Managing employee costs in a changing business environment

At a time of subdued economic growth, employers are likely to focus on managing employee costs in a way that is straightforward to implement and easily reversed when conditions improve. Options include reducing employee overtime, implementing salary or hiring freezes, or ending the use of contingent workers such as agency workers or independent contractors.

These options are available in all the countries covered in our guide, although are typically more complex to implement where countries have a strong tradition of employee representation, whether through trade unions or works councils.

For example, in countries such as Germany, Italy and the Netherlands, pay is often governed by company or national collective agreements. Employers will not be able to implement a salary freeze if pay rises have already been agreed with employee representatives. It may be possible to negotiate a freeze in such a case, perhaps in return for a commitment not to implement redundancies for a period.

By contrast, in the UK and the U.S. it is much less likely (at least in the private sector) for wages to be governed by collective agreements, in which case employers are usually free to decide not to award an annual pay increase.

During longer-lasting periods of instability, or where an organisation needs to make more significant cost reductions, employers still have options that allow them to avoid job losses. These include periods of short time working, offering unpaid or part paid leave, temporarily withdrawing employee benefits or imposing temporary pay reductions.

Such measures take longer to implement and generally require employee consent, including from employee representatives such as works councils in some countries. Even if employees consent to changes, there may be mandatory administrative processes to follow. In Italy, employee agreements about temporary salary reductions have to be signed before a protected labour venue, such as a labour office or conciliation body.

Employees and their representatives are often more willing to agree cost-reduction measures if governments offer financial support for reduced working hours. Such schemes compensate employees for a proportion of their lost wages and normally apply to temporary slowdowns where employers expect employees to return to their normal hours in due course.

Furlough and short-time work schemes of this type were common in Europe during the global pandemic, although many countries have now withdrawn them. However, where they remain available they are a valuable tool. In Germany, the “short-time work allowance” (Kurzargeitergeld) continues to be available. The Federal Employment Agency typically pays for 60 or 67% of the net wages employees lose as a result of unworked hours. Many U.S. states also offer short-time compensation/ work sharing schemes as an alternative to lay-offs.