Thinking | 17 March 2020

COVID-19 cost saving options for employers

By Aaron Dearden, Fay Calderone and Alex Armstrong-Millar

The COVID-19 pandemic is set to weigh heavily on the Australian economy.  The OECD’s Interim Economic Outlook for March has confirmed that the impact of the COVID-19 outbreak on economic prospects is severe.[1]  Workplaces are being forced to contain costs and manage the significant financial impacts of the pandemic.

Some businesses have no choice but to proceed with redundancies.  While this may provide an immediate reduction in ongoing labour costs, it does come with cash flow challenges in making redundancy and termination payments. It also means businesses lose good people and the investment they have made in them, often over many years. There are however alternative measures that can be implemented quickly to avoid the need to make portions of a workforce redundant that are listed below.

In considering these options and other measures to be taken, employers need to build trust with the workforce and ensure leaders lead by example. This may include announcing temporary management pay cuts, cancellation of bonuses, and freezing capital works projects. These are all measures that can be announced prior to speaking with the wider workforce about measures to be taken with their cooperation.

The impact on the business culture and long term morale also needs to be considered. Simon Sinek often cites the example of a manufacturer that needed to save $10 million in labour costs during the height of the recession in 2009. It implemented four-week unpaid furloughs for its roughly 7,000 employees instead of layoffs. The CEO's pitch: Far better for all to "suffer a little than any of us should have to suffer a lot." The move reportedly saved $20 million, and ultimately increased morale.

The circumstances we are currently facing are unprecedented under our current Australian industrial environment but we are working through various cost saving options as outlined below. They are not standalone options and could be used interchangeably (eg the employee agrees to take two weeks annual leave and two weeks unpaid leave).

Request employees take annual or long service leave

Ask employees to take annual leave and long service leave. While this option involves an immediate cost, it reduces the contingent liability that will in any event have to be paid out on termination later, possibly at higher rates.

Providing employees with their annual leave and long service leave balance and meeting them and asking if they would be prepared to take leave starts the conversation. Employees appreciate what’s happening and most employees will be prepared to try and do their part, especially if they understand the alternative may be mass job losses.

Some employees may not be prepared to volunteer to take leave but may be prepared to do something else (for example, a period of unpaid leave or to reduce their days to an eight day fortnight).

Employers may also be able to direct employees to take annual leave where that employee has accrued an excessive amount of leave.  Employers will need to consider the specific provisions of all applicable awards and enterprise agreements; for instance, under some awards, employees can only be directed to take annual leave where a certain amount has been accrued.  Under many awards, the direction to take excess leave cannot result in the employee’s leave balance dipping below six weeks of accrued leave.

Further some awards include terms that require an employee to take paid leave in certain circumstances and where such a requirement is considered reasonable.

Enterprise Agreement pay increases

If an enterprise agreement applies, consider whether the agreement can be varied so that automatic wage increases do not take effect.  Employees and unions understand the economic impact of what is occurring.  Some employees and unions may be willing to defer increases for six plus months or simply hold rates until the next year.  Note that any agreement dealing with enterprise agreement rates will most likely need a variation to be approved by the Fair Work Commission.  In the current climate, one would expect the Fair Work Commision would be open to approving such variations. The Fair Work Commission is currently braced for these applications having set up a “hotline” email to deal with urgent applications to vary enterprise agreements or other instruments to deal with the consequences of COVID-19.

Agree to reduce days

Obtain agreement with employees that they temporarily agree to work reduced hours or days. For example, employees may agree to work an eight day fortnight or 30 hours a week.  As part of this they may agree to be paid annual leave for the days they don’t work or agree to take unpaid leave on the other days.

Voluntarily agreeing to unpaid leave

Employers can ask their employees to agree to take a period of unpaid leave.  These arrangements must be done by agreement without coercion or undue influence. If such arrangements are agreed, it is strongly recommended they are documented so that there is no misunderstanding or attempts to claim back pay at a later date.

Voluntary pay cuts

Ask employees if they will accept pay cuts.  The pay cuts do not need to be permanent but could be based on a percentage pay cut for a period of four, eight or twelve weeks with the agreement to review the cut on an ongoing basis.

Employers will need to obtain the consent of impacted employees before implementing pay reductions and consider the terms of applicable awards.

Terminate employment of employees on probation or with less than 12 months service by way of redundancy

An employer is able to terminate an employee during a period of probation provided the reason for termination is not unlawful.  Employees who have not been employed for the minimum statutory period (six months for employers with more than 15 employees; 12 months for employers with less than 15 employees) are not entitled to bring an unfair dismissal claim.[2]

Likewise, employees that have been employed less than 12 months are not entitled to redundancy pay under the NES when the employment is terminated due to a genuine redundancy.

End supplementary labour arrangements

Reducing labour hire, casual employment arrangements for employees not employed on a regular and systemic basis and ending non-critical contracting arrangements may be an effective way to reduce costs.

Put a forced shut down into effect

Normally people associate shut downs with the Christmas period, however, some awards permit employers to implement more than one shut down a year.  Notice periods apply, but this is another option for employers covered by applicable awards to use.  For example, under the Manufacturing Award 2010, employers are permitted to put a shut down into effect twice per year and where there is agreement between the employer and majority of affected employees, for three separate periods in a year.

Enact a stand down under the Fair Work Act

Under section 524 of the Fair Work Act (the Act), an employer may stand down employees without pay in certain circumstances, including where there is a stoppage of work for which the employer cannot be held responsible and where an employee cannot be usefully employed.

Workplaces are increasingly looking to standing down employees as an outcome of COVID-19, especially in industries that require face-to-face contact and where roles cannot be performed from home.

Initiating stand-downs is likely to be closely scrutinised.  Employers must carefully delineate between situations where there has been a downturn in the relevant industry and/or the company is in a poor financial position (for which a stand down is not permitted under the Act) as opposed to situations where there has been a genuine stoppage of work due to circumstance beyond the employer’s control.

Businesses across a diverse range of industries are feeling the financial impact of COVID-19 now.

Employers should turn their minds to appropriate measures that can be put in place to reduce labour costs and ensure business continuity.  All cost-cutting initiatives must be carefully considered in accordance with the Act, the provisions of awards and enterprise agreements prior to implementation.  For example, employers need to be conscious of their consultation obligations.  Some of the measures considered above may be suitable for certain industries, businesses or employees, but not all.

Any temporary agreements reached with employees should be documented.

Our employment team are well equipped to assist you to navigate the uncertainties arising from COVID-19, to consider the specific measures that would be appropriate for your business and assist to efficiently implement them.  Please contact us to discuss how cost reduction strategies can be implemented effectively for your workforce.

See our related article on how the safe harbour regime can help businesses through the economic effects of COVID-19.

[1] OECD Interim Economic Assessment, ‘Coronavirus: The World Economy At Risk’, 2 March 2020.
[2] s 383, Fair Work Act 2009 (Cth).

Key Contacts

Employment lawyer Karl Rozenbergs advises clients in adverse action claims, on negotiating enterprise agreements and much more.

More about Karl

Aaron has extensive employment and industrial relations law experience working with clients across a range of industries.

More about Aaron

Alison has more than 20 years’ experience in a wide-ranging employment and privacy practice.

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A highly regarded employment lawyer, Fay advises on proactive compliance, discrimination and performance management.

More about Fay

Mark is an employment lawyer experienced in litigious and non-litigious applications of employment and industrial relations law.

More about Mark

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