In practice, salary reduction for (executives) employees is a rather sensitive and controversial topic, mainly due to a lack of knowledge of the relevant legal provisions and the widespread belief among laypeople that such a reduction is not even possible.

Below, we present the basic legal framework for reducing the salary of a executives, the options available to the employer, the rights of the employee, and we point out the most common mistakes that occur in practice in this regard.

According to the Employment Relationships Act (hereinafter: ZDR-1), an executive is an employee who manages a business area or organizational unit at the employer and has the authority to conclude legal transactions or make independent personnel and organizational decisions. may, in exceptional cases, conclude a fixed-term employment contract if they are already employed by the employer in other positions for an indefinite period or if they are an executive appointed to a senior position in accordance with the law or the act of establishment.(1)

According to the first paragraph of Article 9 of ZDR-1, the autonomy of the contracting parties is restricted, namely, the law stipulates in this provision that when concluding and terminating an employment contract and during the term of the employment relationship, the employer and the employee are obliged to comply with the provisions of this and other laws, ratified and published international treaties, other regulations, collective agreements, and general acts of the employer. The basic rule here is that an employment contract or collective agreement may stipulate rights that are more favorable to the employee than those stipulated in ZDR-1, but not vice versa.

An executive who has a permanent employment contract for performing managerial work in the event of termination of the employment contract without his will or fault due to early dismissal or because he is not reappointed after the expiry of his term of office, is entitled to the rights to which employees are entitled under the provisions of this Act that apply to termination for business reasons.(2)

In cases where an executive does not have a traditional employment contract but rather a management contract, the relationship is governed by civil law, where ZDR-1 does not apply directly, but rather the provisions of the Obligations Code (hereinafter: OZ) apply. In the latter case, the contractual freedom of the contracting parties is greater, and a unilateral change in the amount of salary is only possible if this is expressly stipulated in the contract (e.g., the employer’s right to adjust the salary if predetermined results are not achieved). otherwise, the general contractual provision applies, whereby the change requires the consent of the other contracting party, i.e. the employee.

Although ZDR-1 does not contain provisions governing the reduction of basic salary, it stipulates that salary consists of the basic salary, a part of the salary for job performance and additional payments.(3) The worker’s job performance shall be determined taking into consideration the cost-effectiveness, quality and scope of the performed work for which the worker has concluded the employment contract.(4)

In addition, the employee’s basic salary may not be lower than the minimum wage, which is defined as the salary for full-time work, without emphasis on job performance.(5) ZDR-1 does not stipulate that job performance can be negative, nor that failure can affect the basic salary.

It is true that an executives usually have higher salaries than ordinary workers, but according to the law, this fact alone does not allow for a fundamentally different regulation of salaries and interventions in salaries than that which applies to ordinary workers.

However, the employer may adjust the employee’s basic salary, as agreed in the employment contract, on the basis of job performance, which may be assessed both individually and collectively, under the conditions specified in any sectoral collective agreement, provided that the employer has criteria for assessing work performance set out in the company collective agreement or in a general act of the company/employer.

Although an executives are often assumed to be more flexible and have a better understanding of business, this does not mean that the employer is completely relieved of responsibility for the legality of changes to contractual terms. A salary reduction is a sensitive intervention in the fundamental rights of an employee – including an executive – and must therefore be carried out in accordance with the law, contractual provisions, and the principle of good business practice.

In the event of a salary reduction, it is recommended that employers and employees review the existing employment contract, internal documents, any applicable collective agreements, and whether the reasons for such a measure are adequately documented.

In view of the above, we can conclude, based on case law(6), that in principle it is permissible to interfere with the basic salary through so-called negative job performance, but it should be emphasized that there must be an appropriate legal basis for this, with clear criteria established in advance, and such interference may be very limited. The ZDR-1 does not specify anything about a potential reduction in basic salary.

[1] Article 74, 1st par. of the ZDR-1.

[2] Article 74, 3st par. of the ZDR-1.

[3] Article 126, 2st par. of the ZDR-1.

[4] Article 127, 2st par. of the ZDR-1.

[5] Article 2, 2st par. ZMinP. See also Article 3 of the ZMinP

[6] See, for example, VIII Ips 77/2007 of 8 April 2008, VIII Ips 40/2007, VIII Ips 102/2007, etc., even though they refer to the period of validity of the previous ZDR, which did not contain any provisions different from those in ZDR-1 in this regard.