According to the company’s manager, orders have decreased significantly and the board is considering reducing wages. Can the employer unilaterally reduce wages and, if so, under what conditions, by how much and for how long? What are the employee’s rights in this situation?
The general rule is that the terms of the employment contract, including the workload and salary, are changed by agreement of the parties in accordance with § 12 of the Employment Contracts Act (hereinafter TLS). The parties can agree between themselves when and to what extent the changes will apply, either for a specific time or permanently.
The employer may unilaterally change the terms of the employment contract only in cases provided by law. TLS § 37 gives the employer the opportunity to reduce the employee’s salary only if the following conditions are met simultaneously:
- the employer cannot provide the employee with the agreed amount of work due to unforeseen economic circumstances beyond his control;
- paying the agreed salary is unreasonably burdensome to the employer.
The salary cannot be reduced, for example, if the employer is unable to provide work to the agreed extent, but at the same time the employer has sufficient financial resources to pay the salary and there is no real need to reduce the salary.
Before reducing the salary, the employer must check whether it is possible to offer the employee another job. Since the TLS does not limit the offer of another job to the qualification requirements or specialty, the employee must be offered work that he can do with his abilities and skills, including jobs with lower qualifications and different jobs from the previous job. If no other job is offered or the employee does not accept the offer, the employer shall notify the employees’ representative or, in the absence thereof, the employee directly, at least 14 calendar days in advance of the planned salary reduction. The employee must have the opportunity to speak. The employee must present his opinion within seven calendar days of receiving the notification.
The law allows a temporary reduction of wages for up to three months within a 12-month period and up to the minimum wage established by the government (725 euros per month in 2023).
If the employee agrees to a reduction in wages, he has the right to work proportionally less, for example, if the wages are reduced by 25 percent, his working hours must also be reduced by the same amount.
If the employee does not agree to the salary reduction, he has the right to terminate the employment contract by notifying the employer five working days in advance. The employee has the right to terminate the employment relationship upon learning of the decision to reduce wages. The employer cannot reduce the employee’s salary until 14 calendar days have passed since the notification of the intention to reduce the salary, after the consultation period, a decision on the salary reduction has been submitted to the employee, and five calendar days have passed since the decision was submitted.
An employee who has terminated an employment contract due to a reduction in wages will be paid compensation at the end of the employment contract, in addition to the usual final bill, as in the case of layoff, i.e. in the amount of one month’s average wage.
Ülle Kool
consulting lawyer of the Labor Inspectorate