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20 Jul 2021

Pandemic promises: re-aligning the workforce after contractual changes

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With the swift onset of the pandemic, many employers were forced to make changes to the way their workforces operate and to their employees’ terms and conditions of employment. Given the unprecedented circumstances, such changes may have been rushed and implemented without the usual planning, preparation and documentation that would typically accompany them. As employers look ahead, many are asking what their obligations are in respect of “pandemic promises” they may have made and what other changes they can make.

In this e-alert we set out various scenarios that may arise and how employers should respond, in each of the following jurisdictions:

United Kingdom

Given the financial impact of the Covid-19 pandemic on its business, 12 months ago an employer implemented a 20% pay cut. Now the employer wants to make this change permanent. Can the employer do this and, if yes, how should it be done?

First, an employer should look closely at the wording included in any documentation concerning the pay cut. Was it expressly stated that this was a temporary change that would cease after 12 months or was it actually documented to be a permanent change? Assuming it was only a temporary change, the simplest option is for the employer to obtain express agreement from the employee to make the pay cut permanent. It would be advisable to obtain the express agreement in writing, for example this may be done by a side letter which both parties sign to reflect the amended terms and conditions.

Given that pay is often an issue which prompts strong reactions employers should deal with this carefully. They need to consider the communications to employees and the messaging surrounding the pay cut. For example, if the employer has weathered the pandemic storm better than it had anticipated, a pay cut may be difficult to understand for the workforce. Employers should: listen to what employees have to say and take into account their concerns; consider if any incentive can be offered to help them accept the change; think about the timing of the change and whether it can be linked with the introduction of something more beneficial.

As an alternative to permanent pay cuts, the employer is also considering informing employees in an ALL STAFF memo/email that the company will defer paying 20% of their salaries each month for the next 12 months and, if certain company targets are hit, will pay employees the withheld sums at the end of that period. Is this lawful?

If an employer unilaterally imposes this change this would be unlawful and they would expose themselves to a number of possible claims which, depending on the circumstances, could include breach of contract, constructive dismissal (if the employee resigns in response to the employer’s breach) and unlawful deduction of wages. An employee could also choose to continue to work under protest and bring a claim for breach of contract or unlawful deduction of wages.

As with the scenario above, employers would be advised to seek express agreement from employees as to the change. If an employee does not expressly agree to the change but continues to work under the new terms, there is a possibility that their conduct means they are deemed to have impliedly agreed to the variation of their terms and conditions. However, it is not advisable to rely on implied agreement and the best option for the employer would be to seek employee agreement to the change. 

What options does the employer have if employees refuse to agree to the permanent pay cut, or object to the pay deferral scheme?

If employees refuse to agree to the changes, the employer could choose to use a dismiss and re-engage policy, whereby they dismiss the employees with notice or payment in lieu of notice who do not agree to the changes and immediately offer them re-engagement on the varied terms.

This strategy, which is often termed “fire and re-hire” has recently attracted adverse media attention in the UK and the employer should be aware of this reputational risk. In addition to the possibility of negative publicity, this strategy also carries legal risk as an employee with two years’ service could bring an unfair dismissal claim. Further, depending on the number of proposed dismissals an employer may be required to “collectively consult” with the workforce – which requires the employer to meet specific obligations under the relevant legislation.

In response to the local Covid-19 lockdown measures, the employer implemented a "Flexiworking" policy which allowed employees to work their set daily hours at any time of the day and from any location. Now those lockdown measures have been eased, the employer wants employees to return to working within core business hours and 3 days a week at the office. Can the employer unilaterally withdraw the Flexiworking policy and implement the new one?

It will be crucial to consider whether the “Flexiworking policy” is a contractual policy. If it is contractual, the risks identified above in terms of making unilateral contractual changes will apply to this situation.

If, however, the policy is non-contractual the employer has greater flexibility. It will be important to look at the communications surrounding the implementation of the policy and whether it was said to be a temporary policy in response to the pandemic and whether it expressly states that the employer has the right to withdraw or amend it any time. If this is the case, employer will be on strong grounds to unilaterally withdraw the policy and implement a new one. 

The employer should be aware of possible indirect discrimination claims – for example as the burden of childcare statistically falls on women more than men, and has done so during the pandemic, this policy of revoking Flexiworking may indirectly discriminate against women. To defend such a claim the employer would need to show the policy was objectively justifiable as a proportionate means of achieving a legitimate aim.

