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How to Compassionately and Legally Break Promises to Your Staff

How?At the end of February 2020, the federal unemployment rate was 3.5%. At that time, business owners were looking for ways to attract and retain valued employees. They made promises of new benefits and higher pay. But that was before COVID-19 became a reality in the U.S. Since that time, many small businesses have been forced to close down and lay off staff.

Hopefully, many of these businesses will be able to re-open and re-hire. Whether this means returning to pre-pandemic staffing in the near term remains to be seen. Clearly, the vast majority of small businesses are facing monumental financial challenges.

What does this mean for those promises? Are businesses legally required to keep all of those promises? Are there ways for businesses to step back, at least for a while, to retain employees and their loyalty to the business? There are no easy answers. Here are some ideas to consider.

Promises of pay increases and promotions

In the past several years, as the unemployment rate tumbled, employees have come to expect annual raises. While their expectation isn’t legally binding on employers (except as explained later), it’s important for companies to share the facts of their financial woes and explain why anticipated raises may not come through, at least for a while.

In fact, as was the case during the Great Recession, employers may reduce employee compensation across the board (e.g., a 10% cut). This is permissible as long as cuts don’t violate minimum wage and overtime rules, written employment agreements, or union-negotiated contracts.

Planning 401(k) contributions

When employees committed to make their annual contributions to a company’s 401(k) plan for 2020, they were informed about employer contributions on their behalf. Employees may well have based their commitment for the year on the amount of employer contributions. Now, companies may be financially unable to make their promised contributions. The tax law allows employers to make one change during the year as long as the plan document permits it.

Under a safe harbor rule, employers can cut back or suspend certain employer contributions as long as supplemental notice is given to employees (some employer contributions cannot be changed).  This notice must explain the employers’ action (reduction or suspension in contributions) and give employees an opportunity to change their elective deferrals for the rest of the year. They may want to do so because their original elective deferral was made solely to obtain employee matching contributions or because they, too, are now suffering financially and can’t afford to put money aside in the plan.

Other Perks

Many perks provided to employees is embedded in company culture, such as snacks and beverages in the break room, holiday parties, and company outings. While small businesses want to maintain “normalcy” when the economy re-opens, the cost of these perks may be too much to handle for a while. Companies are free to eliminate these perks. However, any promised benefits, such as paid holidays and bonuses, that are part of employment agreements or union contracts cannot be unilaterally changed by employers. When in doubt about making any changes impacting employees, it’s advisable to consult with an employment law attorney.

Looking ahead

Everyone hopes that the economy can return to pre-COVID-19 levels and that loyal employees will be rewarded for remaining with the company. This may take time and everyone hopes it won’t be that long.

It’s often been repeated that hope is not a plan. According to the U.S. Army War College, “hope is not a strategy; it’s the only strategy.”

It’s up to employers to be transparent with employees about the company’s finances, explain changes that must be made for the company to remain viable, and, most importantly, maintain hope.