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How to Reduce Labor Costs in Your Business: Strategic Legal and Human Aspect

The economic crisis caused by the COVID-19 brings many challenges for employers. There is almost no sector of activity that is not or will not be affected by this crisis. Difficult times require difficult decisions, so one of the options for employers in the fight against the crisis is to reduce salaries to their workers.

Circumstances of Reduction Salaries to Employees

For understandable reasons brought by the new situation, many employers are no longer able to pay salaries in the amount that was before the economic crisis caused by the COVID-19. Nevertheless, many employers want to keep workers because they are trying to sustain the future of their business, so reduction in workers’ salaries is being imposed on them as an acceptable measure.

How to Handle a Salary Reduction?

As the amount of salary is regulated by the employment contract or the criteria for calculating the salary are regulated by the relevant general act of the employer, it will be necessary to amend the employment contract or general act of the employer to determine the amount of salary. Either of these two methods requires strict adherence to the legal regulations.

The provisions of the employment contract can be changed in two ways:

  1. Annex to the employment contract – the employee is offered changed working conditions and in this case a reduction of salary with a deadline to manifest;

  2. Termination of the employment contract with the offer of the amended contract – on that occasion, the employer submits to the employee a business-related dismissal and a proposal for an amended employment contract with the proviso that the dismissal must indicate that the legal consequences of dismissal (notice period, etc.) occur only after the deadline for the employee to manifest on the proposed amended employment contract. That period may not be less than eight days. After the expiration of the period of at least eight days, the employee must return to the employer the signed amended employment contract. Otherwise, the notice period begins to run after the expiration of the period for manifest.

When the provisions of the employment contract regarding the amount of salary refer to the collective employment agreements or general employment statutes by which the employer determines the amount of salary, instead of amending each contract individually, the employer may reduce the salary by amending the collective employment agreements or some other general employment act that regulates the amount of salary. It is important to emphasize that the employer should follow the legal procedures related to their changes.

According to the current case law, it is contrary to all legal principles to unilaterally reduce the payment of the contracted salary without clear criteria for such conduct and without establishing the relevant facts from those criteria, which in this case justify such a reduction.

Human Aspect of a Salary Reduction

Once all the legal aspects have been checked out and prepared, the communication of the new business policy is the next step.

Develop an employee-focused communication plan. Before you begin calculating salary cuts, talk to employees about the company’s cash flow problems. Draft an explanation for the highest ranking member of your organization’s leadership team to share with employees. Assure employees that your first priority is job security. Convey a very nonthreatening message that during an economic downturn, a lower salary is better than no salary at all.

Negotiate carefully with employees who volunteer to take a pay cut or employees who offer to take a furlough instead of a pay cut. Well-paid employees may volunteer to take a pay cut, which can be extremely helpful. Refrain from agreeing to furloughs because, if they are handled improperly, a furlough can become problematic concerning a salaried employees' exempt status.

If you have any labor law inquiries, you may send your message to and he will be happy to answer you.

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