Fictitious Downsizing

Alexey Chantsev
Labor law expert
Alimirzoev & Trofimov law firm

Despite some economic stabilization, the current situation still forces some companies to downsize their business activities. This causes companies to reduce staff or cut personnel costs in another way.

In most cases, staff reduction is real and caused by downsizing of business activities or by other economic reasons. Moreover, there is an opinion that in order to initiate staff reduction employer must have not only initiative but also objective cause that interferes with continuing of labor relations.

In the meantime, legislation does not require a direct correlation between the existence of real economic circumstances, such as business restructuring, reducing business activities or another circumstances, and employers’ right to reduce staff. In fact, except some specific situations, only employers can determine a number of its employees.

The Constitutional Court of the Russian Federation has clarified that employers, in order to effectively act and rationally use their assets, can solely exercise employers’ constitutional rights (article 34, part 1, article 35, part 2) by hiring and staffing, provided that employers they respect employees’ rights stated in the article 37 of the Constitution.

Thus, in the case of labor disputes caused by staff reduction, employers do not have to provide courts with economic or other grounds for their decisions.

There is an opinion that staff reduction requires liquidation of certain positions. Meanwhile such an opinion has no legal grounds, as employer has a right to solely decide to change its personnel list and or number of employees and therefore has the right to reduce staff even for one position.         

Generally, staff-reduction procedures oblige employers to go through several steps in order not to breach employees’ rights: Employees with better work performance and qualification have priority right to keep their positions; and staff reduction requires two months prior notification in writing and the employer must offer another vacant position (if there are any) to the employee.

Sometimes an employee believes that staff reduction is fictitious because the employer has not offered to the employees any vacant position in another company of the employer’s group. Many Western companies, including worldwide companies, have sophisticated corporate structures, including numerous legal entities that work under united brand. There are a lot of situations when an employee is listed in one legal entity but his or her direct manager works for another. Sometimes there is a situation when a human resource department of one legal entity is responsible for labor-related documentation maintenance for all legal entities in the group of companies. It’s hardly surprising that in this situation an employee sometimes believes that his or her employer is not a particular legal entity but a group of companies as a whole and in the case of a staff reduction the employee has to be offered all vacant positions existing in all companies in the group.

According to the Labor Code, an employer is an individual person or a legal entity (company) that has entered into employment relationship. To the extent permitted by Federal law, other entities can be considered as an employer if they have a special right to enter into employment relationships. The Federal Law on the Protection of Competition provides term group of companies but the law does not consider group of companies as an entity and does not entitle it to inter in employment relationship. Thus employer has to offer vacant positions only within the legal entity that employee has an employment relationship with.   

Before initiating a staff reduction, an employer has to closely observe employees’ priority rights to keep their positions. Generally employees with better work performance and qualifications have the priority. But the procedure of assessing work performance and qualifications is not defined in the law, so courts have to stick with the procedure and criteria provided by the employer. If the employees have an equal level of work performance and qualification, the employer must chose for staff reduction those who are less socially protected.          

It’s worthwhile to notice that staff reduction is often accompanied with internal personal conflicts so employers tend to accelerate and shorten staff reduction procedures. This acceleration and shortening can lead to violation of employees’ rights. However, court practice shows that Russian courts are very severe about compliance with staff reduction procedure. Thus every staff reduction should be thoroughly prepared in advance.