Finally, with the end of the “Flexiworking policy” the employer should expect an influx of flexible working requests and it would be advisable to ensure it has a robust flexible working policy in place which is ready to use.

In light of the local Covid-19 travel restrictions, the employer allowed employees to carry over 10 days of their annual holiday entitlement into the next holiday year but did not specify when the employees had to take this holiday. It is now halfway through the holiday year and some employees have considerable amounts of unused holiday to take, including their carried forward leave. What options does the employer have?

This is a problem many employers are facing given the length of the pandemic and the difficulty of travelling abroad in certain jurisdictions. The purpose of annual leave is to ensure that employees have a break from work which will be important for their health and well-being, especially given the extra stress the pandemic has brought. However, as an employer it’s important to manage the taking of annual leave to ensure business continuity or to encourage employees to take holiday at quiet times so that they are available during peak periods of the year (for example if workflow is seasonal).

The employer should review the communications about the annual leave as well as their holiday policy to accurately assess the current position. The best route to start with would be for the employer to strongly encourage employees to take their leave within certain time periods or be at risk of losing it. 

Ultimately if the employee does not voluntarily take leave, an employer can give notice ordering a worker to take statutory holiday on specified dates. The notice must be at least twice the length of the period of leave that the worker is being ordered to take (eg if they are being ordered to take 10 days leave they should give 20 days’ notice). The legislation doesn’t specify a particular form the notice must take. In terms of contractual annual leave over and above the statutory entitlement it will be important to look at the contractual provisions or any holiday policy which specifies the provisions governing such leave.

France

Given the financial impact of the Covid-19 pandemic on its business, 12 months ago an employer implemented a 20% pay cut. Now the employer wants to make this change permanent. Can the employer do this and, if yes, how should it be done?

In France, pay is an essential element of the employment contract. As with any element of the contract, the employer cannot change it unilaterally. The employer must obtain the employee's prior agreement.

To reduce an employee's pay, several options are possible:

  • Obtaining the employee's agreement to a temporary pay cut (option 1);
  • Obtaining the employee's agreement to a permanent pay cut in the event of serious economic difficulties (option 2);
  • Negotiating a collective performance agreement to reduce the remuneration (option 3).

Option 1: Employee agreement to a temporary pay cut

In exceptional circumstances, such as Covid-19, the employer may ask employees to reduce their salary.

The employee must expressly and unequivocally agree to the modification of the employment contract and must not have been subject to duress in any way.

The employer must draw up an addendum to the employment contract setting out the duration and the new amount of pay. In any case, the salary may not be lower than the minimum wage or the minimum wage provided for in the collective agreement.

Once the term of the addendum to the employment contract has expired, the employer cannot impose the pay cut.

Option 2: Obtaining the employee's agreement to a permanent salary cut

If the employer is facing serious economic difficulties due to the health crisis, he can offer to his employees to lower their salary on economic ground.

In French law, there are four economic grounds (Article L1233-3 of the French Labor Code):

(i) Economic difficulties, depicted either by a sustained trend in at least one economic indicator (for instance, turnover) or by any other factor capable of justifying these difficulties;

An economic indicator presents a sustained trend, if the duration is, in comparison with the same period of the previous year, at least equal to:

  • One quarter, for companies with a workforce of fewer than 11 employees;
  • Two consecutive quarters, for companies with a workforce between 11 and 49 employees;
  • Three consecutive quarters, for companies with a workforce between 50 and 299 employees;
  • Four consecutive quarters, for companies with a workforce of 300 employees or more.

(ii) Technological changes;

(iii) Reorganization of the company aimed at safeguarding its competitiveness;

(iv) Cessation of business (unless it is due to a fault of the employer).

If the company can justify such economic difficulties, the employer can propose a salary cut to the employee by following the following procedure:

  • Offer the salary cut by registered letter with acknowledgement of receipt;
  • Leave a 1 month period of reflection for the employee to agree or refuse (15 days if the company is in receivership or liquidation).

The employee may nevertheless refuse this reduction in salary and the employer may not compel him to do so.

Option 3: Collective performance agreement

In France, employers can negotiate collective performance agreements in order to respond the needs of the company's operations or to preserve or develop employment. These agreements make it possible to adjust working hours, employee salary and mobility.

As a result, the employer may enter negotiations to reduce employees' salary on a long-term basis.

