EACCNY “Post-Pandemic Labor Law” Series | Managing staffing short of cost-cutting in Europe and the United States

With the help of our members, we are creating a Thought-Leadership series on the impact of COVID-19 on Labor & Employment from the perspective of both sides of the Atlantic. Today, we present Deborah S. Brenneman, Partner at THOMPSON HINE LLP in Ohio, along with Gijs van Nes, Partner & Naud van Doorn, Associate both at NAUTADUTILH in Amsterdam, The Netherlands, who will address “Managing staffing short of cost-cutting in Europe and the United States”. |

As the end of the Covid-19 pandemic seems to be coming more and more in sight, the long-term economic consequences of the pandemic are also becoming increasingly apparent. In order to mitigate these economic consequences, many employers might have to take cost-saving measures. Both in the United States and in Europe, employers have several opportunities in this respect, also allowing them to avoid having to part with (large parts of) the workforce.

United States

Early on, businesses with no more than 500 employees were able to obtain governmental assistance to maintain their workforces.  The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) signed into law on March 27, 2020, provided a substantial temporary revamp of small business loans under Section 7(a) of the Small Business Act. The CARES Act’s “Paycheck Protection Program” (PPP) expanded the scope of businesses eligible for Section 7(a) loans, altered the maximum loan amounts and permitted uses of loan proceeds, and afforded repayment relief and loan forgiveness to borrowers. PPP loan applicants were required to use the proceeds to retain workers and maintain payroll or make mortgage, lease and utility payments. The current PPP loan program closed on August 8, 2020 and it is not clear when or if another round of loans may become available.

Outside of the CARES Act relief, employers are wrestling with a variety of options for managing their workforce needs and economic constraints.   Some employers have experienced a dramatic loss of business; others have seen their businesses boom as a result of changing opportunities. Both situations pose challenges in the current unpredictable environment.

For employers on the positive end of the changes, they may be reluctant to add a significant number of permanent employees until they can better assess whether the increase in business is long term.  Those employers are reaching out to staffing agencies to utilize temporary employees, and utilizing independent contractors.  These employers must be mindful of how they structure those arrangements to minimize potential risk and liabilities.  Employers may be considered a “joint employer” of those temporary employees for purposes of many employment law claims and issues.  Therefore it is important that employers carefully craft their agreements with staffing or temporary agencies to minimize the likelihood that joint employer status is created, and to consider indemnification in the event that claims are asserted directly against the employer.  Employers who retain independent contractors also need to utilize proper agreements, as well as assess how those contractors are utilized and managed.  If contractors are improperly classified, and are later determined to be actual employees, the employer could be subject to a variety of penalties and back taxes.

Employers whose businesses have contracted do have a variety of options to avoid layoffs.  Many employers have implemented reductions in wages or salaries for all or some portion of their workforce.  This is generally permissible unless there are union agreements, employment contracts, or other policies that prohibit reductions.  Employers need to tread lightly, however, when it comes to reducing the salary of an employer who is considered to be exempt from overtime requirements under the Fair Labor Standards Act (“FLSA”).  For those employees, the reduction must be prospective and the employee’s rate of pay must still meet the minimum salary threshold set forth in the FLSA.  Additionally, employers could risk destroying the exempt status of that employee if the reduction is taken on a weekly or short-term basis.  The reduction does not have to be permanent, but it does have to be for some extended period of time to avoid that risk.

Other employers are managing reduced demand by placing some employees on periods of leave, or reduced schedules. These options can also be effective, but also come with some caveats.  If employers place employees on a schedule with a reduced number of hours, that could prevent the employees from obtaining unemployment benefits. Employers should look at the unemployment guidelines in their state to determine whether it would be more beneficial for the employee to be placed on furlough rather than a reduced schedule.  Employers who choose to place employees on unpaid leave typically must continue providing existing benefits.  Employers who explore these options must also be mindful of the fact that if exempt employees provide any service during a given work week, they must be provided their full salary.

Europe / the Netherlands

In Europe, governments play an important role in mitigating the economic consequences of the corona crisis. In response to the impact of the corona crisis, the European Union has created the ‘SURE’ (Support to mitigate Unemployment Risks in an Emergency). This scheme, on the basis of which the European Union has lent an amount of EUR 100 billion on the financial markets, aims to support businesses, in order to ensure that employees retain their income and that companies keep their heads above water. The SURE will subsequently be provided in the form of loans, granted on favourable terms from the European Union to member states. The idea behind the SURE is that the European Union is able to obtain loans on the financial market on more advantageous terms than some member states. The SURE is mainly used for so called ‘short-time working’. This means that employees will (temporarily) work fewer hours without loss of income, because the government compensates the fewer working hours. By means of SURE, employees can still receive their salary, despite the fact that there is less or no work at all, as a result of the corona crisis.

Several European countries also have put their own specific subsidy schemes in place on the basis of which companies can be compensated for their loss of income, in order to deal with the economic consequences of the corona crisis and prevent job loss. The entitlement to government support may be subject to certain conditions, which may include restrictions on the implementation of reorganizations and dismissals for business economic reasons or restrictions on the ability to pay bonuses and dividends. Temporary measures from the government, on the basis of which postponement can be requested for the payment of taxes, in order to temporarily create a little more breathing space may also be in place.

Employers who are not eligible for government support or who need to make additional cost savings can try to achieve such savings by reducing the flexible part of their workforce, for example temporary workers, or by not renewing temporary employment contracts. Another option for achieving cost savings is to (temporarily) adjust the terms and conditions of the employment contracts. When considering such amendments, the first attempt should be to reach an agreement in consultation with employees and/or employee representatives. Employers can appeal to the loyalty of employees to agree to temporary adjustments. However, employees cannot easily be expected to agree to detrimental changes in the terms of their employment.

If the terms and conditions of employment cannot be changed in mutual consultation, employers can try to change the terms and conditions of employment unilaterally. The rules that apply in this respect differ from country to country. However, compared to the United States and generally speaking, more and stricter rules apply within the European countries regarding the possibilities employees have to unilaterally amend employment conditions. From a Netherlands point of view, for example, a unilateral amendment in employment conditions is in principle only allowed if the employer has such a significant interest in doing so that, according to principles of reasonableness and fairness, the interests of the employee which would be harmed by the amendment must be overridden. Pursuant to case law in this respect, a unilateral change is not readily permitted, certainly when it comes to primary employment conditions such as salary.

When it comes to secondary employment benefits, a unilateral change is allowed in more cases, but the same strict rules apply. In addition, a distinction can also be made for benefits which, in view of the increased working from home, are less obvious to harm the interest of the employee, such as fixed travel allowances or a lease car.

Whether the economic consequences of the corona crisis will make it easier to change employment conditions unilaterally, the question remains to be seen, case-law on this is still scarce at the moment. Hence, at present, employers should be aware of the limited possibilities to reduce costs by unilaterally changing employment conditions.

While both employers in the United States and employers in Europe have a variety of options at their disposal to manage staffing and avoid layoffs during this turbulent period, they must select and implement those options carefully.

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