Reducing Salary Costs Across the Globe – An Overview of COVID-19-Related Work Hour Reduction and Furlough Schemes

Can companies reduce the working hours and/or pay of their international workforce?

As the COVID-19 pandemic continues to disrupt business across the globe, many international companies are continuing to consider and implement cost-saving measures to protect their financial health. One of the major points for consideration is whether multinational companies may reduce the working hours and/or pay of their international workforce.

As an initial matter it is important to note that, in most countries, employers will not be able to simply change an employee’s work hours or pay unilaterally — even in times of crisis — given that these are material terms of employment.  Rather, written employee consent may be required. While this may sound like a tough sell, in practice many companies are reducing salaries and generally employees are agreeing, out of a sense of solidarity and an understanding that the alternative is potential job loss in a very bad market. Thus, assuming employers can obtain employee consent (should it be required for the specific proposed action), there are several schemes that employers may be able to leverage in order to avoid mass layoffs. Note, the rules on these schemes are continuing to evolve quickly and careful review and planning will be needed before moving to implementation.

Partial Reduction in Work Hours — Government Support to Employers: Many countries across the globe have established governmental programs to provide financial support to employers that can enable them to reduce employee working hours, reduce payroll costs and minimize layoffs.

  • For example, in the Netherlands, the Temporary Emergency Measure for Work Retention scheme (“NOW”) is intended to prevent employers from having to dismiss employees due to economic impact of the COVID-19 crisis. To qualify for this scheme, employers need to show that their business turnover (generally based on revenue) is (or is expected to be) reduced by at least 20%. In turn, they will receive significant government compensation for salary costs related to this turnover reduction. Companies must commit to not dismissing their employees while using this arrangement.
  • Similarly, in Japan, companies may put employees on a temporary partial suspension (for example, reducing one day of work per week) and pay the statutory leave allowance at a rate of 60% of base salary on each suspended workday. Companies that have paid the statutory suspension allowances can receive subsidies from the government of up to two thirds of the paid statutory suspension allowances (with a cap of JPY 8,330 per day) for up to 100 days.
  • In France, if business activities are negatively impacted due to the COVID-19 crisis, a partial activity scheme could be considered by the employer on an exceptional basis. This specific scheme allows the temporary suspension of employees’ employment contracts and a reduction in their working hours, during which they receive from their employer a compensation indemnity amounting to at least 70% of their remuneration. In such circumstances, employers may receive a State allowance (the amount of which depends on several factors, including the size of the company).
  • In Ireland, the government published the Emergency Measures, under which the government will provide for a rebate of up to 70% of an employee’s take-home income subject to certain weekly caps. In order to qualify for the Scheme an employer must be able to show at least a 25% reduction either in the actual or predicted turnover of the employer’s business or in customer orders being received by the employer and be unable to pay normal wages. While this was initially interpreted to mean that the employer had to be virtually insolvent or close to insolvent, the Office of the Revenue Commissioner has confirmed that employers who have normal cash reserves to meet future expansions and plans can still qualify for the scheme. Note that the scheme is available for employers who keep staff on their payroll during the pandemic (among other criteria). Employees may be: (a) temporarily not working/laid off; or (b) on reduced hours and/or reduced pay.
  • In New Zealand, the government announced a wage subsidy scheme which is available to all employers that are significantly impacted and are struggling to retain employees as a result of the COVID-19 crisis. To be eligible, employers must have suffered (or are projected to suffer) at least a 30% decline in revenue compared to last year for any month between January 2020 and June 2020.  An employer must make certain commitments in applying for this, including that they will make their best endeavor to continue to employ the affected employees at a minimum of 80% of their income for the duration of the subsidy period. This is equivalent to keeping people working four out of five days of the week. The level of financial support received will depend on the number of employees and whether they are full-time (i.e., 20 or more hours per week) or part-time (i.e., less than 20 hours per week).
  • In Australia, the government has implemented the JobKeeper payment, which provides wage subsidies to businesses that are significantly affected by COVID-19 so they may continue paying their employees. Affected employers who meet the turnover criteria will be able to claim a fortnightly payment of AUD 1,500 per eligible employee for a maximum period of 6 months.
  • Additionally, Germany has a short-time work scheme, and the German parliament has simplified the conditions for receiving a short-time work allowance in this time of crisis.

