
Businesses affected by the global economic downturn are being forced to implement cost-cutting initiatives to help them stay afloat.

Global unemployment has reached an all-time high. Eurostat, the statistical office of the European Communities, recently estimated that 13.5 million people were unemployed in the European Union alone.

While unemployment figures are predicted to continue to rise, employers are becoming aware that although reducing headcount may be a “quick fix” solution to the economic pressures, they are losing talented and highly skilled workers in the process.

Increasingly, employers are reacting to this by considering alternatives to redundancy that do not involve further reducing employee numbers. This article provides general observations on current alternatives to redundancy and the legal risks associated with each in France and the United Kingdom.

Cost-Cutting Examples
As an alternative to redundancies, employers may wish to consider the following cost-cutting measures:

• Reducing working hours (e.g., move from a five-day to a four-day working week)
• Salary reductions
• A recruitment freeze
• A salary freeze
• Removing discretionary benefits
• Reducing/altering contractual bonus plans

These changes will likely constitute a change to an employee’s contractual terms of employment, assuming that the employer has no express legal or contractual right to make such changes pursuant to a specific covenant (e.g., a mobility covenant) or employment contract.

Such changes can be made after obtaining the employees’ express agreement or they can be imposed by employers through specific procedures.

Such measures may also require a prior information consultation with the appropriate employees’ representative bodies before being implemented and/or a negotiation with union representatives when the measures require the amendment of a collective agreement. 

Obtaining Employees’ Express Agreement to the New Terms
Obtaining individual employees’ agreement to the new terms is the ideal way to make these changes. That way, there is unlikely to be any dispute—and individual employees’ agreement to the change will reduce the risk of claims being brought at a later stage.

In order to record the changes and to provide clear evidence, it is highly recommended that employers obtain employees’ consent in writing before implementing the change. In France, the employee’s consent cannot derive from the fact that the employee has continued working under the new terms and conditions.

Unilateral Imposition by the Company
Hopefully, some (though probably not all) of the employees will accept changes to terms and conditions once the rationale is properly explained to them, and will sign their consent to the amendment of their employment contract.

A common approach then taken by employers in the UK is to impose the new terms unilaterally on any of those employees who have refused to agree to the change. However, a unilateral change without an employee’s agreement will be considered a breach of contract. It may also result in a claim for constructive unfair dismissal and/or a claim for unlawful deduction of wages.

In France, the employer cannot impose a change in the employment terms and conditions of an employee who refuses such change. However, it is possible to dismiss an employee who refuses the change when such change is justified by economic reasons. This requires the employer to follow a specific procedure. When more than nine employees refuse a change in their employment contract in companies employing at least 50 employees, the employer is required to set up a social plan, a mandatory and binding negotiated agreement that specifies employee severance terms.

Termination of Employment and Offer to Reengage (Not Valid in France)
In the UK only, if agreement cannot be reached with the employees, and to prevent those who have not signed a contract variation or new contract from having an open-ended breach of contract claim if they stand and sue, the drastic option open to employers is to terminate all existing contracts of employment and offer continued employment under the new terms. This is not without its challenges, however. For example, there is a risk that the employer will lose its employees permanently when they are dismissed. In addition, employees may claim wrongful dismissal and unfair dismissal if they have been dismissed in this manner.

However, if the employer can show that it had sound business reasons for dismissing an employee who refused to accept a change to his or her terms and conditions, it is likely that this will be sufficient to establish a fair reason for dismissal, as long as the employer can show that it balanced its needs against those of its employees.

Careful consideration of the reason for the changes is required, and employers should record their business rationale for the changes in writing, prior to implementing any processes.

We recommend that companies contemplating dismissing and reengaging employees on new terms and conditions seek specific legal advice on this topic, as the legal requirements vary for each country and cannot be discussed in full in the scope of this article. There may also be other collective consultation obligations you need to be aware of if you plan on dismissing more than 20 employees.

Practical Hints and Tips on Implementing Changes
Often, in order to persuade employees to accept a change in terms and conditions, employers need to undertake a selling exercise. Companies should look for ways in which employees will be more inclined to accept the change, even if it is to their detriment. For example:

• Offering employees additional benefits or incentives to persuade the employees to accept this change (e.g., a positive change to benefits or holiday entitlement) or
• Offering a one-off cash bonus in return for their acceptance.

From an employee relations point of view, it is also advisable to call a meeting to inform the employees of the proposed changes highlighting the rationale for the decision, rather than simply issuing the affected employees a letter asking for their agreement to the proposed changes by unilaterally imposing the new terms.

Other Factors to Take into Consideration
Companies planning on implementing a salary reduction should consider other possible implications, such as the terms of any pension schemes in place. These are usually calculated based on a percentage of an employee’s salary and by reducing an employee’s salary, the amount of pension contributions made by the employer will also be affected. It is also likely that the employer will need the employee’s consent to make any such changes to the pension scheme.

You should also review the terms of any other contractual benefits such as life insurance or private medical insurance with the relevant providers. The contributions the company is required to make may be reduced as a result of the salary decrease, as well as the amount to which the employee is entitled. Similarly, bonus plans may be affected on the same basis.

Conclusion
The current economic conditions make it likely that employees will be more accepting of any changes as they will be aware that the rationale behind the change is hopefully to avoid redundancies in the future. Employees are more likely to view the proposed change as the lesser of two evils. You may wish to consider other innovative measures such as encouraging staff to take sabbaticals or implementing job-share arrangements.

If employers can avoid redundancies and retain their employees, then together they can fight the tough economic conditions so that when the recession is finally over, businesses will be fully prepared.