Once the agreement is concluded, the employer must inform the employees of the existence of the agreement. Employees have the right to refuse the application of the agreement (Article L.2254-2 of the French Labor Code).

As an alternative to permanent pay cuts, the employer is also considering informing employees in an ALL STAFF memo/email that the company will defer paying 20% of their salaries each month for the next 12 months and, if certain company targets are hit, will pay employees the withheld sums at the end of that period. Is this lawful?

In France, remuneration can include of several elements: a fixed part (fixed salary paid every month) and a variable part (obtained if the employee succeeds in reaching his objectives).

The remuneration and the method of calculation are the result of an agreement between the employer and the employee. The employer cannot change the essential elements of the employment contract without the employee's agreement.

Consequently, the employer cannot unilaterally change the composition of the salary without the employee's agreement.

In order to make such a change in the method of calculating salary, the employer has the same options as set out in point 1, the employer can:

  • obtain the employee's temporary agreement by signing a rider to the employment contract (option n°1);
  • obtain the employee's definitive agreement if the company can justify an economic ground (option n°2);
  • negotiate a collective performance agreement (option n°3).

If the employee refuses, the employer must continue to pay the salary. Non-payment of salary is a serious breach of duty by the employer.

If the employer unilaterally changes the calculation method without using these options or unilaterally delays the payment of salary, the employee may ask to the judge to obtain a rapid court decision forcing the employer to pay the wages as defined by the employment contract.

What options does the employer have if employees refuse to agree to the permanent pay cut, or object to the pay deferral scheme?

As mentioned in points 1 and 2, the employer cannot change an essential element of the contract without the employee's agreement.

If the employee refuses the modification of employment contract, French judges consider that the employer has only two options (Cass. soc., 26 June 2001, n°99-42.489) either:

  • renounce the project and continue the employment contract under the previous conditions;
  • ·or dismiss the employee.

Refusal is not a fault constituting a reason for dismissal (Cass. soc., 14 November 2007, n°06-43.762). However, the economic reason given by the employer for proposing the modification of the employment contract may justify a dismissal, for example, economic difficulties. The employer must then follow the procedure for dismissal on economic grounds.

If the employer negotiates a collective performance agreement which provides for a change in the employment contracts, the employer may initiate a procedure for dismissal for real and serious reasons (Article L.2254-2 of the French Labor Code). The employer is not obliged to follow the specific procedure for dismissal for economic reasons.

In response to the local Covid-19 lockdown measures, the employer implemented a "Flexiworking" policy which allowed employees to work their set daily hours at any time of the day and from any location. Now those lockdown measures have been eased, the employer wants employees to return to working within core business hours and 3 days a week at the office. Can the employer unilaterally withdraw the Flexiworking policy and implement the new one?

The Covid-19 health crisis was an unusual time in companies' operation, it created special rules that are no longer applicable.

 Until 9 June 2021, the rule in France was 100% remote work for activities that could be done so. Since then, France changed lockdown rules.

The French National Protocol provides that employers will have to negotiate the new modalities of remote work rhythm the trade unions in the company. It is recommended to maintain several days of remote work per week. Therefore, the employer cannot unilaterally decide on the new remote work.

Two situations are possible:

  • If the company has already signed a remote work agreement providing for several days of remote work per week, this agreement shall apply from 9 June 2021;
  • If the company has not signed a remote work agreement, the employer will decide on the new modalities of remote work through consultation of the trade unions.

Once the new modalities of remote work are negotiated, the employee is obliged to respect it. Th employee cannot refuse without committing a fault.

In light of the local Covid-19 travel restrictions, the employer allowed employees to carry over 10 days of their annual holiday entitlement into the next holiday year but did not specify when the employees had to take this holiday. It is now halfway through the holiday year and some employees have considerable amounts of unused holiday to take, including their carried forward leave. What options does the employer have?

In France, in principle, paid leave must be taken by the employee. Failing this, paid leave will be lost by the employee. He will, in principle, be entitled neither to carry over leave nor to financial compensation (Cass. Soc., 20 November 2012, n°11-20.343).

Also, if the employees have a much larger balance of days, the employer will have few options:

  • He will be able to agree with the employee to carry over the paid leave to the following year:

To carry over the paid leave, the employer must give his express authorization. However, neither the employer nor the employee can impose this deferral. If this postponement is granted, it is likely that the employer will be faced with the same situation the following year.

