Salary Cuts During the Pandemic

• Salaries of certain workers may be reduced
• Salaries of “No Work Employees” may be withheld
• Consent of affected employees not mandatory

A number of employers have asked: can the salaries of employees be reduced in the light of the COVID-19 pandemic?

Recently, the business operations of one of our clients suffered serious disruption due to the implementation of Enhanced Community Quarantine (“ECQ”) measures. Some of its employees were not able to work (“No Work Employees”); others were constrained to render reduced number of hours of service (“Reduced Work Employees”). The rest continued to render normal or regular hours of work (“Normal Work Employees”).

Our client then decided to implement cost-cutting measures in order to salvage its business. One of the solutions that it considered was to lower the salaries of its employees.

Can our client implement this cost-cutting measure?

If yes, who are the employees which can be legally covered? What are the legal requirements that a company should comply to be able to implement the said measure?

SAID THE LAW:

There are three legal principles that must be considered:

First, a fair day’s wage for a fair day’s labor;

Second, no work, no pay; and

Third, non-diminution of benefits.

The “No Work Employees” and “Reduced Work Employees” are covered by the cost-cutting measures. Their respective salaries can be equitably or proportionately reduced. In fact, in the case of the “No Work Employees”, the company may legally withhold the payment of their entire salaries following the “no work, no pay” principle.

However, the “Normal Work Employees” should not be part of the cost-cutting measures. They should be paid their regular salaries because they continue to render normal or regular hours of work – “a fair day’s wage for a fair day’s labor”. Otherwise, the prohibition against diminution of benefits and/or non-payment of wages under the Labor Code will be violated. The exception to this rule is when the “Normal Work Employees” agreed to the reduction of their salaries in order to assist the company in hurdling the slump in its business operations.  

For the reduction of the salaries of the “No Work Employees” and “Reduced Work Employees” to take effect, it is a good practice, if feasible, to secure their written consent.

However, their consent is not mandatory. In other words, the company can immediately implement the cost-cutting measure without getting the approval of these employees. As mentioned earlier, our client can even refuse the payment of the salaries of the “No Work Employees” on the basis of the “no work, no pay” principle.

It is different, however, in the case of the “Normal Work Employees” as they are entitled to receive their regular salaries under the law. If they agree to the reduction of their salaries to help the company survive this crisis, their written consent must be secured. This is because they are waiving their rights; hence, such waiver must be clear, unequivocal, and voluntary to be effective. 

To summarize, the salaries of the “No Work Employees” and “Reduced Work Employees” can be reduced, or even withheld in the case of “No Work Employees”, but not with “Normal Work Employees” unless they give their consent. It is a good practice to secure the approval of the “No Work Employees” and “Reduced Work Employees” before lowering their salaries. However, this is not required by law, meaning, the company can proceed with the implementation of the cost-cutting measure without their consent. With respect to “Normal Work Employees”, their consent is needed before their salaries can be reduced.

Key Contact: