Under Peruvian law, unjustified salary cuts, that is, salary cuts unilaterally imposed by the employer and not supported by objectively valid or legal reasons, are considered an act of harassment equivalent to dismissal pursuant to (Article 30, item b), of Supreme Decree N° 003-97-TR, which is in line with Article 49 of Supreme Decree N° 001-96-TR).
Although it can be validly stated that the employer, if so justified by economic reasons, can reduce the salary of employees, a number of court resolutions have repeatedly denied such possibility by interpreting the Single Article of Law N° 9463 (1941) in such a way so as to require the consent of employees and justification of the measure.
This has been going on for several years now. By way of example we can mention a Labor Court Resolution dated September 29, 1980 and Resolution N° 2919-97-SANTA issued in 1999 in connection with a Cassation Appeal. In the past decade, the Constitutional Court first prohibited salary cuts (Court File N° 2906-2002-AA/TC) but then authorized them subject to prior agreement with the employee (Court File N° 009-2004-AA/TC).
Moreover, in 2014 the Constitutional Court proposed authorizing the employer to unilaterally reduce employee salaries on an exceptional basis, if so justified by special circumstances which could have an adverse economic impact on the company’s activities, to avoid further damages (Court File N° 020-2012-PI-TC).
The Supreme Court, through Resolution N° 9072-2014 issued in relation to a Cassation Appeal, authorized the employer to unilaterally reduce employee salaries to the extent said reduction was supported by objectively valid and real reasons and, in addition, the act of harassment was severe, continuous, and seriously detrimental to the employee. Sometime later, through Resolution N° 10377-2014-Lima, also issued in relation to a Cassation Appeal, the court resolved that an express agreement was required.
In late August 2016, through Resolution N° 00489-2015-LIMA issued in relation to another Cassation Appeal, the court changed its stance to make salary cuts more flexible. This resolution was issued at a difficult time for Labor Law in Peru, as the Supreme Court had resolved, through controversial resolutions, that it was possible to grant additional compensation, other than the one legally established for arbitrary dismissal, or that employees filling a position of trust were not entitled to the aforesaid compensation. Through Resolution N° 00489-2015-LIMA, the court resolved that salary cuts, as an extraordinary measure to be taken in special circumstances, could be imposed with the consent of the employee or could also be unilaterally imposed by the employer. The court added that the salary cut had to be reasonable, that is, it could not involve a significant or arbitrary salary reduction.
If the salary cut is to be agreed upon by both parties, then it will require the free, spontaneous, express, and informed consent of the employee and the employer. If a salary cut is unilaterally imposed by the employer, then it should be supported by objective reasons like, for instance, in order to guarantee the financial and other stability of the employer.
In the opinion of the Supreme Court, it is possible for the employer to unilaterally impose a salary cut under extraordinary circumstances, for reasons related to the financial situation of the employer. In other words, the employer must prove that the salary cut is intended to guarantee the continuation of operations by the company (because it is facing a financial crisis). Therefore, the Supreme Court was not trying to give employers a blank check to reduce the salary of employees.
Unfortunately, the lack of information and the interests of some people resulted in a mistaken rejection of the resolution, for which reason, apart from being criticized by bad press did not help. A march against salary cuts, called “Not Even One Sol Less”, was staged in September.
By coincidence, the same day the march was staged, the Supreme Court changed its stance again in Resolution N° 3711-2016-Lima, also issued in relation to a Cassation Appeal, resolving that unilaterally imposed salary cuts, that is, without the consent of employees, would be considered an act of harassment equivalent to dismissal.
With this new stance, or rather with the Supreme Court’s decision to resume its former stance, salaries can be reduced through an individual agreement or otherwise through a collective bargaining agreement. In the latter case, it will be necessary for the employer to reach an agreement with the labor union that enjoys majority support if the company falls within any of the objective reasons which allow it to terminate employment contracts collectively, supported by objective reasons, that is, if an act of God or an event of force majeure occurs or if the company is facing a financial crisis or if there has been a structural, technological or similar change, or if the company is undergoing any dissolution, liquidation, bankruptcy or equity restructuring process.
In the opinion of the Supreme Court, in the above cases salary cuts are aimed at avoiding or limiting the dismissal of employees, so in order to impose a salary cut the company must start a collective cessation procedure supported by objective reasons, as provided for in the labor legislation.
In view that very few companies bring collective termination proceedings due to objective reasons because the Labor Administrative Authority has been systematically rejecting said proceedings in the last few years, in practice we have the individual agreement, as a requirement to authorize a salary cut, provided the minimum living wage is honored.
This new shift of stance rules out the possibility of unilaterally reducing salaries, an option previously available under extraordinary circumstances and supported by reasonable criteria, even followed by an audit subsequently conducted by SUNAFIL within a specific number of days to guarantee its validity.