  • The employer may refuse to take the paid leave when the situation requires it :

In France, the employer remains the decision-maker as to when the leave scheduled. He may therefore refuse a request to take leave. However, this refusal must not be abusive. It may, for example, be justified by the need for continuity of service, high activity or the existence of exceptional circumstances.

However, this measure is unpopular with employees.

In any event, the employee must be able to take all of his or her paid leave during the period in question. Failing this, the employer may be ordered to pay damages if it is the employer himself who has prevented him from taking his leave (Cass. Soc., 12 July 2014, n°03-43.296).

The employee will not be able to more than 24 days in a row (i.e. 4 weeks) unless there are specific exceptions (Article 3141-17 of the French Labor Code).

UAE

For the purpose of this alert, we have focused on the legal requirements that currently apply to:

  1. Private sector employers and employees subject to Federal Law No. 8/1980 (the “UAE Labour Law”) and the Ministry of Human Resources and Emiratisation (“MOHRE”) Ministerial Decree No. 279/2020 (regarding private sector labour during the implementation of precautionary measures to reduce the spread of the novel coronavirus, "Ministerial Decree 279/20"). Employers based in free zones should take advice on whether Ministerial Decree 279/20 applies to them;
  2. Private sector employers and employees subject to the Dubai International Financial Centre (“DIFC”) Law No.2/2019 (the “DIFC Employment Law”); and
  3. Private sector employers and employees subject to the Abu Dhabi Global Market (“ADGM”) Employment Regulations 2019 (the “ADGM Employment Regulations”).

Given the financial impact of the Covid-19 pandemic on its business, 12 months ago an employer implemented a 20% pay cut. Now the employer wants to make this change permanent. Can the employer do this and, if yes, how should it be done?

It is possible to convert a temporary variation of contract to a permanent arrangement so long as it is done with the employee’s consent. It is important for employers to ensure that they have properly documented any agreement (whether temporary or permanent) to limit the risk of an employee bringing a claim for unpaid wages and denying that there has been any agreement to reduce pay.

In some respects there are mechanisms set up to do this onshore in the UAE. At the height of the pandemic, MOHRE issued Ministerial Decree 279/20, which envisaged employers implementing pay cuts in response to the impact of the preventative measures that were introduced in order to limit the spread of the virus. For example, Ministerial Decree 279/20 specifically provides for temporary and permanent pay cuts to be made along with other adjustments to terms and conditions of employment: MOHRE introduced a template contract appendix which employers under its purview are required to use in order to validly agree temporary variations to employee pay; and permanent reductions require a formal contract amendment which must be approved by MOHRE. 

Free zone employers (including those in the financial free zones of the DIFC and the ADGM) are not subject to Ministerial Decree 279/20 unless the respective free zone authority specifically requires it. However, such employers can easily record pay reductions in their own form of agreement, which should clearly state the fact that the change is a permanent change in pay and (in order to comply with the requirements of the DIFC Employment Law or ADGM Employment Regulations, as appropriate) be signed by both the employee, and for the company. If no such agreement is reached and the employer continues to pay the reduced pay even after the period of the temporary arrangement has expired, and the employee continues to work without objection, it may be possible to imply by this acquiescence that the contract has been varied permanently. However, to reduce the ongoing risk of a claim for unpaid wages, the permanent variation should be agreed in writing. 

As an alternative to permanent pay cuts, the employer is also considering informing employees in an ALL STAFF memo/email that the company will defer paying 20% of their salaries each month for the next 12 months and, if certain company targets are hit, will pay employees the withheld sums at the end of that period. Is this lawful?

Such deferral would generally be unlawful if implemented unilaterally and without employee consent. Therefore, if an employer in any part of the UAE proceeded with this course of action, they would likely face claims in respect of unpaid wages. Under the UAE Labour Law, such claims could be brought any time up to one year from the date on which the normal full salary was due to be paid. In the DIFC, employees would have six months from the due date in which to bring such a claim. In the ADGM, employees have 6 months in which to bring a claim and seek a court order not only for payment of the 20% of pay withheld but also an award of compensation of such amount as the Court considers just and equitable in all the circumstances having regard to any loss sustained by the employee that is attributable to the unauthorised withholding of pay.

If the employer operates the pay deferral arrangements and an employee continues to work without objection after receipt of the ALL STAFF memo/email then it may be possible to imply that the employee has agreed to such variation. However, it is not advisable to proceed in reliance on implied consent as that approach involves significant risk of claims. 

