Wage cuts a smart move, but legally tricky

Recently, there has been active dispute over wage reduction, and it has been proposed that in the period of economic decline one possibility for employers to survive could be to reduce employees’ wages.

This proposal has had a positive reaction among employers, but has prompted employees and trade unions to fight for their rights and future. At first glance, this seems a monstrous and lousy thought to most people, as significantly more people receive wages than pay them. But if we think about it more deeply, the idea may be in the employees’ longterm interests as well. It is clear that merely reducing wages (e.g., for increasing employer’s profit) would be unjustified. But if reduction of wages were the only possible way for an employer to survive and for employees to keep their jobs, then maybe it would not be such a bad idea.

Lawyers — and probably also employers and employees — will ask whether and how this might be legally accomplished.

The first principle regarding employment contracts, as well as most of other contract types, is that generally, amending a contract requires the consent of both parties. Only in very extreme cases is it possible to amend or terminate a contract unilaterally. In employment relations it must also be remembered that the law protects an employee more than an employer, as presumably an employee is always the weaker party (even if actually he or she is not). Due to the aforesaid, legal norms regulating employment relations prescribe several rights and obligations that, in an employment contract relationship, incline the more favorable position towards the employee. For example, in order to terminate an employment contract, the employer always needs a certain reason, which is explicitly stipulated by law, but an employee may terminate the employment contract at any time and without disclosing any reason, just by giving one month advance notice to the employer. It is also uniquely clear that an employer cannot “merely” reduce employee’s wages, i.e., amend the employment contract. The law provides extremely limited possibilities for a change of wages at the employer’s initiative.

Estonia’s current Employment Contracts Act practically provides only one option: amendment of the terms of the employment contract due to reorganization of production or work. Employers have the right to amend the bases for remuneration of employees and work regimes upon reorganization of production or work if they notify the employees thereof in writing at least one month in advance. During this month the employment contract terms must remain the same. Employees have the right to demand termination of their employment contracts if they do not consent to such amendment. Still, one needs to be very careful while interpreting this article. Reorganization must be actual and objectively reasoned (e.g., new and more effective devices shall be introduced that require rearrangement of positions, etc.). Furthermore, anything concerning employee’s wages is under strong protection of law.

In case of a temporary decrease in work volume or orders, the Employment Contracts Act also allows employers to establish a part-time working schedule for employees for up to three months per year, or to send employees on a holiday with partial pay for the same period. This step still requires consent of the labor inspector and the employee. Such a situation is different from ordinary amendment by mutual consent, as temporary amendment is possible even without the employee’s consent, but in such case the employee has a right to terminate the employment contract.

Thus, an employer actually has no possible way to reduce wages unilaterally and forcibly to the only legal method may be nsgotiations and amending the employment contract by mutual agreement. If no agreement can be reached, then the employer has also the option of laying off the employee, if actual grounds exist for the layoff. The layoff is possible only if certain conditions cause the termination of the employee’s position, whereas restrictions provided by law, e.g., granting priority to keep the position to pregnant persons or those raising a child under three, must be followed. The employer must also notify employees about forthcoming layoffs in due term stipulated by law and follow the compensation payment requirements.

In conclusion, it may be said that if an employer actually cannot continue with existing wages, then it has four choices: reduction of salary by mutual consent, laying off employees, liquidation or bankruptcy.

In order to achieve an agreement with employees, it would be reasonable to introduce the alternatives (i.e., layoff, liquidation or bankruptcy) to them. Thus, in hard times it is wise above all to discuss the problem and
reach an agreement, whereas inflexibility on the part of employers or employees does not lead to reasonable solutions. Ideally, both parties understand the situation and hard times shall be survived by considering each
other’s interests and by making judicious compromises.

Mariana Hagström, attorney-at-law, partner

Jürgen Valter, attorney

Law Firm Glikman & Partners

The Baltic Times
October 02, 2008