Inflation will be very high this year. Inflation is expected to average close to 9% for 2022. As an employer, are you obliged to apply an inflation adjustment to employees’ salaries even in these times of high inflation?
In principle, you are only obliged to do so if you have agreed this with the employee. This could be in the employment contract or in a staff handbook or collective agreement.
HAS AN INFLATION ADJUSTMENT BEEN AGREED WITHOUT RESERVATION?
Then, in principle, employees are entitled to this. If you want to change a condition of employment, you need agreement with the employee. If you cannot reach such an agreement, an employer has various options to unilaterally change the employment conditions anyway.
An employer can unilaterally change the employment conditions by means of a unilateral change clause if this has been agreed. Even if this is the case, as an employer, you can only invoke the unilateral changes clause if you have such a weighty interest in the change that the interest of the employee must give way to it in reasonableness and fairness.
A compelling interest exists in the event of serious business economic circumstances, such as a poor financial position. It must become clear that it is no longer possible for the employer to apply the current terms of employment; An employer’s interest must be so weighty that by the standards of reasonableness and fairness, the employee’s interest must give way. Among other things, how much the employee loses per year/month and what the employer does to mitigate this play a role in that consideration.
Has no unilateral change clause been agreed? Then an employer can unilaterally change the terms of employment under circumstances by invoking good employee conduct. An employee must generally respond positively to reasonable proposals from an employer related to changed circumstances at work. An employee may only reject a proposal if acceptance cannot reasonably be required of him. We are happy to consider a reasonable proposal in this context.
HAS AN INFLATION ADJUSTMENT BEEN AGREED WITH AUTHORITY TO DEVIATE?
If so, as an employer you have a so-called discretionary power. A discretionary power does not mean that the employer can arbitrarily decide whether or not to grant a full or partial inflation adjustment if this was done uniformly for years. What matters is that the discretionary power must be exercised on the basis of good employer practice. How to do that? The following points are important:
- provide clarity in advance about the exercise of the power to derogate;
- sufficiently substantiate that the inflation adjustment in question would be an unusually high amount;
- sufficiently substantiate that downward adjustment is justified and the employer has good grounds for reaching its decision;
- do not apply arbitrarily, but to everyone;
- possibly: offer alternatives to salary increase or downward adjustment.
NOTHING HAS BEEN AGREED BUT AN INFLATION ADJUSTMENT HAS BEEN APPLIED TO SALARY FOR YEARS?
If a particular allowance is granted for many years, an acquired right may arise under circumstances. Acquired rights are rights of an employee that are not contractually or legally defined but have arisen in practice due to a structural award.
Acquired right?
This depends on a number of factors: 1) the content of the course of action, 2) the nature of the employment contract and the position of the employer and employee vis-à-vis each other, 3) the length of time during which the employer has followed the course of action in question, 4) what the employer and employee have declared or not declared to each other in connection with that course of action, 5) the nature of the advantages and disadvantages for the employer and the employee resulting from the course of action, and 6) the nature and size of the circle of employees towards whom the course of action has been followed.
Based on these factors, is there an acquired right? Then, in principle, the employees are entitled to it. As an employer, using the criteria for unilateral modification as explained above, you will have to argue why you may unilaterally modify the acquired right.
CONCLUSION
If an inflation adjustment has been applied to employees’ salaries for some time, as an employer you cannot simply change it. To be able to change the amount of the inflation adjustment you apply to salaries, you must properly substantiate and communicate this. In addition, you may have to take measures to mitigate the impact on employees. We have a lot of experience with these kinds of issues and are happy to think along with you. Contact us by phone or email and we will look into it with you!