What options does the employer have if employees refuse to agree to the permanent pay cut, or object to the pay deferral scheme?

Ultimately, an employer can wield the threat of dismissal (and potential re-engagement on modified terms of employment) as a motivating factor for encouraging employees to agree to an amendment to their terms and conditions of employment, but dismissal for refusing to agree to a permanent pay cut is not without risk. Employees employed under the UAE Labour Law may claim arbitrary dismissal on the basis that refusing to consent to a contractual change to their terms and conditions of employment is not a 'valid reason' for dismissal. Successful claims will lead to an award of compensation of up to three months' gross remuneration, in addition to the usual termination payments (including end of service gratuity and payment in lieu of accrued but untaken holiday). 

Whilst employees whose employment is governed by the DIFC Employment Law or the ADGM Employment Regulations generally cannot challenge the lawfulness of the reason for a dismissal (unless it is a discriminatory reason, or retaliation for them having whistleblown) they can expect to be paid their full contractual period of notice of termination, in addition to the usual termination payments referred to above.

In response to the local Covid-19 lockdown measures, the employer implemented a "Flexiworking" policy which allowed employees to work their set daily hours at any time of the day and from any location. Now those lockdown measures have been eased, the employer wants employees to return to working within core business hours and 3 days a week at the office. Can the employer unilaterally withdraw the Flexiworking policy and implement the new one?

A key factor in this situation is what is the contractual nature of the Flexiworking policy. Generally, where the policy is non-contractual and stated to be subject to variation or withdrawal, it will be easier for an employer to manoeuvre and amend or withdraw the policy accordingly.

Where the policy is contractual, or where its status is unclear, the employer will have to tread more carefully and the position will differ depending on whether the Flexiworking policy was agreed as a temporary or permanent arrangement.

If the arrangement was agreed as temporary and clearly documented as such then reverting or switching to a previous work pattern and/or work location (in whole or part) will, in most cases, simply be a matter of giving notice of the change. If an employee refuses then the employer is likely to be able to rely on that as a valid reason for dismissal under UAE Labour Law. This will provide the employer with some insulation against the employee being able to successfully bring a claim for arbitrary dismissal.

In the DIFC and ADGM, the position would be less clear. The scenario presents the possibility of discrimination claims being pursued by employees who are unwilling to move away from the Flexiworking policy. For example, a female employee with childcare responsibilities may claim indirect sex discrimination on the basis that a new arrangement puts her at a particular disadvantage due to childcare requirements and the statistical reality that women are more likely than men to be responsible for providing childcare. In support of the claim, such an employee may point especially to the fact that the ongoing pandemic increased that burden with the prospect of children being sent home from school following COVID outbreaks. An employer in the DIFC or ADGM would be able to defend such a claim if they could show that the change in policy is objectively justified as a proportionate means of achieving a legitimate aim.

If the Flexiworking policy had been agreed as a permanent arrangement, an employer (in any part of the UAE) will need the employees' consent to implement the change back to core hours and three days' in the office, in line with ordinary contractual principles. Employers may find (depending on the labour market conditions) that employees are willing to consent to the change to escape the possibility of being dismissed. However, the threat of dismissal may not be sufficient incentive for employees whose employment is governed by the UAE Labour Law who may have recourse to claim arbitrary dismissal (on the basis that refusing to consent to a contractual change to their terms and conditions of employment is not a valid reason for dismissal) and seek an award of compensation of up to three months' gross remuneration (in addition to the usual termination payments). Employees whose employment is governed by the DIFC Employment Law or the ADGM Employment Regulations would generally not have similar recourse to challenge the dismissal so long as the employer dismissed them on full contractual notice (plus the usual termination payments) unless the employer could show that the employees' conduct warranted immediate termination (for cause), which seem unlikely in this scenario.

Further, as discussed in our previous international update 'COVID-19 and returning to work: what should employers consider? (7 June 2021)', given the potential interplay of Long COVID and employer obligations in relation to disability discrimination, it is possible that a change in working arrangements could place a DIFC or ADGM employer at risk of claims for a failure in this respect.

In light of the local Covid-19 travel restrictions, the employer allowed employees to carry over 10 days of their annual holiday entitlement into the next holiday year but did not specify when the employees had to take this holiday. It is now halfway through the holiday year and some employees have considerable amounts of unused holiday to take, including their carried forward leave. What options does the employer have?

