Companies should use the legal alternative of suspending employment contracts which can be done at zero cost
February 10, 2021/AOP
By Pablo Mitogo, Associate Attorney from Centurion Law Group
Since the outbreak of COVID-19, many countries have been overwhelmed and the health systems of the most powerful countries have collapsed.
The wave of chaos has also reached companies, especially in small economies such as Equatorial Guinea. Many companies have seen their volume of activity decrease drastically, with subsequent cost reductions. The question remains how does a company reduce costs without drowning the company?
In recent months we have seen many processes of reduction of employee workforce. Careful observation revealed that companies that reduced workforce for economic reasons suffered penalties of 30 days of salary per year of work for each worker. Consequently, they increased costs rather than reducing them because these processes are not free. The law approved this in 2012 prior to the COVID-19 pandemic. An employee cannot be dismissed without just cause and if dismissal is due to economic reasons, a slightly lower penalty is paid than that paid for wrongful dismissal. However, this penalty is still high if the aim is to cut costs.
There is another way to do this type of reduction at zero cost but why are companies not using this simpler and cheaper formula?
1. What does this formula consist of?
Suspend the employment contract. The suspension of the employment contract equates to a temporary interruption of the obligation to work on the part of the employee and the obligation to pay a salary on the part of the employer. Furthermore, all the computations on the employee’s rights are paralyzed: vacations, extraordinary payments for October and December and, seniority. Additionally, there are no penalties.
2. What happens when you suspend an employment contract?
There are three outcomes: i) The employee stops coming to work ii) The employer stops paying his salary and iii) There has not been a dismissal. Therefore, the employer does not pay the settlement or compensate the employee because the employment contract is still in force but is temporarily frozen.
Many of the companies that initiate these types of procedures are suffering a drastic drop in their activity. They do not want to dismiss their employees but when this need arises, the suspension of the employment contract allows the employer to achieve the same goal of reducing personnel costs without costing the company money.
3. Is there a limit to the number of employees that an employer can suspend?
No, it is a bilateral and voluntary procedure between the employer and the employee. However, the suspension must be notified to the labor authority to avoid surprises in the future. Equatorial Guinea’s labor law prioritizes the preservation of employment at all costs, hence it is always a good idea not to dismiss employees and to keep the employment contract in force even if it is temporarily frozen.
4. How it is done and what are the risks?
The risks here are minimal. The only risk is that where the contract was not suspended correctly, the suspension agreement may be declared null in the future. To avoid this, two practices must be observed: i) Do not dismiss the employee during the suspension period and ii) Suspend the employee with his agreement and notification to the labor authority. The necessary steps are as follows:
- Negotiate the suspension and the duration thereof with the employee. The employee must agree to the suspension.
- Inform the labor authority about said suspension once an agreement has been reached with the employee.
- Sign a contract, to give a greater guarantee of the suspension, in which the terms of the suspension are specified by defining when the employee is expected to return to work or what circumstances must be met in order for him to return to work. (Consult with an experienced attorney to maximize the guarantees)
5. How is the employee reinstated after suspension and what are the effects?
As established in the agreement, the employee must return to work after receiving such notification from the company. The employment relationship continues under the same conditions as agreed to when the contract was suspended. Since the labor rights are not computed during the suspension period, the process is complete with no accumulated cost. It is noteworthy that all the rights that the employee had before the suspension are preserved.
In summary, most companies dismiss a group of employees due to economic reasons in order to reduce staff and save costs when facing a crisis. The consequence of this process is that compensation for dismissal is generated for each employee which can result in high expenses. Companies should use the legal alternative of suspending employment contracts which can be done at zero cost. The suspension of employment contracts seems to be the most adaptable solution for companies dealing with the COVID-19 crisis.