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Managing Salary Reductions of Overseas Employees During COVID-19

As companies around the world grapple with the economic effects of the COVID-19 pandemic, they are facing decreases in business demand and revenue which affect their ability to meet current expenses, including employee salaries.  There are two primary ways for a company to address this problem, either through reducing payroll and overhead expenses or seeking government support to offset lower revenues.

If your company has employees abroad, you will need to assess how to handle anticipated salary reduction, and how to avail of any local government pandemic-related subsidies.  There may be limitations in some countries on salary reduction, and the rules should be well known before initiating any communication or action with a current employee.  Likewise, there may be local government support that would affect the need to reduce salaries, at least in the interim.

The act of reducing salary is not just a financial decision but may have lasting HR and employee morale consequences.  However, there are ways to approach this challenge that can keep valuable employees engaged while still maintaining your business.

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What to Consider Before Reducing Salaries

If the decision has been made to reduce salaries for overseas employees within local guidelines, there are a few issues to consider before implementing policy.

  • Will the reduction be the same percentage for all employees, or will it be tiered by salary amount?
  • How will other compensation such as commissions and bonuses be affected by the reduction?
  • Will working hours be reduced along with the salary amount?
  • Which employees will be impacted the most and how can the employer support them?

It is worth mentioning, that any home country policies or reductions may not be practical or even legal in another country where you employ workers, so it becomes difficult to implement a ‘one size fits all’ global policy on salary reduction.

Foreign Restrictions on Salary Reductions

Most countries require an employment contract that sets salary and work roles for each employee, and any reduction in salary would affect the terms of that contract.  Given the emphasis on employee rights in many foreign locations, any change to terms of payment should not be taken lightly.

Foreign employment laws will usually require that there is a mutual agreement for the salary reduction and consent from the employee in writing.  Some countries, such as Malaysia, will not allow any reduction of salary unless a company can show that it is a measure of last resort for cost-savings, however, work hours can be reduced with the employee’s consent. 

In Singapore, the employer must also notify authorities prior that the salary reduction is only a temporary cost-saving measure in response to the pandemic.  Another option for employers is to offer a ‘no-pay’ leave to the employee until business demand resumes.

Because the requirements vary between countries, it is best to consult the country’s labor department website, or you can view our COVID-19 Updates Page.

Communicating and Setting Expectations

The key to any plan for reducing employee salary is clear and transparent communication.  Most employees understand the position a business may be in at this time and are likely to be amenable as long as they are well informed.  To this end, employers should let employees know ahead of time of any potential salary reduction so it won’t be a surprise.

This is especially true for remote overseas employees who may feel more vulnerable and not as integral to a company as home office employees.  As an employer, you will want to let them know how you will be handling any reduction, the time span, and any in-country rules and benefits that may apply.  Once a mutual agreement is signed, the reduction would be handled in the local payroll, either through your own corporate entity or the third-party administering foreign employment.

Most employees will want to do what is necessary just to keep their position, support the company, and avoid a potential termination.  However, if an overseas employee is resistant to the reduction then it would pay to proceed cautiously.  Explain the reasoning, assure them as best you can that all employees are affected, and be prepared to discuss their options.  A complete termination during the pandemic may be more suspect than usual and subject to employee claims if they feel it is unjustified or in retaliation for refusing a salary reduction.

Seeking Financial Support

If an employer is willing to maintain payroll during the pandemic, many governments are offering some type of financial support for businesses.  This could take the form of wage subsidies as in Singapore where the government offers a subsidy until June for 25-75% of an employee’s wages. 

Canada offers a similar scheme under the Canadian Emergency Wage Subsidy that covers 75% of an employee’s wage if the employer suffered a decrease in gross revenue of at least 15% due to the virus.  The UK will offer up to an 80% wage subsidy for furloughed employees.

Tax deferral is another form of financial support being offered and in Italy, all tax payments from the past few months will be extended, and there are tax credits available to businesses with a 25% or more reduction in revenues.  Some countries such as the US are even offering grants or low-interest loans to companies that maintain their current payroll.

Client Case: Reducing Salaries in the UK and Canada

Recently, a client with employees in the UK and Canada inquired about how to reduce salaries by 10% for their employees.  We replied that the rules are different in each country, and in the UK employee consent is required if they have an employment contract setting salary amounts.

In Canada, working hours (and payment) can be reduced if they reach a Work-Sharing agreement with the employee.  Work sharing will result in reduced hours and shared job duties among a group of similar employees, where a reduction of 10-60% is possible.  The time period for work-sharing has been increased from 26 to 76 weeks.

After communicating the options to our client, we initiated the process with the local employment partners in the UK and Canada.

Do you need more information?

Business and government response to the pandemic is a rapidly evolving situation, and each country is setting their own guidelines to both support employers as well as make sure that employee rights and benefits are being observed.  You might have more questions such as:

If our company reduces salaries for overseas employees, do we have to make the same reduction for home country employees? 

If business activity does not resume soon, can salary reductions be maintained indefinitely? 

Does an employer need to maintain the existing salary level to have access to wage subsidies, or can it be based on the reduced amount?

During this time of uncertainty, our clients are approaching us every day for assistance with addressing these issues for overseas employees, and how to access available employer benefits. 

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