Is four the new five?

As we move deeper into the recession, employers are considering their options in relation to reducing employment costs. Effecting redundancies is the most obvious way to make cost savings, but it is not the only one. Some employers are opting for the four-day week as an alternative to headcount reduction. Staff morale is maintained, as well as having a workforce ready and willing to go back to a five-day week when the market changes... or so the theory goes. Those who are considering four-day working should think carefully about how the arrangements are implemented, as there may be problems when the time comes to revert back to the status quo.

KPMG and Norton Rose are among the high-profile employers who have announced their four-day flexible working package as one of their measures for tackling the downturn. There can be little doubt that this was a popular decision within both firms, as virtually all of their workforces agreed to the new arrangements. Both measures are temporary and apply to the financial year 2009/10. Both firms have sweetened the deal by offering to make a reduction in pay less than the required 20 per cent – 15 per cent in the case of Norton Rose and ten per cent for KPMG. Norton Rose has already announced that it will implement the contingency arrangements across a number of their departments with effect from the start of the new financial year in May 2009.

As a short-term temporary measure, Norton Rose and KPMG’s attempt at cutting costs is an attractive option. The key issue is to scope out the firm’s future requirements in advance and to build the flexibility required to achieve these objectives into the contract. This is, however, easier said than done.

Consenting adults

Changing employees’ terms and conditions, particularly across the workforce, is not something that should be done lightly, or that can be done overnight. Changes of this description cannot be forced on employees – their consent is required. There is little option other than going down the route of getting employees’ consent through consultation, as it is highly unlikely that there will be sufficient flexibility in existing employment contracts to move from five days to four, and all that that entails.

Employment contracts can easily be varied with consent. The difficulty lies in doing it in such a way as to give the employer maximum flexibility so that it can react quickly when necessary, but at the same time sell it to the employees as a good deal.

Checklist

From the employer’s perspective, it wants to retain all of its high-performing staff at reduced hours and cost, but insist on them returning to normal hours with minimum notice when the green shoots make an appearance. Below is a checklist of headline issues that the employer needs to consider:

What is the duration of the temporary arrangement – six months, one year or longer? Whatever the length, the important point is to have an expiry date, after which employees revert to their previous working arrangements.
When will the temporary contracts become effective? Is there a specified start date or will the employer retain the discretion to trigger the new arrangements by giving notice to the employees? Clearly, the latter option gives the employer more flexibility as the reduced working only comes into effect as and when required. If worded correctly, it enables the employer to decide not to trigger the four-day working arrangement if it is deemed unnecessary.
Once triggered, will the new arrangements continue: until the expiry of the contract; for blocks of time (for example, three months) with the option to renew; or, until notice is given to the employees?
How long should the notice be to trigger or end the new arrangements? One week may be too short for employees to reorganise their work/life; three months is too long to make a rapid response to market conditions. Anything between two weeks and one month seems reasonable.
How many times during the period of the temporary contract can the four/five-day week be triggered and stopped?
Which day out of the five will be a non-work day? All employees may want a Monday or Friday to lengthen the weekend, but that will be unworkable. It makes sense to agree in advance who will be taking which day off and to stagger the non-work days across the week to match business demands.
In a busy market, full-time employees will be required to work weekends to service a deal, or to deal with a heavy workload. How will this work under the new arrangements? If an employee is required to come in on the fifth day, will he or she be compensated for the additional hours? If not, it must be made clear in the contract that the normal working pattern will be four days or such additional hours or days as are necessary for the performance of his or her duties.
Are employees allowed to work for another employer on the fifth day? Be sure to include restrictive covenants to prevent employees working for a competitor on this day.
Remember to include absent employees (those on maternity and sick leave and sabbaticals) in the consultation process as it will have an impact on them too.
Are the proposals being put to a vote? What percentage of the workforce needs to vote ‘yes’ to trigger the change? What happens to those employees who do not vote in favour of the new arrangements? Can they remain on their old terms and conditions?

Adjusting benefits

Employees, on the other hand, will have different concerns. Reduced pay will have an impact on other benefits. It is the reduced salary that is usually used to calculate bonus payments, maternity leave and pension contributions. How will it work for those with flexible benefits who have already purchased benefits on the basis of their full-time status? What might appear to be a minor problem to an employer can be a stumbling block for an employee. Holidays and season ticket loans are a good example. If employees have purchased annual season-tickets on a loan basis, they may need to cash them in if they are taking a sabbatical. Or should they keep them just in case they are required to go back to normal working? Holiday entitlement will be reduced pro-rata, so what happens where employees have already taken, or booked, more than their pro-rated entitlement? Will they end up owing holiday or money to their employer?

Childcare can be a nightmare for employees. Those with full-time nursery places or nannies may need to revisit their arrangements to reflect the new working patterns. Unfortunately, nurseries and nannies may not be able to accommodate the new set-up or revert back to the old arrangements so easily or speedily.

Remember that the new arrangements do not prevent employees from requesting flexible working patterns that differ from the four-day week. Under the statutory regime, all requests must be seriously considered and can only be refused on specified grounds. It may well be that the new way of working cannot accommodate a request because of, for example, ‘inability to reorganise work among staff’ or ‘insufficiency of work during the proposed period’. More likely, a request for a shorter working week fits well with business objectives in a downturn.

Selling the message

If ever a negative message was to be sold to employees, this is the time. The silver lining to this cloud is that the shorter working week avoids redundancies. Employees will naturally feel valued that alternatives to redundancy have not only been considered, but put into place. Add a sweetener to encourage participation. For example, the salary deduction could be less than 20 per cent, as was the case with KPMG and Norton Rose. It may be that a further sweetener can be offered during the consultation process, for example, by spreading the reduction in salary over a longer period to soften the blow.

When selling the message, employees need to be aware of all the implications of down-sizing to a four-day week and how the reduced salary will impact on their other benefits. The consultation process will need to address these issues, and sufficient notice will be required so that employees can adjust their lives and finances.

With over two million out of work, the shorter working week is a positive message. Buy-in from employees is likely, so it pays to have a well thought-out and flexible strategy with water-tight contractual provisions to implement it.

Easy option?

The long list of issues that need to be considered demonstrates that the temporary four-day week is not an easy option to implement, nor to leave. The consultation process will be just as long and complicated as any redundancy exercise. And there’s the additional burden of transitional issues at entry and exit from the temporary arrangements. It will be interesting to learn from the experiences of Norton Rose and KPMG once their temporary contracts have run their course and business is (hopefully) back to normal.

Going forward, one of the take-away messages is that a flexible workforce is a valuable asset. More needs to be done to build flexibility into standard employment contracts so that an employer has manoeuvrability whatever the weather, and without having to embark on workforce-wide changes to terms and conditions.

Perhaps the main consideration, however, is the timescale for the recovery. If things do not pick up by the time the contracts come to an end, the redundancies that the arrangements were designed to avoid may still be necessary.

Mark Mansell is a partner at Allen & Overy LLP. He can be contacted at mark.mansell@allenovery.com