Having a significant proportion of employees who have declined to take annual leave presents concerns for employers both in respect of the operational continuity of the business – with the possibility that a build-up of untaken leave may lead to work bottlenecks with multiple employees taking leave - and in terms of employers' obligations in respect of employee wellbeing at work under health and safety provisions in the UAE Labour Law, DIFC Employment Law and ADGM Employment Regulations. It is therefore an issue that many employers have sought to address.

Ideally, the taking of annual leave would be agreed with employees through active encouragement but ultimately UAE employers subject to any of the above laws have the right to direct their employees to take leave on dates determined by the employer. It is good practice to agree this with employees and to give as much notice as possible and, under the DIFC Employment Law and ADGM Employment Regulations, DIFC and ADGM employers must give employees at least seven days' prior written notice of the requirement to take leave. An additional option for reducing high accumulation of annual leave entitlement for those employers who operate an annual leave purchase scheme, is to allow employees to sell some or all of the additional days purchased back to the company.

If, despite these measures, there remains a significant amount of accumulated leave at the end of the annual leave year, the options for employers differ depending on the location and the law governing the employment relationship.

Under the UAE Labour Law, it is open to employers to inform employees that they will lose their entitlement at the end of the annual leave year and will not be permitted to carry over annual leave into the next year unless they have been prevented from taking leave due to work demands (as opposed to travel or other COVID-related limitations). In practice, it is common for employers in the UAE to allow employees to carry forward their leave and make a payment in lieu of all rolled-over and accrued but untaken leave on termination in accordance with the law.

Under the DIFC Employment Law and ADGM Employment Regulations, employers may similarly inform employees that at the end of the annual leave year the employees will lose any accrued leave entitlement in excess of either five days' leave or any contractual carry-over limit (whichever is higher). However, in doing so, employers must be mindful of anti-discrimination provisions in the law and the risk that arises when the reason that an employee has been prevented from taking annual leave is due to a prohibited characteristic such as disability, or pregnancy and maternity.

Hong Kong

Given the financial impact of the Covid-19 pandemic on its business, 12 months ago an employer implemented a 20% pay cut. Now the employer wants to make this change permanent. Can the employer do this and, if yes, how should it be done?

The amount of monthly salary to be received by an employee is a contractual right. An employer cannot unilaterally vary any employment term to implement a reduction in pay. Assuming that the employer did previously obtain the prior consent of the employee before it implemented the reduction, in the event that it now wants to make this amendment permanent, the employer will need to record the change in writing and preferably have the employee countersign the document agreeing to the permanent 20% salary reduction. 

If an employer unilaterally imposes a pay cut in the absence of the employee's consent, the employer will have contravened the provisions of the Employment Ordinance in respect of making a timely payment as well as making a deduction which is also not permitted by the Ordinance. While there are certain situations where an employer can lawfully deduct sums from an employee's wages, the employer's financial difficulty or operational needs are not one of them and the employer would incur both civil and criminal liability for their actions. 

A unilateral variation of an employment term is a repudiatory breach of the employment contract which would allow the employee to claim constructive dismissal.

As an alternative to permanent pay cuts, the employer is also considering informing employees in an ALL STAFF memo/email that the company will defer paying 20% of their salaries each month for the next 12 months and, if certain company targets are hit, will pay employees the withheld sums at the end of that period. Is this lawful?

An employer has both contractual and statutory obligations to make timely payment of an employee's salary. The Employment Ordinance stipulates that an employer must pay wages to an employee no later than 7 days after the end of the wage period. 

As stated in the answer to Question 1 above, there are specific circumstances in which an employer can make deductions from an employee's salary. Even with the employee's consent, the employer cannot make the deduction of 20% of the employee's salary and defer payment until later in the year as this is not permitted by the Employment Ordinance. The consequences of making such a variation is that the employer will breach the law and the deduction and deferral of the 20% will be unlawful.

What options does the employer have if employees refuse to agree to the permanent pay cut, or object to the pay deferral scheme?

If the parties are unable to reach a consensus on the permanent pay cut (the deferral scheme is not an option as it is not permitted under Hong Kong law), the employer may decide to dismiss the employee with notice or a payment in lieu of notice and thereafter hire a new employee with reduced pay. The employer would need to pay all contractual and statutory benefits to the employee within the 7 days of the termination date.

