Legal Aspects of HR Costs Reduction

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In the current difficult economic conditions many employers have to consider different cost reduction options in order to save their businesses from collapse. HR costs are usually one of the first to be considered, since they constitute one of the largest expenditures for employers. However, each company has its own structure of HR costs and hence should make a decision regarding them that best corresponds to its own needs, e.g., whether to transfer employees to a part-time work schedule, or to reduce salaries, bonuses or an employee's list of social benefits, or even resort to more severe measures and carry out staff redundancies. It should be noted, however, that before taking any steps on HR costs reduction (or "optimization"), the legal aspects -- as well as HR management aspects -- should be considered.

In my experience, not paying sufficient attention to the legal aspects may adversely affect the whole process of HR costs reduction and lead to additional expenses for the employer. It is therefore highly recommended for lawyers to be engaged in the process of elaborating an HR cost reduction plan, since they will be able to check that it is in compliance with all legal requirements as well as propose additional options or approaches that may not previously have been considered.

For example, a popular method of reducing HR costs is a reduction in bonuses or the employee benefits package. However, which form the reduction will take will depend on whether it is provided in the employment contract of the employee or the internal policy of the employer. In the first case, the employer should be in compliance with the general rule of the Employment Code of the Russian Federation (the "Employment Code") stating that the provisions of an employment contract should be amended by mutual agreement. Thus, in order to amend the bonus provision of an employment contract, the employer should negotiate and agree any proposed changes with the employee. It is worth bearing in mind here that the employer cannot force its employees to sign such amendments; consequently, these arrangements always need to be negotiated rather carefully in order to ensure that each employee clearly understands the actual reasons for the amendments and is comfortable with signing the respective addendum to the employment contract.

When reducing the salaries of employees, employers should also take into account the principle of equal payment for work of equal quality. Under the provisions of the Employment Code, the level of an employee's salary depends on his qualifications, the complexity of the work performed, and the amount and quality of the work performed. It is prohibited to discriminate against employees when establishing and changing the terms of payment for labor: put more simply, when reducing the salary of an employee, the employer should reduce the workload of the employee accordingly. Otherwise, the employer will face a situation where employees are requested to perform the same work but for a reduced salary, which we believe would be in violation of the above provision of the Employment Code.

We have encountered the practice of employers simply issuing internal orders to reduce employees' salaries without signing any respective amendments to employment contracts. However, such a practice is at odds with the above general rule of the Employment Code and such orders should be accompanied by respective amendments to employees' employment contracts.

When it is not possible to obtain the consent of employees to introduce respective amendments to employment contracts, employers may consider the option of amending them unilaterally. However, this option is possible only in a limited number of cases established by law and should be carried out in accordance with a prescribed procedure.

In the second case, when the bonus is provided in the internal regulation of the employer, it is easier for the employer to amend, since the consent of the individual employee is not required. The employer should simply introduce the amendments to its internal policy and then have the employee sign such amendments. It should also be taken into account that, if there is a representative body of the employees, such amendments should be adopted by the employer with due consideration of the opinion of such a body.

However, some companies, in order that employees do not become unmotivated, prefer not to reduce bonuses and introduce instead new or additional key performance indicators as eligibility criteria on which any bonus payment will be based. As a result, bonuses will be paid to a fewer number of employees and the company will thus be able to reduce costs. If the bonus payment conditions are provided both in the employment contract and the internal policy, the employer should introduce amendments to all documents. Failing to comply with this requirement will result in the more favorable provision for the employee being applied.

By way of a conclusion it is worth repeating that it is strongly advisable to consult with a lawyer before taking any measures with respect to HR costs reduction. A lawyer can mitigate or eliminate any potential legal risks, or even propose alternative options that will be easier to implement.