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How should we tell the employees that we need to reduce their wages?


Question from our reader: The turnover of our company has decreased drastically in the recent weeks due to a lack of customers. We have decided to implement the option of reducing wages, initially for one month, pursuant to section 37 of the Employment Contracts Act. Do we need to conclude respective annexes to the employment contracts with our employees or is it sufficient to notify them via e-mail? What should be included in these annexes or e-mails?

Answer of the Labour Inspectorate: The Employment Contracts Act (TLS) allows an employer to reduce the workload and wages for up to three months over a period of 12 months due to unforeseen economic circumstances beyond their control. This is a unilateral decision of the employer and does not require an agreement with an employee or drawing up an annex to the employment contract.

Subsection 37 (4) of the Employment Contracts Act refers to the trustee of the employees or, in the absence thereof, to all employees in regard to notifying, and to the Employees’ Trustee Act in regard to consulting with them. Pursuant to Chapter 5 and subsection 21 (1) of the Employees’ Trustee Act, unless otherwise agreed between the parties, the employer has to provide information in writing or in a format which can be reproduced in writing. Thus, the employer may submit a notice of the reduction of wages via e-mail, but must make sure that the employee or their trustee receives the letter (for example, they can ask for confirmation of receipt of the e-mail). In the event of a dispute, the employer must be able to prove when and how the notice was delivered to the employee or their trustee.

Therefore, the e-mail sent to employees or their trustee should include, at the minimum:

  1. The reason why the wages are reduced (for example, a description of how the COVID-19 virus has already affected the turnover, orders, number of customers, etc. of the company) and how exactly this has led to the reduction of the workload and wages of the employees.
  2. The duration of the reduction of wages pursuant to section 37 of the Employment Contracts Act.
  3. The amount by which workload and wages are reduced. If the employer is reducing the workload and wages equally for everyone, for example by 40%, this should also be mentioned. However, if the employer is reducing the working hours and workload in the light of the employees’ actual possibility to contribute, individual notices must be sent to each employee, indicating the extent to which the reduction applies to them, so that they could consider whether or not this is acceptable to them.
  4. The employer should explain that the employee has the right to refuse to work in proportion to the reduction of their wages.
  5. In the notice, the employer should invite employees to enter into a discussion regarding the situation and possible alternative solutions. The trustee or an employee who has received the notice and wishes to express their opinion must give their opinion within seven calendar days of receipt of the notice from the employer.
  6. The notice should clearly inform the employee that if they do not agree to the reduction of their wages, they have the right to cancel their employment contract pursuant to subsection 37 (5) of the Employment Contracts Act. The employee must inform the employer of their decision five working days before the reduction of working hours and wages implemented by the employer takes effect. Upon cancellation of the employment contract, the employee shall be paid compensation for cancellation in accordance with subsection 100 (1) of the Employment Contracts Act to the extent of one month’s average wages of the employee in addition to the wages earned and compensation for unused annual holiday which has not expired. In addition, the employee also has the right to receive additional compensation for cancellation from the Unemployment Insurance Fund if the employment relationship has lasted for at least five years. If an employee cancels the employment contract because they do not agree to the reduction of wages, they have the right to receive unemployment insurance benefits from the Unemployment Insurance Fund if they register as unemployed; for more information, see https://www.tootukassa.ee/eng/content/financial-benefits/unemployment-insurance-benefit.
  7. The employer may also set down a specific deadline in the notice by which time the employees must give notice of whether or not they agree to the reduction of wages, and to whom (at what address) they should make that decision known.

See also the longer explanation of the implementation of section 37 of the Employment Contracts Act: https://www.tooelu.ee/en/news/COVID-19/2572/decrease-in-the-work-volume-and-lay-offs.

Please see also the infographic of the Labour Inspectorate on extraordinary reduction of wages:

Reduction of wages (pdf)

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Photo: Pixabay

How should we tell the employees that we need to reduce their wages?
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