Cutting staff costs: heads should not always have to roll

 Always remember there may be legal consequences of cutting staff costs.

One major consequence of the current downturn is that many organisations have had to look at cutting overheads. Once the easy savings have been made, reducing staff costs will rise to the top of the agenda.

Recruitment freezes have their place, but only work well in sectors such as hospitality, where staff turnover is high. Other employers may see redundancies as the only option, yet it might pay for them to think of other choices, though these may carry legal ramifications.

Redundancy and notice payments are clearly an immediate cost for the business, and, if handled poorly, further costs can be incurred if employment tribunal claims are brought. Then there is the effect on morale for those who remain.

What should be considered, especially among those employers who have already undertaken one round of redundancies, is to look at reducing staffing costs without necessarily losing headcount.

Sabbaticals

Some employers allow sabbaticals – which should be subject to business needs, of course – either without pay or on reduced pay. This allows employers to retain skilled staff, while at the same time making cost reductions in the short term.

Another option, taken by some large organisations, is to look for savings by cutting the cost of pension schemes. On the salary side, cost savings can be achieved by employees making salary sacrifices or deferments. This means that bonuses, especially truly discretionary ones, may be dispensed with.

But employers should be very wary about making unilateral reductions in benefits for a very good reason – they may well end up in an employment tribunal.

If an employer were to take such action, they could be faced with claims of constructive dismissal. Perhaps more worryingly, employees may decide to continue working but to put the employer on notice that the reduction is a breach of contract. Even more dangerous for the employer is the employee who stays silent, but in years to come raises a claim that there has been an unlawful deduction from their wages, thus looking for all the payments they have missed out on for many years. For these reasons alone, sensible employers should consult with staff regarding any proposed changes before putting them into effect. This can bring additional benefits.

For example, when staff are empowered in such a way they may see themselves as part of the solution and will rise to the challenges faced by their employer. If hard decisions need to be taken, and employees understand the reason why those changes need to be made, and have their say in the best way forward, they may well support the business, ensuring it succeeds, even through the difficult times.

Instinctive

It is perhaps not surprising that when companies are forced through legislation to consult with their staff, that the instinctive reaction to the legislation is negative in a similar way, employees who are told about reductions in salary and benefits or redundancies will react negatively to this being imposed. Consultation with employees at such times is obligatory, but perhaps if a different mindset were taken, and companies saw consultation as part of the solution, then they will find the implementation of the measures they need to take easier. They will also have a far stronger organisation in the medium to long-term, which should help when markets pick up.

Key points

  • Look at the full range of cost-saving measures available
  • Look at reducing headcount by natural attrition
  • Consultation with employees is essential to avoid employment tribunal claims
  • Unilateral variations to pay and benefits can result in immediate claims of constructive dismissal and breach of contract, and claims many years later of unlawful deduction from wages (in respect of the whole period their salary was reduced)
  • Consultation as to the measures to be taken allows employees to become part of the solution.

David Israel is a partner at Wedlake Bell

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