Reducing Personnel Costs Without Termination

Reduce personnel costs without layoffs: 5 employment law tools

Austria is currently experiencing an economic downturn. Many companies are looking for ways to reduce their personnel costs without simultaneously losing valuable expertise through layoffs. This is understandable, as layoffs not only entail costs for severance pay, termination compensation, and recruitment, but also impact company culture and the labor market.

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In such cases, employment law provides various options that can lead to tangible savings. It is important to note: Any intervention in existing employment contracts is possible with the consent of the affected employees. Accordingly, all measures described below must be agreed upon between employer and employee, unless collective bargaining agreements (collective agreement or works agreement) allow for a unilateral directive.

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An overview of the five most important tools:

1. Reduction of Working Hours: Fewer Hours, Lower Costs

The simplest and usually most socially acceptable measure is the consensual reduction of working hours. Since the contractually agreed working hours are part of the employment contract, the employer cannot unilaterally change them. However, a written agreement between employer and employee is possible at any time to reduce working hours and adjust remuneration accordingly.

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Many collective agreements in Austria allow for flexible working time models, especially flexible working hour ranges or flextime arrangements, which enable the calculation of standard working hours over several months. The introduction of flexible working time models helps avoid overtime surcharges when capacity utilization is irregular.

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In situations with low order volumes, standard working hours can be reduced without negotiating the cut with each individual employee, provided a works agreement allows for such a reduction.

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Companies can also utilize short-time work as a state-subsidized model. This option can be supported by the AMS during temporary economic difficulties and significantly reduces wage costs without terminating the employment relationship. The employee's hourly wage increases due to state subsidies, and companies achieve a reduction in their wage costs due to the lower employment level. However, short-time work is limited to economic emergencies.

Important: A unilateral reduction of working hours by the employer is unlawful. An employer who instructs employees to work fewer hours without a legal basis providing for a reduction in standard working hours remains obligated to pay full remuneration.

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2. Termination with Offer of Amended Terms: When a Consensual Change to Working Conditions Fails

If a consensual change to working conditions fails, the instrument of termination with an offer of amended terms is available. This provides for the ordinary termination of the existing employment relationship if the employee does not agree to the offer to continue the employment relationship under altered, usually less favorable, terms. The employee has the option to avoid the employer's termination of the employment relationship by accepting the change in working conditions desired by the employer.

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In practice, there are two variants: In the case of a notice of change with a suspensive condition, the employer first makes an offer of change and only gives notice of termination if this offer is not accepted within a specified period. In the case of a notice of change with a resolutive condition, the termination is issued immediately, with the proviso that it becomes invalid if the employee accepts the offer of change.

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The following cannot be changed by a notice of change: Minimum entitlements based on law, collective agreements, or works agreements cannot be altered to the detriment of the employee. The minimum remuneration stipulated in the collective agreement must not be undercut. The new employment contract must also comply with statutory and collective agreement minimum standards.

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For employers, the notice of change is a powerful tool that requires careful preparation. Errors in wording or unclear acceptance deadlines can lead to the offer of change being rejected, and the employment relationship continuing under the previous conditions.

Practical tip: Before using a notice of change, consensual solutions should always be sought. It is the last resort before an actual termination of the employment relationship. Prior legal advice on employment law is strongly recommended.

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3. Unpaid Leave Agreement: Maintaining the employment relationship without salary payment

An unpaid leave agreement, also known as unpaid leave or sabbatical, is a consensual arrangement by which employer and employee suspend the employment relationship for a certain period. During this leave, no remuneration is paid, but the employment relationship remains legally valid.

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This instrument is attractive for employers because no wage costs are incurred during the leave period, and the knowledge and experience of an employee are retained. During this time, employees can pursue their own projects, further their education, or achieve personal goals.

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Legally, there is no statutory basis for unpaid leave agreements outside of family-related leave periods. Therefore, the start and end of the leave, the handling of service-dependent entitlements such as vacation or seniority allowances, the management of severance contributions under the BMSVG, and conditions for early return must be regulated in writing and precisely.

