'General management has decided that our salary will be reduced. Is that allowed?'

This is a situation we have encountered several times over the last few weeks: the general management of an international group sent a memo stating that all salaries are reduced by 20% due to the coronavirus. But in the Netherlands, that is not acceptable.

– klik hier voor de Nederlandse versie van deze tekst –

Another situation: the annual salary increases are postponed for a few months because of the uncertain situation. Is that allowed? No, that is also not allowed ‘just like that’.

Below, we briefly explain the rules in different countries. This helps us to explain why foreign management teams sometimes come up with drastic measures that are not possible under Dutch law and regulations. We will then show how the proposed changes in salary policy are dealt with in the Netherlands. We provide answers for both situations:

general management wants to reduce the salary
general management wants to postpone salary increases

legislation in the Netherlands and abroad

Every country has its own culture and customs. Every country also has its own laws and regulations for employers, employees and individual employment agreements (your contract).

legislation in Europe ↓

The laws and regulations in European countries seem to be quite similar, partly due to the EU. However, there are still some differences. For example, dismissal of an employee in the Netherlands should be assessed by an independent party to determine a valid reason (e.g. by the UWV, the Dutch Employee Insurance Agency). In Belgium and some other European countries, people can be dismissed without prior verification. In Belgian labour law, the ‘power of dismissal’ has a solid foundation: both employer and employee always have the opportunity to terminate the employment relationship.

What is applicable in almost all European countries is that the individual employment contract is a mutual agreement between two parties; an agreement that cannot be unilaterally amended by one of the parties.

legislation in England ↓

In England (or in fact, the United Kingdom), it is customary to add clauses to the individual employment contract that we do not have in the Netherlands. For example, there may be a clause in the employment contract that is about ‘unforeseen, exceptional circumstances’ that could lead to a unilateral adjustment of the employee contract. The position of the employee is, therefore, much less secure than in the Netherlands.

legislation in the United States ↓

America (the United States) has 50 states. Legislation varies per every state. Many employees in America do not have an employment contract as we know it, and if they have an employment contract, the rules or conditions may vary from state to state.

At a federal level (i.e. for all states of America), if there is no employment contract, US legislation dictates that there is ‘employment at will’ (an agreement at will). This means that the employer can make unilateral decisions about the contract, working hours and salary. The only choice an employee has, if they do not agree, is to resign.

What is also regulated at a federal level is that discrimination is prohibited. Even if there is ‘employment at will’, the employee can start litigation in case of discrimination.

American and English management teams decide more easily about hours and salary

In the Netherlands, increasingly more people are working for international business groups as a result of globalisation. In some cases, the general management is Dutch, but more and more often, the general management is based abroad. And general management often bases its decisions on the laws and regulations in their home country.

As a result, American and English management teams can decide rather quickly on working hours and salary levels. However, legislation in the Netherlands is different.

The legal status of employees in the Netherlands

The employee is well protected in the Netherlands, especially when you compare it to other countries.

The employee’s rights are initially governed by book 7 of the Dutch Civil Code, title 10 (labour law). Also, many supplementary agreements between employers (associations) and trade unions are recorded in collective labour agreements (cao). The Works Council Act (WOR) contains several articles that provide the Works Council with the rights and obligations to help and protect the employee.

If there is no collective labour agreement, or the agreement leaves room for debate, the influence of the Works Council often increases. The Works Council has certain functions and tasks that were previously handled by the trade unions.

situation 1: general management wants to reduce the salary

A memo from general management has announced that all top managers will take a pay-cut of 50% and that all employees worldwide must accept a pay-cut of 40%. Everyone should continue to work their contract hours.*

The employment contract between the employee and the employer is a joint agreement that, apart from exceptions, cannot be changed by either of them individually. Employee and employer must agree on that change together. The employer may, of course, offer the employee a new contract, but the employee does not have to sign that new contract if there are things they do not agree with.

The individual employment contract may state that (if there is a collective labour agreement) the collective labour agreement applies to the employment contract. It also usually states that (if there is a staff regulation) the staff regulations apply. If the salary is determined by the collective labour agreement, the reduction of the salary should not only be approved by the employees. The employer should also consult with the trade unions to adjust the collective labour agreements. If the employer wants to adjust the working conditions in the staff regulations agreed upon by the Works Council, they must consult the Works Council.

exceptions when salaries can be adjusted

There are three exceptions where the employer may decide, without consultation, that salaries can be adjusted:

in case of a unilateral modification clause
in case of unforeseen circumstances
in all reasonableness and fairness (exceptions arising from judicial rulings)

unilateral modification clause

If the employee’s individual employment contract states that the employer can decide to change the employment contract, the employer can. But only when stating well-motivated, serious reasons that outweigh the interests of the employee.

unforeseen circumstances / in reasonableness and fairness

Employers rarely get the opportunity to use unforeseen circumstances or reasonableness and fairness. However, employees may be expected to accept reasonable proposals for changing working conditions if these proposals are needed due to changing business conditions. But because the salary is an essential condition of employment, this reason will be rigorously tested. Employers cannot apply this too quickly.

The employer is at risk of the employee (or the trade union/Works Council on behalf of a group of employees) starting a lawsuit against these adjustments.

the economic emergency package

We currently have an economic emergency package in place in the Netherlands, including the NOW scheme (emergency measure for bridging employment). This scheme means that companies can receive financial compensation from the government in the event of a significant loss of turnover. This is compensation for the salary sum for the period March-April-May 2020 and this compensation can cover up to 90% of salary payments. The higher the turnover loss, the higher the compensation. Some conditions apply; for example, the employer must make an effort to pay 100% of the wages and not dismiss anyone.

the response of the trade unions and/or Works Council

The trade unions and the Works Council are, of course, aware of the NOW scheme.

The organisation can apply for the NOW scheme if there is at least a 20% loss of turnover. If there is no loss of turnover, why should salaries be reduced? It is no reason for the trade unions to adjust the collective labour agreement, and there is no reason for the Works Council to amend the staff regulations.

can general management reduce the salaries?
In principle, salaries cannot be adjusted by the employer without the employees agreeing to this. Sometimes approval from the trade union and/or the Works Council is also required. And since there is a very favourable government scheme in place for the period March-April-May 2020, there is actually no direct reason to adjust salaries.

Of course, other circumstances can also play a role. For example, the NOW scheme looks at the entire business group in the Netherlands. Perhaps your group element is suffering a loss of turnover, but other departments can have excellent sales numbers. In that case, your group will not be eligible for the NOW scheme. Or perhaps the organisation cannot wait until the NOW scheme starts its payments.
For reasons such as these, problems may already have been brewing in the organisation and they are now surfacing during this ’time of corona’. It is time for a good discussion between management and Works Councils on how to tackle these problems together.

situation 2: general management intends to postpone the annual salary increases

A memo from general management states that the annual salary increases, which are the result of the individual performance and evaluation reviews, are postponed for three months.*

The answer to this situation is essentially the same as the answer to the first situation. The employer cannot adjust the salary arrangements without the employees agreeing. It often also requires approval from the trade union and/or the Works Council. The right of consent of the Works Council may also apply (Art. 27 section 1 sub c WOR). And since there is a very favourable government scheme in place for the period March-April-May 2020, there is actually no direct reason to adjust the salaries.