As bars, restaurants, theatres, sporting and entertainment events, gyms, casinos, movie theatres, and other establishments shutter globally in response to the COVID-19 pandemic many employers have been forced to consider immediate layoffs of their employees around the world in response to their businesses having been essentially shut down. Other employers, faced with the possibility of a looming global recession, are preparing for potential future international layoffs. Significant pitfalls await employers conducting layoffs (temporary or permanent) outside of the U.S., which are heavily regulated by law, including mandatory severance payments, notice periods and cumbersome processes. We discuss some of these pitfalls for selected countries outside the U.S. including Australia, China, France, Germany, Japan, Russia, Spain and the UK below and discuss some of the early responses by countries like Spain and Germany to create exceptions to the normal requirements.
- Temporary layoffs would not generally be permissible based on the COVID-19 outbreak. Australian employers may offer the employee paid or unpaid leave during the crisis period, but the employee is not required to accept the offer.
- With respect to permanent layoffs, employees may be terminated for reasons of redundancy as a result of the effects of the COVID-19 outbreak. Employers that terminate employees based on redundancy must consult with the employee over at least two meetings, offer the employee re-deployment into another position in Australia, and provide notice (or pay in lieu of notice) and redundancy pay. Currently, in Australia, employers do not have the ability to make an argument based on “force majeure” with respect to COVID-19 to absolve themselves of these redundancy obligations.
- Chinese law does not provide for a temporary layoff of employees. Employers and employees are, however, free to negotiate with their employees to amend their employment agreements to account for a temporary work stoppage but it is recommended that at minimum, the employer agree to pay the employee the applicable minimum salary and social insurance during this time.
- With respect to permanent layoffs, the employer is also free to enter into an agreement with employees to terminate the employment relationship. The standard mutual termination offer is a “N+1” package, with “1” being the one-month notice period (or one-month salary in lieu of notice) and “N” being the employment years in relation to calculation of statutory severance.
- In addition, if the employer is prepared to cease operations in China, the employer could de-register in China but the deregistering process takes some time (usually longer than one month) and the employer cannot terminate employees until this process is complete. In addition, the employer will still be required to pay statutory severance under such circumstances.
- If the employer would like to terminate more than 10% of all employees citing serious business difficulties, under Chinese law, the employer must develop a mass layoff plan and explain the circumstances to all employees 30 days in advance. The employer must then incorporate employees’ comments in the layoff plan and then report the plan to the local labor administration authorities. In addition, the employer is still required to pay the statutory severance under such circumstances.
- Under French law, during the COVID-19 outbreak, an employer may choose to operate under partial activity modality. Under this modality, an employer may temporarily suspend employees’ contracts. During the suspension period, the employer must pay each employee a compensation indemnity equal to at least 70% of the employee’s remuneration. Subject to receipt of authorization from applicable authorities to shift to partial activity mode, the employer would be eligible to receive a specific allowance co-funded by the state and the unemployment administration, amounting to EUR 7.74 per non-worked hour (applicable rate for companies with a headcount between 1 and 250 employees).
- The employer may also temporarily release their employees from work if that is necessary to safeguard their health and safety. If employees are released from work for health and safety reasons, however, the employer must continue to pay employees’ full compensation.
- With respect to permanent termination, under French law, given the economic difficulties induced by the COVID-19 pandemic, the employer would likely have proper economic grounds to dismiss employees. However, such dismissals may require pre-dismissal meetings with the employees (with 5 days’ notice), a 15-day notice of dismissal (or potentially pay in lieu of), the opportunity for re-hiring within a year and potential severance based on length of service.
- German law does not recognize the concept of temporary layoffs. However, on March 13, 2020 the German parliament passed the “law on the crisis-related temporary improvement of the regulations for short-time work allowance” in a fast-track procedure which gives companies easier access to a state-funded short-time work allowance amid the COVID-19 outbreak. Short-time work is the temporary reduction in working time in order to reduce the wage costs for an employer. In the event short-time work applies, employees will work less for a temporary period and be eligible for less remuneration during this period. It is even possible to completely reduce working time. During the period of short-time work, employees are eligible to receive a short-time work allowance from the Federal Employment Agency in the amount of 60 % of the net pay attributable to the lost working hours (or 67 % of the net pay for employees with at least one dependent child).
- The implementation of short-time work is not possible without an employee’s consent, unless the employment contract already provides for this possibility. In order to qualify for short-time work, an employer must meet several requirement including have a substantial loss of working hours, either for economic reasons or due to an unavoidable event.
- With respect to permanent layoffs, employers must be careful that employees in protected categories, such as those with a severe disability or who are pregnant, are not laid off. There is no statutory severance in Germany. The only payments required by law are earned wages and accrued vacation which are paid pursuant to the employer’s regular payroll practices. In addition, all notices of terminations require a written form to be valid (i.e. a physical document signed by an authorized representative of the employing entity needs to be delivered to the employee in its original signed version). Alternative methods for presenting and executing the notice of termination (DocuSign, scan, email etc.) do not suffice.
