Restructuring and workforce reduction

Many companies will from time to time experience the need to make operational adjustments that result in changes to individual positions and/or implement workforce reductions that lead to redundancy among employees. Job losses due to downsizing or restructuring have serious consequences for the employees concerned. The Working Environment Act requires that an objectivity standard is applied to dismissals brought about by the situation a company finds itself in, cf. Section 15-7 of the Working Environment Act. This objectivity standard has been further developed in legal usage. Stringent conditions must be met if a process and grounds for dismissal, or substantial changes to an employee’s position can be considered legal.

A set of separate provisions in the Civil Service Act apply to workforce reductions and restructuring processes in central government.

The rules here governing downsizing processes differ substantially from those in the Working Environment Act, and they are not discussed in detail here.

Firstly, there must be an objectively legitimate need for dismissal due to downsizing/restructuring. The minimum requirement is that the process is a real and valid one. Covert individual dismissals undertaken under the guise of a workforce reduction process are not considered legitimate. The need for changes must also be permanent. If the problems are not permanent, then staff should be laid off on a temporary basis only.

Companies basically have a wide scope when deciding how their business should be organised, and what its activities shall be. The main requirement for objectivity is therefore often met. Typically, a company has a legal basis in its need to cut costs, improve results or boost its competitiveness. But documentation, verifying that an objective standard has been applied and underpinning the consequences of decisions, must be provided.

Furthermore, it is a requirement that the selection process of employees for dismissal be conducted objectively; both the scope (the employees being considered for dismissal) and the criteria applied during selection must be objective. In addition, differing interests must be appraised: the company’s need to implement redundancy measures must be weighed against the consequences of those measures for the employees. As a rule, the scope of selection shall include whole company. A narrower selection can however be seen to be objective, for example where the company has branches/local entities at distant locations, or where there is a considerable difference in the type of activities performed, or even in the legal systems applying. There are numerous examples of companies that have made mistakes in establishing the scope of selection and in understanding how the scope may be narrowed.

Selection criteria must also be objective. It is customary to choose several criteria, while attaching greater weight to some. Typical criteria are expertise, seniority, personal suitability (sales figures achieved etc.) and social considerations (age, single parent).

Irrelevant criteria, such as gender, race, personal appearance or characteristics etc., cannot be applied.

For companies with a collective agreement, it is important to note that the agreement may include rules that require seniority to be given a priority.

From time to time the requirement for objective selection criteria does have legal consequences. In particular, there tends to be disagreement where the weighting of criteria is concerned, and also in the way employees are measured against these criteria. This is particularly the case where more weight is attached to arbitrary criteria. It is important to conduct a thorough process here.

Employees likely to lose their jobs are entitled to be considered for another suitable position in the company. If there is such a vacant position, then there is no objective basis for dismissal. It is, however, not possible to request that a new position be established for this purpose.

Legal practice demonstrates that the process conducted prior to dismissal needs to be thoroughly assessed in order for a restructuring and/or workforce reduction process to be approved as being objective. It is crucial that documentation is available showing that the company has thoroughly considered the requirements and the employee selection criteria, while also weighing up the differing interests. It must also be evident that other suitable work has been considered.

Prior to reaching a decision regarding notice of dismissal, the employer shall consult with the employee affected, cf. Section 15-1 of the Working Environment Act. Where mass redundancies (more than ten employees) are concerned, there is also a requirement to enter into extended consultations with the employee representatives before making a decision. The purpose of this duty of consultation is to ensure that all relevant aspects of an issue are aired before a decision is made. It is often advisable to include employee representatives in the process early on, even in cases of redundancy where fewer than ten employees are involved, in order to ensure that the issues are comprehensively studied and that possible alternatives to dismissal are envisaged.

Good documentation throughout the entire process is of crucial importance.

Be aware of the fact that an employee given notice of dismissal in connection with workforce reductions or restructuring processes has a preferential right to a new position in the company for one year, if the employee in question is qualified for that position.

Given an objective basis for a restructuring and/or workforce reduction process, and there exists complete documentation of the process, the termination of an employee’s employment contract can be implemented.

The letter of dismissal must be in writing and formal.

Having received a notice of dismissal, the employee is entitled to request that it be negotiated and to pursue its validity in the courts. In the event of a judicial process, the employee may also demand to keep his position in the company during the legal proceedings.

An alternative to a letter of dismissal may be that the parties enter into a severance agreement or agree to a new position for the employee. It is natural to discuss such matters in the consultation held with the employee. It is also customary that companies choose to offer severance pay to all permanent employees considered supernumerary. Such severance packages can also include individual supplements linked to an employee’s seniority or age. Severance agreements, or agreements regarding new positions, are advantageous in that the matter is brought to a close, whereas with notice of dismissal there can be legal consequences. The need for and feasibility of such alternative solutions must be carefully considered in each specific instance.