Many businesses are suffering financially as a result of the coronavirus outbreak. Despite the Dutch government’s support measures, companies could be facing bankruptcy. To reduce costs, some companies wish to lower salaries. But are such pay cuts a viable option?
Adjusting employment conditions
Adjusting employment conditions requires, in principle, the employee’s consent. Only in pressing circumstances a company may be permitted to adjust employment conditions without the employee’s consent. Such unilateral change is subject to strict rules. Read more about this in our blog Adjusting employment conditions: what are the employer’s options?.
What about adjusting salaries? Salary is categorised as a primary employment condition. Case law shows that it is far more difficult to adjust such primary employment condition than changing secondary employment conditions such as a bonus scheme.
A lawsuit in 2013 concerning an employer proposing a pay cut of 10% demonstrated the limited room for pay cuts. The Works Council, together with 69% of the employees, agreed to the 10% salary reduction. However, one of the employees declined to accept and succesfully initiated a court case. The judge ruled that difficult financial circumstances will hardly ever oblige an employee to accept a pay cut. In view of the nature of the employment contract, the employer’s obligation to pay salary is fundamentally linked to the employee’s obligation to perform the stipulated work. The fact that the Works Council and 69% of the employees agreed to the salary reduction was not decisive.
Similarly, in 2015, the Dutch department store chain V&D attempted to change employment conditions so as to prevent bankruptcy and announced a pay cut of 5.8%. The court ordered the company to reverse the unilateral pay cut, considering that salary is a primary employment condition and that employees could not be expected to agree to a salary reduction. Shortly afterwards the company collapsed.
During the current crisis, the trade unions fear that more and more companies will attempt to reduce salaries because of the coronavirus outbreak. The electric-automobile manufacturer Tesla and the insurance company Aon recently announced that they will reduce salaries. The Irish airline Ryanair announced pay cuts in various countries and is in the process of negotiating such measures with workers’ unions. It remains to be seen though whether such pay cuts will be upheld if challenged in court proceedings.
Various companies are asking their employees to contribute by taking extra holidays. Read more about this in our blog Coronavirus: your employment rights regarding holidays.
Acquiring the employee’s consent for a pay cut…
Since attempts to reduce salaries are often ruled against by the courts even when the company’s demise seems inevitable, the best way is probably to involve the employees in the process, requesting their consent to an inevitable pay cut. Full transparency concerning the company’s financial situation and oulook may help to win the employes’ support for such drastic measures. After all, employees should benefit from the fact that impending job losses may be averted when the company manages to overcome temporary financial distress due to the coronavirus outbreak. It may also help if the company offers to compensate pay cuts once the financial conditions have improved. Being well informed and given the exceptional circumstances employees may be prepared to accept a temporary salary reduction. For example, Dutch soccer clubs very recently agreed with players’ unions that professional soccer players’ salaries will be cut by a total of 35 million euros a year.
Dutch NOW scheme subsidising staffing costs
The Dutch Temporary Emergency Bridging Measure to Preserve Employment (“the NOW scheme”) has been created in response to the coronavirus outbreak. Under the NOW scheme employers can apply for an allowance to help paying salary costs. If an employer makes use of the NOW scheme, a salary reduction could impact the government’s support since the employer is required, if at all possible, to continue paying wages. Hence, a pay cut may lead to a full or partial claw back of the government’s subsidy.
Partial severance payment due in case of salary reduction?
In 2018, the Supreme Court ruled that, in the event of a partial dismissal, involving a substantial reduction in working hours an employee is entitled to a partial transition payment (severance pay). But does this also apply to an employee whose salary is reduced without a partial dismissal?
The Supreme Court recently clarified the obligation to pay a transition payment in the event of a pay cut following re-employment. This case concerned an employee who was re-employed in a lower-paid position after long-term disability. The Supreme Court ruled that the right to a transition payment exists only in the event of (partial) termination of the employment agreement. Re-employment in another suitable position – without loss of hours, but with a reduction in salary – cannot be regarded as partial termination. According to the Supreme Court, the employee was therefore not entitled to a partial transition payment.
According to this ruling, an employee would not be entitled to severance pay because of a unilateral pay cut. Hence, the employee is only entitled to a transition payment where the salary reduction is based on a structural and substantial reduction of working hours (partial dismissal).
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 Subdistrict Court Zutphen 27 March 2013, ECLI:NL:RBONE:2013:CA0060, JAR 2013/116.
 Subdistrict Court Amsterdam 23 February 2015, ECLI:NL:RBAMS:2015:899, RAR 2015/69.