Partial Reduction in Work Hours — Government Support to Employees: Alternatively, should employers need to reduce the working hours and pay of employees, the government may provide support to the employees directly in lieu of an employer reimbursement.

  • For example, in the Philippines under the COVID-19 Adjustment Measures Program (CAMP), the government is offering financial support of a one-time lump sum payment of Php5,000 to affected workers or those workers in private establishments whose employment faces or suffers interruption due to the COVID-19 pandemic. Note: This would apply to employees whose pay/working hours are reduced due to the implementation of flexible work arrangements, as well as to employees who are temporarily suspended as a result of COVID-19.
  • In Norway, parliament adopted a temporary measure where the company’s duty of payment is reduced from 15 days to 2 days. After this, the employee would be entitled to full pay from the government (up to 6 times the basic amount) for 18 days. After these 20 days, the employee may be entitled to unemployment benefits for the remaining period of the temporary layoff. On March 16, 2020, the unemployment benefit was increased to 80 % pay (up to three times the basic amount) and 62.4 % pay (up to six times the basic amount).
  • In Brazil the government will pay workers a social benefit ranging from 25-70% of the unemployment insurance benefit, where salaries and working hours are reduced.
  • In Chile, the government recently enacted an initiative that allows employers to agree to a reduction in working hours with employees, so employees may in turn access benefits and supplements charged to unemployment insurance. Under this option, the employer may agree with employees to a reduced working day and proportional remuneration for those hours. Employees will have access to a supplement of 25% of their remuneration (subject to a monthly cap), charged against unemployment insurance.
  • In South Africa, the Unemployment Insurance Fund is making certain benefits available to employees when a company shuts down for a certain period or if employees are required to work reduced hours.

Pay Reduction with No Change to Working Hours: This is not generally an option; however, in the limited instances where it is available and appropriate in the circumstances, it may be considered if agreement can be reached with employees. In any event, employers should be careful to ensure they continue to meet any minimum wage requirements.

Furlough: Where reducing working hours is not an option, employers may consider resorting to placing employees on furlough, i.e., a temporary unpaid leave of absence which thus eliminates their working hours altogether. Some countries are developing financial support for furlough schemes in a bid to prevent the alternative: layoffs and their corresponding consequences.

  • For example, in Denmark, the Danish government has agreed to a relief package for companies who would otherwise be forced to cut staff by at least 30% or more than 50 people because of COVID-19. The government will pay 75% of total salary expenses (subject to a cap) as long as the employer doesn’t lay off employees. Companies wishing to benefit from the new scheme must send employees home with their full salary during the salary compensation period and during this time, the employees are not required to work. Under the salary compensation scheme, companies may receive:
    • Up to 75% (but maximum DKK 23,000) for employees subject to the Salaried Employees Act
    • Up to 90% (but maximum DKK 26,000) for employees not subject to the Salaried Employees Act
  • Italy has issued a decree wherein the employer is entitled to ask for extraordinary support by the Italian Public Administration (PA) and to furlough employees for up to 9 weeks. During this period, employee salaries would be paid by the PA.
  • The United Kingdom also just finalized such a plan – the Coronavirus Job Retention Scheme, wherein the government will reimburse 80% of wages for all employees who are ‘furloughed’ but still on payroll, up to a cap of £2,500 per month.

However, note that such government support schemes usually have an income cap, so high earners may still face significant loss of income. To account for this, some employers may wish to ‘top up,’ i.e., supplement, the government compensation. If an employer is considering a top-up approach, they will need to carefully assess to ensure that the government benefit is not forfeited as a result of the employer ‘top-up.’

It is also important to note that given that the spirit of these programs is tied to saving jobs, employers who utilize these governmental schemes may be temporarily barred from concurrently moving forward with a reduction in force. For example, this principle is the case in the Netherlands, New Zealand and Switzerland.

Other government schemes similar to those set out above are also being implemented in countries such as: Austria, Belgium, Canada, Denmark, Poland, Singapore, South Africa, Spain, Sweden and Switzerland.

However, there remain a slew of countries where no comparable special relief measures for employers have been issued, despite tangible impact to businesses deriving from the COVID-19 pandemic, such as: Hong Kong, Indonesia, Korea, Malaysia, Mexico, Thailand, and Vietnam.  Notably, in India the government announced that employers must continue to pay employees while the nation is on lockdown, despite offering no government financial support to do so.

As with all COVID-19 matters, we expect further developments to follow as additional countries continue to evolve their response to this global crisis.