In response to the local Covid-19 lockdown measures, the employer implemented a "Flexiworking" policy which allowed employees to work their set daily hours at any time of the day and from any location. Now those lockdown measures have been eased, the employer wants employees to return to working within core business hours and 3 days a week at the office. Can the employer unilaterally withdraw the Flexiworking policy and implement the new one?

In Hong Kong there is no legal framework on flexible working arrangements and the employees do not have a right to work from home, so the answer will be entirely dependent on the employment terms.

If the Flexiworking policy has not been incorporated as a part of the employment contract and the employer has expressly reserved its power to update it from time to time, the employer will be free to unilaterally withdraw the current Flexiworking policy and implement new arrangements according to its business needs. It is nevertheless prudent for the employer to review its employment contracts to make sure there is no contradiction between the contractual terms and the new arrangements. 

The employer should provide reasonable notice to the employee before implementing the new arrangements. Although the effects of the epidemic are subsiding, some employees may still have difficulties returning to work (e.g. those who have young children whose schools close on short notice for disinfection due to an outbreak, or those who have vulnerable elderly parents at home and want to avoid crowds). Where employees' duties can be carried out remotely at home or on a flexible schedule, the employer should be accommodating and should not unreasonably refuse an employee's request to continue working remotely otherwise the employer may be liable for indirect discrimination on the grounds of family status.

As the employer wants employees in the office 3 days a week, the employer should set out clearly the procedures for deciding which 2 days employees will work from home (e.g. whether the employees can choose freely every week or if their line manager will make agree the same days for the employee to wfh each week in accordance with operational needs. Any decision taken should be communicated clearly to all employees and preferably in writing with sufficient notice so that the employees have time to make adjustments.

In light of the local Covid-19 travel restrictions, the employer allowed employees to carry over 10 days of their annual holiday entitlement into the next holiday year but did not specify when the employees had to take this holiday. It is now halfway through the holiday year and some employees have considerable amounts of unused holiday to take, including their carried forward leave. What options does the employer have?

The first option is forfeiture. Employees will normally be incentivised to take their annual leave rather than risk losing it. Therefore, the employer should notify the employees when they will require any carryover leave to be used up, failing which it will be forfeited. Before any forfeiture action is taken, the employer must ensure whether any carry-over leave proposed to be forfeited is statutory annual leave or contractual annual leave (which is the portion of annual leave in excess of the statutory annual leave).

Statutory annual leave is strictly governed by the Employment Ordinance and cannot be forfeited. In contrast the forfeiture of contractual annual leave is regulated by contractual terms. The employer should therefore review the employment contract to determine if any of the unused leave is contractual in nature and can be forfeited.

Another option is for the employer to direct the employees to take leave. In respect of statutory annual leave, under section 41AA(4) of the Employment Ordinance the employer may direct an employee to take annual leave by providing written notice of at least 14 days (or less upon the mutual agreement of the employer and employee) that the employee needs to take annual leave on the specified dates.

Whether an employer has the power to require an employee to use up his contractual leave on specified dates is determined by the contractual provisions. If there is no clear distinction between the two types of leave and where the employment contract is silent on the employer's power to require an employee to take leave, potentially the employer can make use of section 41AA(4) of the Employment Ordinance to direct the employees to take unused contractual leave.

A further option would be for the employer to buy out the unused leave. However, for obvious reasons, most employers prefer not to and many cannot afford to deploy this option and where statutory leave is concerned, it is only permissible to make a payment in lieu under limited circumstances stipulated in the Employment Ordinance and will require consent from the employees.

When employers are considering the options open to them to clear the annual leave backlog, they should be mindful of the purpose of annual leave – to maintain the employees' wellbeing by giving them a break to relax and unwind. This is particularly important in times of a global pandemic but is often overlooked given the travel restrictions. Employers should be slow in exercising their right to forfeit annual leave and should consider giving the employees an "ultimatum" - a final (but reasonable) period for them to take their unused leave - before the leave days will be forfeited.

Singapore

Given the financial impact of the Covid-19 pandemic on its business, 12 months ago an employer implemented a 20% pay cut. Now the employer wants to make this change permanent. Can the employer do this and, if yes, how should it be done?

VL: Singapore law does not prohibit employers from making long-term wage cuts if companies are suffering from extremely poor or uncertain business conditions that are likely going to be long term. This is essentially treated as a contractual matter and consent from the affected employees will be required.

