3 August 2022

Unilateral pay cut

By Seliz Demirci

The corona crisis forced many organisations to take a critical look at their business operations.

This often resulted in cost-saving measures, which many organisations are still applying today. These measures sometimes affected employees directly, for example through changes in the internal bonus or the leave policy. Another measure was to reduce salaries. Reducing salaries is undoubtedly the most far-reaching measure and is therefore not readily accepted by the courts.

Unilateral pay cut

Recently, an employer was allowed to implement a unilateral pay cut within its organisation. The organisation had undergone a restructuring in 2019, resulting in redundancies. In 2020, the organisation had to take another critical look at its staffing levels and associated costs. Part of the re-organisation consisted of an adjustment of the salary structure. The organisation informed its employees that salaries would be structurally reduced by a certain percentage. Some of the workers opposed the proposal. These employees jointly initiated legal proceedings.

The issue was whether the organisation was entitled to unilaterally reduce salaries. Salaries are a primary condition of employment and, according to the law, may not be reduced unilaterally by the employer. In this case, the employer and the employees had also not agreed on a unilateral change clause that the employer could rely on. In principle, without a unilateral change clause, an employee is not obliged to accept proposals from an employer to change the terms and conditions of employment; these must be agreed upon between the employer and the employee.

Test of reasonableness

In the absence of a unilateral change clause, any unilateral change of the terms and conditions of employment is subject to a test of reasonableness. The employer must then make a plausible case that there are changed circumstances that make it reasonably necessary to change the terms and conditions of employment. The employer must also make a reasonable offer to the employees. In addition, the employees are expected to accept the proposal if it is reasonable.

The court ruled that the employer was allowed to reduce the salaries of the employees. The decisive factor was that the organisation had made it clear that – despite the measures already applied – a precarious situation had arisen that needed to change. In addition, part of the pay cut was temporary and a compensation scheme had been offered. The court agreed with the argument of the employer that there were no other alternatives to ensure continuity of the company and to retain the employees. In this case, the stringent requirements for a unilateral change of employment conditions were satisfied.
District Court of Overijssel, 8 February 2022, ECLI (abridged): 384

Inclusion of a unilateral change clause in an employment contract

The standard for unilaterally changing terms and conditions of employment is set very high. A proposal to do so is rarely accepted in the courts. The ruling discussed shows that there are points to consider to increase your chances of successfully implementing a pay cut. For example, pay cuts should only be considered after all other measures have been exhausted. The measure must also be aimed at maintaining the continuity of your organisation and not for other purposes, such as making a profit.

Excuse

It is useful to agree on a unilateral change clause with your employees. It allows your organisation to keep the option to change the terms and conditions of employment open if it has a compelling interest in doing so. Moreover, your employees will then be prepared for the fact that the terms and conditions of employment can be changed and will not necessarily remain the same. You should note that a unilateral change clause cannot be used as an excuse to change the terms and conditions of employment. However, when a unilateral change clause is agreed, your organisation will face a less strict assessment standard than if the clause were absent.

Would you like more information?

Do you have any questions? Please do not hesitate to contact us.

Court of Amsterdam 13 September 2021, ECLI (abridged): 5029.

This article appeared earlier in Rendement.

Seliz Demirci

Seliz Demirci

Lawyer

Within the Employment & Pension law section, Seliz advises national and international employers and employees on various employment law issues.

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