During these bleak days of economic downturn, employers in both the public and private sectors around the globe are seeking ways to reduce operating costs. One potential source of savings is to cut salaries and other benefits to employees. However, in the Cayman Islands, wages, salaries and other benefits are often fixed by contracts of employment and cannot be altered by the employer unilaterally without inviting claims for constructive dismissal and exposing the employer to payments of notice, severance and unfair dismissal under the Labour Law and/or a lawsuit before the Court. That said, many employees may consent to the cuts when faced with the option of either reduced pay or job loss.
Before asking employees for consent, an employer considering this option should carefully consider a number of issues. First, they must identify the savings needed to reduce the chances of redundancies and then identify an approach that will achieve the required target savings, how long the new pay scale would be in place and whether the savings would revert back to the employee retroactively. Most voluntary pay cuts are between 3 per cent and 10 per cent but some are as high as 25 per cent.
Unpaid leave and other benefits
A suitable alternative to salary cuts for an employer whose business has slowed considerably is offering employees unpaid leave. Employers have been known to allow the employees to choose the new pay scale and/or the number of unpaid leave days. A related strategy is to offer employees an opportunity to take unpaid sabbaticals for a number of months bearing in mind that during such sabbatical other obligations may remain such as the requirement to provide health insurance coverage. Caution should be exercised to ensure no undesirable immigration repercussions arise as a result.
Shortened work weeks may also be offered either by reducing work days per week or hours per work day.
Overtime is often simply the only way in which work can be done or production completed. However, in some circumstances, overtime is a result of inefficiencies of planning or management. Redundancies may be avoided by increasing time use efficiency or varying contractual hours.
A reduction in other benefits such as commission, bonus and use of company vehicles may also be negotiated between employer and employee.
A further consideration to be weighed before approaching employees for consent is the likelihood of their agreeing to a reduction in compensation in any form. The employer must take into account their personalities, financial well being, firm loyalty and whether there is a strong team environment. The willingness of employees to agree to reductions in wages, salaries, working hours or benefits to a great degree will depend on the employee’s perception that the employer is also taking comparable and visible reductions in the benefits of ownership. A similar consideration is whether staff morale would suffer by being asked and the risk that it would alert employees needlessly to the employer’s vulnerable financial status which may cause distress amongst the employees.
Handling the issue
Once the employer has reviewed the above and is confident that salary cuts are both necessary and likely to achieve the goal of reducing the risk of redundancies, it is critical that the manner in which consent is sought be carefully planned.
Consent must be freely given by the employee. There can be no whiff of coercion, intimidation or pressure of any kind. Otherwise, the employer may once again be exposed to a potential finding of constructive dismissal by the Labour Tribunal and/or the Courts, not to mention the publicity nightmare that may ensue should allegations of bullying to force pay cuts become public.
Any change in compensation from that which was previously agreed to as set out in the employment contract should be in writing and be made on clearly stated consideration sufficient to satisfy the requirements of a valid amendment to a contract. Asking employees to accept a reduction in pay is only advisable as a last resort and in good faith and not as a mechanism to increase profits and make up for shortfalls caused by the economic downturn.
Every employer’s circumstance is different in terms of contracts of employment, short- and long-term business outlook and suitable available options to reduce operating costs. Therefore, in every stage of the restructuring process, sound analysis and guidance from legal professionals who specialise in these matters is essential to increase the likelihood of a positive outcome for everyone involved.
This publication is intended only to provide a summary of the subject mattered covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice.