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Freshfields Risk & Compliance

| 4 minutes read

The cost to the workforce of the COVID-19 outbreak: are there alternatives to downsizing?

The economic fall-out of the COVID-19 outbreak is being felt around the world at both micro and macro levels. 

At the time of writing, the outbreak, which the WHO declared a pandemic on 11 March 2020, has resulted in 174,000 confirmed cases globally and over 6,700 deaths. 

The fight to contain the spread of the virus has led to the closure of businesses, and the suspension or restriction of international travel. It has also forced companies to adopt (at times disruptive) working-from-home policies across offices. 

Meanwhile, US stocks have suffered the worst fall since 1987 in light of virus fears and the timelines of corporate transactions are being reassessed, with some transactions being suspended or postponed.

In these turbulent times, companies are having to consider their business continuity and contingency plans on a daily basis, considering both the short- and long-term impact of the COVID-19 outbreak. And global employers are having to grapple with a plethora of practical issues, including data protection, discrimination and on-site adjustments (see our checklist).

But what does all this mean for the workforce? Does the need to manage employment costs simply mean redundancies? The good news is that it doesn’t have to.

We set out below some potential alternatives to downsizing that might allow companies to retain their experienced, quality staff and avoid the expense of redundancies (in the short term) and future recruitment and training costs (in the long term).

1. Unpaid leave and/or a reduction in working time

One approach that some employers are already taking is inviting employees to take periods of unpaid leave, for example in the airline industry

In the past, we have also seen employers respond to a reduction in their resource requirements by implementing a strategy whereby employee working time is reduced, with corresponding reductions in employee salary or wages. 

If done correctly, these practices can achieve significant cost savings without affecting the overall size of the workforce. There is, however, a difficult line for an employer to walk between, on the one hand, requesting that employees take unpaid leave or reduce their hours and, on the other, requiring them to do so.

There are a number of risks with this approach (for example, potential breach-of-contract and constructive dismissal claims, and the possible triggering of employer obligations to inform and consult, where there is a recognised employee representative body), which means that any period of unpaid leave generally must be voluntary. 

However, the examples show that, with appropriate sensitivity and careful employee communications, these risks can be managed. 

The risks of challenge are also further mitigated by the emergency context in which these requests are currently being made of employees. 

2. Virtual relocation

Where only certain areas of an employer’s business are experiencing a downturn, it may be that there is a need for additional employees in a different location or business unit. Another possible alternative to downsizing is therefore relocation of staff.

While there are always real practical obstacles to adopting relocation as a solution (eg employees being unwilling or unable to commute further or relocate to a different site), these are exacerbated by the COVID-19 outbreak, and the consequential travel restrictions and other lockdown measures. 

However, employers around the globe are increasingly adopting working-from-home arrangements or split-team systems to minimise the risk of contamination and to ensure business continuity. 

Therefore, this unprecedented focus by employers on remote and agile working may actually facilitate a virtual relocation solution to managing employment costs, while minimising the day-to-day impact on employees. 

3. Workforce sharing 

While some sectors of the economy currently have a surplus workforce (eg hotels, retail, manufacturing etc.) other businesses are facing increased demand (eg online retailers and food delivery companies). Indeed, Amazon has announced that it will hire 100,000 extra full- and part-time workers to meet the surge in demand for its services because of the COVID-19 outbreak. 

Shanghai has responded to this dynamic with the creation of a workforce-sharing platform, which allows employers in the city's Minhang district to post if they need additional temporary resources or if they have excess capacity due to suspended or reduced operations. 

The authorities administering the platform then match demand and supply, and help the companies agree on the terms of co-operation. This is an original solution that may, if successful, help insulate both employees and employers from the economic fall-out of COVID-19. 

We explore the legal challenges to such a platform in our blog published at the end of February. 

4. Retraining

Closely related to relocation is retraining. 

Where the profile of an employer’s business is having to change or there is an opportunity to grow into a new sector or product, it may be prudent for an employer to re-skill its workforce to equip them for different roles. 

While any investment or expenditure decisions are going to be difficult and closely scrutinised, re-skilling allows a business to be agile and nimble in the face of economic uncertainties, while avoiding the costs and risks with external recruitment. 

Employers already embarked in re-skilling programmes as part of their digital transformation may want to take the opportunity of the slowdown to accelerate these. 

5. Cost cutting

Finally, as well as the alternatives to downsizing set out above, an employer can look at other ways to cut costs. 

This can be done in conjunction with some of the other initiatives discussed and can be implemented in a number of ways, including:

  • a pay freeze;
  • a headcount freeze, where vacancies are only replaced internally; and 
  • reducing salary or wages for all staff, an approach taken by China businesses

Such proposals should be considered carefully by employers before they are implemented and some measures, such as a reduction in salary, will require consent. 

Looking ahead

As with any change, there are pros and cons to each approach and the measures discussed will always require careful consideration. 

The challenging economic climate will require employers to make difficult decisions in order to manage employment costs. 

Whichever route is chosen, it is critical for employers to think through the human element of any change carefully before they proceed with implementation.

To learn more about alternatives to redundancies, join our webinar on Thursday, 26 March. Please sign up here.


covid-19, global, employment