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Can employers reduce salaries in the context of the coronavirus crisis in Italy?

United Kingdom
Is it legal to agree a salary reduction with employees in the context of the coronavirus crisis and in what circumstances? This article sets out the position in Italy, with comments from other jurisdictions.

In the context of the current Covid-19 crisis, Governments all around the world have issued legislative measures to limit and control the spread of the virus. In particular, lockdowns have been imposed, schools, universities, museums and gyms have been closed, all sporting, cultural and recreational events cancelled and travel within and between countries have been prohibited.

Companies are not exempted from restrictive measures. In fact, in some countries, companies that do not carry out essential activities (i.e. in general terms, activities useful for and linked to healthcare and food) have had to close their businesses in this period or  have at least been forced to limit their activity.

Consequently, employers have had to act in order to limit the negative impact of this situation, implementing measures in order to reduce (among other things) employment costs, such having recourse to ‘social shock absorbers’, or requiring employees take holiday or leave.

Another measure taken into consideration by companies to deal with this crisis is the reduction of employees’ salaries.

Under Italian Law, no specific legal provision exists regarding the reduction of employees’ salaries. However, Article 2103 of the Italian Civil Code, which governs the so-called ius variandi, that is, an employer’s power to change an employee’s duties, should be considered.

Under this article, employers cannot unilaterally demote employees and reduce their salary. Even if an employer assigns an employee to reduced or lower status duties, which is allowed for changes to the organisational structure, the employee is entitled to maintain his or her job level classification and remuneration, except for those elements of the salary connected to specific ways of carrying out the previous duties.

Nonetheless, an employee’s salary can be reduced by an agreement between the employer and employee providing for the employee’s assignment to lesser duties and a lower job category. These agreements need to be signed before a Conciliation Committee and are valid only if they are designed to further the employee’s interests, such as  avoiding dismissal, letting the employee acquire a different skill set or improving their life conditions.

Based on a strict interpretation of the above provision, there is (recent) case law that affirms the existence of a general principle of ‘non-reduction of remuneration’ (principio di irriducibilità della retribuzione), according to which no reduction of employees’ remuneration is allowed, even with the employee’s consent. As a consequence, only the agreements signed on the terms and conditions described above (signing before a Conciliation Committee and for specific purposes) would be considered valid.

Italian courts have explained their interpretation by highlighting the need to protect employees’ reasonable expectation of getting paid a determined amount in compensation for the duties they commit to carrying out when they sign an employment contract; furthermore, it guarantees the employee income stability.

On the other hand, Article 2103 of the Italian Civil Code limits an employer’s ability to reduce an employee’s salary only within the exercise of their ius variandi power. It does not explicitly prohibit the parties (employer and employee) from autonomously agreeing a different remuneration package, as long as it respects the limits provided for by the law and the minimum wage provided for by any collective bargaining agreement that applies to the employment contract.

Considering the above and despite the case law discussed, within the context of the current coronavirus emergency, an agreement between an employer and its employees, which provides for a temporary salary reduction not linked to a change in the employees’ duties should be considered possible and lawful, even if it does not fulfill the conditions in Article 2103 of the Civil Code.

In any case, some precautions are necessary in order not to jeopardise the legitimacy of the agreement. In particular, employers should take the principle of adequate remuneration into account: the reduced salary must be compliant with the minimum wages provided for by the applicable NCBA, which must be respected absolutely.

Finally, in order to reduce the risk of challenges and litigation, the employee should confirm ex post that the salary he or she received during the period of reduction was correct and waive his or her right to any claim in respect of it.

In a nutshell, with adequate preparation, it is possible to reduce the overall cost of labour in this way, which can help employers to avoid employing alternative and more drastic measures.

The view from other places.

United Kingdom:
Written by
Toffoletto de Luca Tamajo, working in employment law since 1925.
Emanuela Nespoli
Partner - Italy
Toffoletto De Luca Tamajo