Changing Employment Terms

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In order to economize while maintaining personnel during the ongoing financial crisis, more and more employers are making uneasy decisions to reduce employees' salaries or implement part-time working schedules, thus changing the previously agreed terms of employment. Though this approach is now widely used and appears to be much more legitimate than, for example, having employees take unpaid leave, employers should take special care when unilaterally modifying the important terms and conditions of employment contracts.

As a general rule of the Labor Code, changing the terms and conditions of an employment contract is permitted only by mutual written agreement of the parties. However, there is an exemption from this rule – Article 74 of the Labor Code sets forth that in the event of a change in organizational or technical working conditions when the previously agreed terms of an employment contract cannot be maintained, an employer is entitled to unilaterally change such terms at its own initiative (except for the job function of an employee).

It should be noted, however, that the concept of "a change in organizational or technical working conditions" is relatively vague, and there is no clear and uniform doctrine of its application. Rules for, and guidance in, interpreting the respective provisions of the Labor Code remain rare and are sometimes contradictory. That said, an employer desiring to unilaterally shorten its employees' working hours or reduce salaries on the grounds of "a change in organizational or technical working conditions" must be prepared to justify and prove the actual existence of such grounds and also explain how they have negatively impacted the employer's organization. If a dispute arises, the employer need to have sufficient evidence confirming that changing the conditions of employment contracts was the result of changes in the organizational or technical working conditions in the employer's organization. In the absence of such evidence and grounds, there is a risk that respective changes to the terms of employment will be deemed unlawful.

The court is unlikely to agree that the recession itself is cause for unilaterally modifying the key terms and conditions of employment contracts under Article 74 of the Labor Code. At the same time, it appears that the actual readjustment or reorganization of the work process in a company directly caused by, for instance, a decrease in production volume or a decrease in supplies or sales which immediately affected the company could be considered a "change in organizational or technical working conditions." For example, this could be proven with the company's internal documents (i.e., schedules, instructions, statistics reports, etc.), or memoranda from directors/managers regarding the need to change the organization of work due to decreased production or sales indicators, which include an explanation of what is to be changed in the technology or organization of production or sales for the purpose of optimization, etc.

The employer must notify employees of upcoming changes to the terms of their employment and the reasons for such changes, in writing, no less than two months in advance. If the employee refuses to accept proposed changes in employment terms, the employer will be required to offer the employee another vacant position (similar to previous position or lower) in the employer's organization. In the event that there are no suitable vacant positions in the employer's organization, or the employee refuses to accept the new position offered, the employment contract can be terminated in accordance with applicable rules of the Labor Code.

When unilaterally changing the terms and conditions of employment contracts by decreasing employees' work hours, the employer should also note that, under the Labor Code, shortened workday and/or shortened work week can only be introduced: (a) for the purpose of preserving jobs; (b) in consultation with the trade union organization; (c) for a maximum period of six months; and (d) with the written notification to the state employment service (within three days of a decision).

Obviously, the preferred approach for changing the terms of employment would be to negotiate with an employee and sign respective amendment agreement to his/her employment contract, in other words, to modify the terms and conditions of the individual employment contract by mutual agreement of the parties. Assuming that the employee does not object to changes, this seems to be the most employee-friendly and technically less complicated way to change the employment terms, which also avoids formalities and reduce the risk of disputes. However, the employer should not attempt to persuade or force an employee to accept and sign an amendment agreement changing the terms of employment. If the employee is successful in proving that such an agreement was concluded under the employer's pressure, a court could deem the agreement unlawful and invalidate it.