Return of the long weekend: why four-day weeks are fraught with problems

Companies looking to tighten their belts are not just turning to redundancy. Some are reducing the working week to four days instead of five, but in doing so are walking along a potential legal minefield as they renegotiate employment contracts.

Mark Mansell, a partner in employment law and benefits at Allen & Overy, says he believes finance directors should seriously consider the outlook for the company and make the tough decisions now, as changing contracts is no small feat in terms of either time or cost.

“There are a number of legal issues when reducing the working week and it is easy to get it wrong.” he says. “If the changes are [meant to be] short term, it could work. But if they are for the long haul then it might be better to implement redundancies instead of heading through the legal minefield of reducing the working week.”

Check the contracts
Companies cannot force reduced working hours on staff. Instead, it must be agreed with the employee.

Owen Warnock, a partner in employment law at Eversheds, stresses that although you want to get staff buy-in, at the same time companies must make clear that a reduced week does not mean there won’t be any redundancies later.

Employers also need to spell out whether any future redundancy package would be based on their new, lower four-day pay, or based on their original full-time income.

“This could be a big disadvantage to the employee if they are made redundant. You need to specify in the agreement the redundancy pay packages,” Warnock says.

Other factors to consider when reducing hours include the fact that employees have the right to a redundancy package whether you offer them one or not. Under the Employment Rights Act 1996, if an employee works reduced hours for either four consecutive weeks, or six weeks in 13, they are entitled to take a redundancy package.

Warnock says a company could argue against having to make this payout if it can show this is a temporary solution and that the employee will return to a full-time position. If a company cannot show this they may have to pay.

One high-profile example is KPMG (see Four by Big Four, below), which is on course to implement a four-day week in its UK offices later this year. It signed an agreement with staff lasting until September 2010 with an opt-out clause available until December 2009. As the contract is temporary, the firm has protected itself from a forced redundancy package payout.

Pension concerns
Pension schemes pose further fine print problems as reduced pay, by default, means reduced payments into a defined contribution scheme or potentially a reduced pension from a final salary scheme (if an employee retires during or shortly after the period of short-time working). KPMG says that for its defined contribution schemes, it will continue to pay the usual amount. It is then up to the employee if they wish to reduce or maintain their own contributions.

Sweeten the deal
Other benefits to be affected include annual holiday entitlement. Companies may want to consider sweetening the deal on offer by keeping annual leave at, say, 20 days, rather than cutting it pro rata, to entice employees into taking it up.

“Finance directors will need to work on a case-by-case basis when dealing with benefits such as holiday and pensions,” Warnock says.

The argument as to whether the most senior staff should also reduce their working week remains open to debate. Mansell insists, “If you are asking other people to take a salary cut, I would strongly advise you to do the same.”

Warnock, however, argues “management contribution is vital in these difficult times” ­ so you can stick to your five-day-week.

Four by Big Four
Professional services firms that are seeing their workload decline are jumping on board the reduced working week bandwagon. Big Four accountancy firm KPMG and Charles Russell, one of the top 50 law firms in the country, are either in consultation or already offering extended leave or four-day weeks instead of redundancy.

As we were going to press, KPMG had received support from 85% of its staff to reduce the working week to four days.

To sweeten the deal, the firm had said that if more than 75% of staff voted in favour of the plan, then overall pay would be reduced by 10% rather than 20%, as originally proposed.

Another option offered by the firm includes taking extended leave for up to three months at 30% pay.

KPMG has said that for employees who take up that offer, the salary cut would be spread over a longer period of up to six months to cushion the blow on take-home pay. A three-month, 70% pay cut would then, we calculate, work out at a 35% cut over six months.

KPMG has said that pension contributions and holiday entitlement will remain the same for the duration of the temporary contract.

Useful links
Download a copy of the Employee Rights Act 1996