Startups made easy. Sorted.

Startup Guides 4 min read

How to cut your wage bill - alternatives to furlough leave

Published:  Apr 24, 2020
84225480 1234575850266773 8773269218104705024 N E1579790175462
Rob Winspear

Placing all of your staff on furlough leave is not always going to be the right answer for businesses looking to cut costs in order to weather out the coronavirus storm.

The lucky ones

If your business already had enough cash reserves to protect itself and pay its fixed costs for the next 6 months, you are in a relatively fortunate position and may not even have had to rely on the coronavirus job retention scheme.

If your business did not have the cash reserves, but is still capable of generating enough revenue, with a skeleton workforce, to get the business through to the other side, then the coronavirus job retention scheme is the perfect solution to reduce your wage bill (and generally your overheads) so you do not risk becoming insolvent. (If you are in this position and want to know how to set up your scheme, click here)

Everyone else

But, what about those businesses who cannot afford to wait until claims under the scheme have been processed and have wages to pay from last month. Or, what about those businesses who have small teams and need every single employee to work even harder over the coming months, rather than have some of them furloughed and mean they are incapable of being able to help the business survive.

For these and other companies, the coronavirus job retention scheme is not going to be of much assistance. These businesses need their existing manpower to generate what little revenue they can, so are not in a position to furlough significant sections of their team, but are still struggling to generate enough to pay for their wage bill and their other overheads.

So, what can these businesses do? You might have thought that the choice was “furlough vs layoff” but there is a third way….

Be frank with your team

One of the positive things to come out of this global pandemic is the collective spirit of the UK to work together and try and help one another. We have seen many figures in the public sphere taking voluntary pay cuts to help the institutions that employ them.

You should talk to your team and explain the position your business is in, give them a picture of what your business forecast is looking like, and explain that this may result in some tough decisions being made.

Look at varying your employee contracts: reducing hours, salary sacrifices or temporary reduction in salary

If your team knows why you are approaching them and asking them to accept worse employment terms, they are more likely to see the bigger picture and accept the situation.

Reducing hours

This could be an effective solution for your sales team. If you have experienced a reduction in inbound inquiries and that was your main sales effort, then you might want to reduce your sales team’s hours so that they are only working as much as the demand requires. This would allow you to pay them less for the hours they are no longer contracted to work.

Ability to work for another employer

A related variation you might want to make if you are reducing your employee’s hours is giving them the freedom to work for another employer (so long as they are still able to give their full effort to your business for the hours you want them to work). Many employment contracts forbid employees from doing this so you may need to vary your contracts to allow this.

Salary sacrifices

You might want to introduce a salary sacrifice scheme where your team gives up some of their cash salary for some other non-cash benefit, such as options in the company or increased pension contributions (which are at a lower net cost than paying cash salary).

This could be an effective way to ease some of your cash flow problems by offering non-cash benefits in the interim.

Salary reductions

There may be no other choice but to appeal to your team to accept a lower salary to do the same job, to avoid the risk of nobody getting paid anything when the company goes out of business.

It is obviously going to be difficult for your employees to accept but they should understand that if you are approaching them to make this sacrifice the alternative is sadly going to have to be redundancies so you can free up their position and advertise it to somebody else who would be willing to work for less than your existing employee.

Extending notice

You may also have some key team members that if they were to leave in the coming months would really cause the business to suffer. If that’s the case you may want to consider extending their notice period so that your business will have more time to plan in the event they decide to move on.

How to vary your employee’s employment contract

You are not allowed to unilaterally impose new contractual terms on your employee that are worse than their previous terms. You have to seek their agreement and formally change the terms through a further agreement.

At SeedLegals we have just launched our “Contract Variation Agreement” that has the power to legally change your employee’s existing employment contract to include all of the terms mentioned above (and others), that could be crucial for your company’s survival.

The agreement will explain that if you are requesting these varied terms because of coronavirus that they will only be temporary and the employee’s terms will return to their original terms as soon as possible.

How do I find or create a contract variation agreement?

You can create all your contract variation agreements on SeedLegals, free of charge, here’s how:

  1. Sign up/sign in to SeedLegals
  2. Create your company (we’ll automatically fetch the details from Companies House, or not, if you are a sole trader)
  3. Go to Quick Agreements
  4. Click to create a new Contract Variation Agreement
  5. Enter the email and name of the person you’re creating it for 
  6. We’ll take you through a few questions where you can decide which new terms you want to introduce to the employment relationship
  7. When you’re done the Contract Variation Agreement will automatically be created
  8. Read it, then e-sign it for the company
  9. Click to share it with the employee, they’ll get an invite email
  10. The employee logs into SeedLegals, reviews the agreement and e-signs, all done.

A big advantage of using SeedLegals is that everything is instantly e-signed online, so your employee doesn’t need a printer at home, and doesn’t need to scan or post anything back. They simply e-sign on their computer, tablet or phone. And, you’ll get a browser notification as soon as they do.

Does creating contract variation agreements on SeedLegals cost anything?

We’ve added contract variation agreements to our Raise and Scale plans, which gives unlimited team agreements (employment agreements, consulting agreements, zero-hours contracts, NDAs and more) completely free for 7 days. Sign up now

After 7 days it’s £19/month… but there’s no commitment to that, and no credit card up front.

So just sign up, create as many agreements as you need, totally free.

Or for more information, please contact us.

Start your journey with us

  • Beulah
  • Brolly
  • Oddbox Transparent
  • Index Ventures
  • Seedcamp
  • Qured