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Unjustified to introduce pay cuts due to corona-lockdown

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Legal news
calendar 27 June 2021
globus Denmark

About four months into the first lockdown, a company notified two employees that their salary would be reduced. Both employees would not accept the salary reduction and were then terminated with reference to coronavirus. The Danish Board of Dismissals took a close look at the company’s accounting figures, but the company refused to submit more detailed calculations. On that basis, the Board did not agree that it was proven reasonable to first notify and then terminate the two employees due to coronavirus.

A few months after the first lockdown, two clinical assistants at a dental clinic were notified that their salary would be reduced by approximately DKK 4.000. In that connection, the company also informed them that the economy was under pressure due to coronavirus and the authorities’ measures. In addition, the company also told the employees that it was pressured due to one of the owners leaving to continue working at another clinic. Therefore, the company had to introduce measures to save costs on staff.

However, both employees refused to accept the salary reduction and were terminated shortly after. The terminations were reasoned with reference to coronavirus.

The employees disagreed with the company’s decision and argued that the salary reduction was arbitrary and did not reflect an actual financial need. The Danish Board of Dismissals therefore had to decide if it had been justified to notify the reductions of the employees’ salary.

Need for cost saving measures was not documented

The Danish Board of Dismissals stated that in order to be able to assess if the reduction in salary and the terminations were justified, the need to introduce cost saving measures had to be documented.

At the time when the employees were notified of the reduction in salary, the company had already introduced cost saving measures relating to its staff. That had for example been done by two out of the five clinical assistants leaving the company just a few months before introducing the salary reduction.

The company presented accounting figures in the case, where it was shown that the company’s income had decreased by 55 % compared to the previous year. The decrease was due to the strict restrictions introduced due to coronavirus that the Danish health authorities had put in place when Denmark locked down in March 2020. Due to the restrictions, the company had to close for five weeks - except for urgent and critical treatments. After those five weeks, the company was slowly able to open again.

The company declined to present other accounting figures and calculations that could further document why it was necessary to introduce salary reductions. Based on this, the Danish Board of Dismissals did find it proven that it had been justified to introduce salary reductions.

The Board emphasised that the employees had been notified of the salary reductions at a time where the Danish authorities had eased the coronavirus restrictions. The Board also noted that the company had notified the employees of the reduction shortly after they were entitled to a statutory salary increase of almost DKK 500 a month in accordance with the applicable collective bargaining agreement. Also, at the time it decided to introduce salary reductions, the company could not with certainty have known how many patients they would lose as a result of one of the owners leaving the company. As a result, both employees were entitled to compensation.

IUNO’s opinion

The case is interesting because it shows that companies cannot introduce salary reductions without at the same time being able to prove a justified need for it. Companies are expected to be able to document the need for cost saving measures and consequently, it will be to the company’s detriment if it then turns out that the measures cannot be justified with reference to the company’s financial situation.

IUNO recommends that companies - in advance - conduct thorough evaluations of its finances that causes the need to introduce salary reductions or terminations. Companies should be aware that even if the need for cost saving measures can be a justified, the Danish courts additionally pay attention to the level of cost savings the salary reductions will introduce. The potential cost saving measures and the need of introducing such measures therefore always have to be proportional with the changes that are implemented.

[Danish Board of Dismissals judgement of 18 May 2021 in case 20200973]

A few months after the first lockdown, two clinical assistants at a dental clinic were notified that their salary would be reduced by approximately DKK 4.000. In that connection, the company also informed them that the economy was under pressure due to coronavirus and the authorities’ measures. In addition, the company also told the employees that it was pressured due to one of the owners leaving to continue working at another clinic. Therefore, the company had to introduce measures to save costs on staff.

However, both employees refused to accept the salary reduction and were terminated shortly after. The terminations were reasoned with reference to coronavirus.

The employees disagreed with the company’s decision and argued that the salary reduction was arbitrary and did not reflect an actual financial need. The Danish Board of Dismissals therefore had to decide if it had been justified to notify the reductions of the employees’ salary.

Need for cost saving measures was not documented

The Danish Board of Dismissals stated that in order to be able to assess if the reduction in salary and the terminations were justified, the need to introduce cost saving measures had to be documented.

At the time when the employees were notified of the reduction in salary, the company had already introduced cost saving measures relating to its staff. That had for example been done by two out of the five clinical assistants leaving the company just a few months before introducing the salary reduction.

The company presented accounting figures in the case, where it was shown that the company’s income had decreased by 55 % compared to the previous year. The decrease was due to the strict restrictions introduced due to coronavirus that the Danish health authorities had put in place when Denmark locked down in March 2020. Due to the restrictions, the company had to close for five weeks - except for urgent and critical treatments. After those five weeks, the company was slowly able to open again.

The company declined to present other accounting figures and calculations that could further document why it was necessary to introduce salary reductions. Based on this, the Danish Board of Dismissals did find it proven that it had been justified to introduce salary reductions.

The Board emphasised that the employees had been notified of the salary reductions at a time where the Danish authorities had eased the coronavirus restrictions. The Board also noted that the company had notified the employees of the reduction shortly after they were entitled to a statutory salary increase of almost DKK 500 a month in accordance with the applicable collective bargaining agreement. Also, at the time it decided to introduce salary reductions, the company could not with certainty have known how many patients they would lose as a result of one of the owners leaving the company. As a result, both employees were entitled to compensation.

IUNO’s opinion

The case is interesting because it shows that companies cannot introduce salary reductions without at the same time being able to prove a justified need for it. Companies are expected to be able to document the need for cost saving measures and consequently, it will be to the company’s detriment if it then turns out that the measures cannot be justified with reference to the company’s financial situation.

IUNO recommends that companies - in advance - conduct thorough evaluations of its finances that causes the need to introduce salary reductions or terminations. Companies should be aware that even if the need for cost saving measures can be a justified, the Danish courts additionally pay attention to the level of cost savings the salary reductions will introduce. The potential cost saving measures and the need of introducing such measures therefore always have to be proportional with the changes that are implemented.

[Danish Board of Dismissals judgement of 18 May 2021 in case 20200973]

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Astrup

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Groth Henriksen

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