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The Supreme Court has ruled that periods of unpaid leave, even if beneficial to employees, can lead to a reduction in vacation entitlement in the respective year. Contributions to the BV-Kasse (occupational pension fund) also generally do not accrue during the leave period.

Practical tip: For evidentiary reasons, the agreement must be concluded in writing. Ambiguities as to whether it is a period of unpaid leave or a termination of the employment relationship can lead to disputes later on.

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4. Interruption Agreement with Re-employment: Actual Termination with Option to Return

An alternative to the unpaid leave agreement is the so-called resolutive suspension: The employment relationship is terminated by mutual agreement, while the employer simultaneously makes a binding commitment to re-employ the employee at a later date. This commitment can be made unilaterally by the employer (re-employment promise) or agreed upon bilaterally (re-employment agreement).

The key difference from a leave of absence is that the employment relationship legally terminates. This means the employer must settle all termination entitlements, such as compensation for unused vacation, pro-rata special payments, and severance payments, if applicable. In the interim, the affected person can claim unemployment benefits.

This model offers companies clear cost relief during economically challenging periods, without having to permanently lose employees. It is particularly suitable for seasonal dips in orders or temporary reduced staffing needs.

For correct structuring, it is important that if previous periods of service from the terminated employment relationship are to be credited upon re-entry, for example, for calculating severance under the old scheme ("Abfertigung Alt"), this must be explicitly agreed upon. Without such an agreement, the new severance scheme ("Abfertigung Neu") automatically applies upon re-entry.

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It is also important to note: The employer is bound by a unilateral re-employment promise and risks claims for damages if it is not complied with, whereas the employee is not legally obliged to return if there is a unilateral re-employment promise.

Warning: If an interruption agreement is concluded during sick leave, the social security authorities may view this as intentional harm to third parties. In such cases, legal advice on employment law should be sought immediately.

5. Change of Collective Agreement: When the Collective Agreement Defines the Framework

In Austria, the applicable collective agreement is generally determined by the company's trade license and its membership in a professional group within the Chamber of Commerce organization. If the company's business activity or operational focus changes, this can automatically trigger a change in the collective agreement.

A change in collective agreement occurs, for example, in the event of a change in professional group membership, a voluntary change of association, or a transfer of undertaking. Generally, the newer collective agreement takes precedence over the older one. Worse working conditions for employees must be accepted. The situation is different for a change in collective agreement due to a transfer of undertaking: Due to an explicit legislative directive, the (old) collectively agreed remuneration may not be reduced by the change in collective agreement affiliation. Employees hired in the future will be paid according to the new, potentially more cost-effective collective agreement. Remuneration agreements exceeding the collective agreement's minimum wage can be offset against actual wage increases within the limits recognized by case law.

For companies planning a transfer of undertaking, restructuring, or a change of industry, the question of the applicable collective agreement is an important due diligence item.

Important: A change in collective agreement solely for the purpose of cost reduction carries significant legal risks. The possibility of achieving a more favorable collective agreement through targeted restructuring should always be carefully examined and legally advised on employment law.

The Right Measure for the Right Situation

No single instrument fits all situations. The choice of the appropriate measure depends on the specific situation: the economic situation, the willingness of affected employees to cooperate, the existence of a works council, the duration of the planned cost reduction, and long-term personnel goals.

As a guide:

• Short-term, temporary dip in orders: Short-time work or other working time reduction and/or working time flexibility
• Medium-term personnel reduction needs without termination: Sabbatical agreement or mutual termination with a re-employment guarantee
• Structural cost reduction with consent challenges: Dismissal with offer of altered terms of employment as a last resort after failed negotiations
• Strategic business development: Change of collective bargaining agreement during restructurings or business transfers

Generally: Measures to reduce personnel costs deeply impact existing legal relationships. Without careful legal preparation and clear written agreements, risks can arise that may later cost more than the intended measures were supposed to save. Engelbrecht Arbeitsrecht advises companies on the selection, design, and legally compliant implementation of these instruments.

For labor law questions concerning personnel costs, working time models, or dismissals with altered terms of employment, our legal experts at Engelbrecht Arbeitsrecht are here to assist you. We look forward to your inquiry and are happy to advise you personally – the earlier labor law measures are planned, the more room for maneuver remains.