- Temporary layoffs are not permitted under Japanese law, but temporary suspension of work is permitted. If suspension is caused by force majeure, employers are excused from paying salary. However, the Japanese government takes a very conservative interpretation of “force majeure” and it is unclear whether Japan would recognize the effects of coronavirus as falling within this category. If suspension is not supported by force majeure, employers must pay their employees at least 60% of their average base salary during the suspension. Employers may be eligible for subsidies from the Japanese government to cover some of these costs.
- With respect to permanent layoffs, under Japanese employment law, strategic restructuring is almost impossible, as companies must be suffering severe financial issues (near bankruptcy) before they are permitted to dismiss employees for redundancy. Even if such financial issues exist, employers must take all measures to avoid termination and ensure all required steps are taken (such as discussions with the affected employees). If these strict requirements are not met, the terminations of employment may be ruled unlawful and ineffective and employees will be reinstated with back pay.
- Temporary layoff without any payments to employees is not permissible in Russia. Russian employers may offer the employee paid or unpaid leave during the emergency period, but the employee is not required to accept the offer.
- Russian employers may also decide to temporarily close their office(s) in the face of the COVID-19 outbreak. If employees are not able to fulfill their duties because of employer’s decision to close their office(s), the period of absence of the employee will be characterized as “downtime due to the fault of the employer” and generally the employee must be paid at least 2/3 of his or her average monthly salary during the downtime period.
- It is possible that the downtime could be characterized as “downtime due to reasons, which lie beyond the control of either employee or employer”—here, force majeure. Whether this characterization is available based on COVID-19 at this time is unsure. In cases where downtime is beyond the control of the employee or employer, generally the employee must be paid at least 2/3 of his or her base salary (which may be lower than 2/3 of the average monthly salary, because the latter usually includes not only base salary, but also bonuses). All benefits must continue to be provided to employees during downtime.
- With respect to a permanent layoff, the spreading of coronavirus is not a valid ground for dismissal. Thus if an employer decides to permanently layoff an employee rather than use downtime, the employer must use one of the other existing grounds for dismissal stipulated by the Russian Labor Code and be prepared to support it. The parties are also free to terminate their employment relationship by mutual agreement, which would generally be conditioned on the employer’s agreement to pay severance.
- Generally, in Spain, temporary layoffs are permitted, but effectuating such layoffs requires following a legal procedure which involves negotiation with employee representatives or, in their absence, an ad hoc commission representing all employees and the presentation of the alleged business-related grounds for the termination, together with particular information and documentation to be provided both to employees representatives and the labor authority.
- Spanish law also provides for a temporary layoff procedure in case of force majeure, which does not require a period of negotiation but instead a communication to the employees’ representatives (or to the employees in case there are no representatives) and the labor authority explaining the force majeure, which must be supported by evidence. The labor authority, once informed, has five (5) days to either accept it or not. A temporary layoff with adequate evidence that it was precipitated by COVID-19 would likely be accepted as being based on a force majeure by the labor authority. Recent legislation from Spain enacted in response to COVID-19 has substantially reduced and simplified the filing requirements for seeking approval from the labor authority for a force majeure temporary layoff.
- The use of temporary layoffs based on force majeure, however, is restrictively interpreted and a temporary layoff based on force majeure only allows the employer to suspend employment contracts for the time during which the emergency is ongoing. Once the emergency is over, the employees’ contracts would re-activate.
- If the layoff is permanent and the employees’ contracts are cancelled, employees are entitled to a written communication stating the legal ground for dismissal, a 15-day notice period (which may be paid in lieu) and a severance of at least 20 days of salary per year of service.
- Temporary layoffs are not permitted in the U.K. unless there is a contractual right to do so in the employees’ employment agreement. It is, however, possible for the employer and the employee to agree to a temporary layoff, provided that the employer has the employee’s consent and there has been a consultation between the parties. If employees are laid off without a contractual right to do so or without their consent – the employee can bring a claim of unfair dismissal (if employee has more than 2 years’ service), breach of contract and unlawful deductions from wages.
- With respect to a permanent layoff, the employer may have the ability to terminate an employee’s employment for reason of redundancy. However, the employer should be aware that employees with over 2 years of service have the right not to be unfairly dismissed. A fair dismissal requires both a fair reason and a fair procedure. Redundancy due to the effects of coronavirus would likely be a fair reason for dismissal. A fair procedure requires the employer to discuss the proposed redundancy with the employee prior to taking a final decision and generally would require at least two meetings – the first to inform the employee of the proposal and the second to hear from the employee in relation to that proposal before a decision is made.
- No matter the method of employment termination, all employees are entitled to contractual or reasonable notice. Employees with more than two years of service are entitled to a statutory redundancy payment based on years of service.
If you are considering a global reduction in force or a reduction in force in any of these countries or in the U.S. we encourage you to contact Orrick to discuss any potential pitfalls.