Please note that guidance issued by the National Wages Council recommends that the wage cut measures should be exercised only to minimise retrenchments, amidst the slowing down of businesses.

As these measures will result in wage cuts over an extended period, severely impacting the livelihood of employees, the consultation and consent of the relevant stakeholders are crucial prior to the implementation of wage cuts.

As an alternative to permanent pay cuts, the employer is also considering informing employees in an ALL STAFF memo/email that the company will defer paying 20% of their salaries each month for the next 12 months and, if certain company targets are hit, will pay employees the withheld sums at the end of that period. Is this lawful?

The Tripartite Guidelines on Managing Excess Manpower expressly allows companies to consider introducing a wage freeze should the need arises and to the extent required by the company's financial position. This is likely to be lawful subject to severity of the company's financial situation of the company.

For companies with flexible wage systems already in place (e.g. variable bonus payment, annual wage supplements or monthly variable component and/or other allowances), such deferment and/or adjustments of payments would be more easily implemented.

However, the employer will have to consult and receive consent from the affected unions and employees, as such wage structure is considered as a cost-saving measure that will severely impact the livelihoods of employees. Please note that such measures may have implications for Central Provident Fund / pension contributions, benefits / allowances and tax.

What options does the employer have if employees refuse to agree to the permanent pay cut, or object to the pay deferral scheme?

Wage cuts and pay deferral schemes are subject to the relevant terms of the employment contracts. Further, both the employer and its employees have the right to negotiate and give consent to vary the terms of the employment contracts. As such, if the negotiations fail, the employer may undertake retrenchment in accordance with the terms of the employment contracts and MOM's Tripartite Guidelines on Managing Excess Manpower. The employer would then have the option to re-hire on new contracts based on the new salary amount or structure.

The MOM’s Tripartite Guidelines on Managing Excess Manpower stipulate that laying-off should employees should be a last resort and alternative measures should be considered first instance. Such measures include requesting its employees to take up to 50% of their earned annual leave, temporary layoffs which do not exceed one month or pay the affected employees not less than half of their gross daily salary during the layoff period.

In response to the local Covid-19 lockdown measures, the employer implemented a "Flexiworking" policy which allowed employees to work their set daily hours at any time of the day and from any location. Now those lockdown measures have been eased, the employer wants employees to return to working within core business hours and 3 days a week at the office. Can the employer unilaterally withdraw the Flexiworking policy and implement the new one?

Currently, the government regulations mandate that working from home should be the default mode of work, unless such work cannot be done from outside the company's premises. In line with this mandate, the employer should, as far as possible, advise for its employees to work from home and not merely anywhere else. As such, it is not possible for the employee to implement a 3-days-a-week policy currently, until the Singapore government provides further updates.

When the regulations have eased and assuming that the new policy is in line with the government regulations in force at the relevant time and subject to any conditions in the employment contract or handbook, it is generally fine to withdraw the Flexiworking policy and implement the new policy.

Notwithstanding the above, the Tripartite Advisory on Mental Well-Being at Workplaces recommends that employers should implement and encourage flexible work arrangements to help employees meet both their work and personal demands to allow caregivers to meet their personal need. Going forward, the employer should adopt a flexible approach to ensure that employees who are caregivers to meet their own needs and ensure that they are not being discriminated against.

In light of the local Covid-19 travel restrictions, the employer allowed employees to carry over 10 days of their annual holiday entitlement into the next holiday year but did not specify when the employees had to take this holiday. It is now halfway through the holiday year and some employees have considerable amounts of unused holiday to take, including their carried forward leave. What options does the employer have?

If an employee is covered under Part IV of the Employment Act, the company must allow such employee to carry forward any unused annual leave that falls within the statutory entitlements to the next 12 months.

For all other employees, the treatment of unused annual leave will depend mainly on the employment contract / handbook. The usual options would be to encash the unused annual leave, carry it forward or forfeit the days of unused annual leave.

In terms of market practice, most companies have made a one off exemption to allow their employees to carry over more days of annual leave as a result of the Covid-19 pandemic but have stipulated that such carried over days of annual leave must be utilised by a certain date which otherwise would be subject to forfeiture. Additionally, some companies in Singapore have also provided a one-time encashment of a proportion of unused annual leave.

The Singapore section of the article was written by partner Jason Yang at Virtus Law LLP (a member of the Stephenson Harwood (Singapore) Alliance). 

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