Changing terms and conditions of employment

OVERVIEW

  • Changing terms and conditions of employment is a complex area and one which can cause problems in balancing the needs of the business and the rights of staff. However, with some understanding of the issues involved, problems (both legal and HR-related) can hopefully be avoided or at least minimised. Set out below is some general guidance for employers, concluding with an action point checklist.
  • An employment contract can be varied in a number of ways (each of which are considered in more detail below): by mutual agreement; by a collective agreement; by variations allowed for in the contract; by unilateral imposition of new terms, or by dismissal and re-engagement on new terms
  • Not all variations will involve a breach of contract as some documents, e.g. parts of a staff handbooks or sickness absence policies are sometimes not contractual and most bonus schemes are non-contractual. In such cases, employers may change such rules without employees’ consent.
  • Be aware however that some provisions in staff handbooks can acquire contractual effect through custom and practice, particularly where the employment contract refers to the handbook to flesh out the detail, e.g. an enhanced redundancy policy.
  • Promotion is an ideal time to change contractual terms and conditions (e.g. including a mobility clause) as when someone is promoted he or she is in effect accepting an offer of working under a new contract of employment.

VARIATION BY AGREEMENT

  • The ideal way of making contractual changes is with employee consent as there is unlikely to be any dispute in the future.
  • Variations can be made orally or in writing but written agreements are essential in order to minimise any later dispute as to what was agreed.
  • Issue revised contract and ask employee to sign and return a copy containing a declaration that they have read, understood and agree to the change in terms and conditions.
  • An employee continuing to work without objecting to any new or revised terms may suffice as consent to the revised terms (i.e. implied agreement).
  • Relying on an employee’s subsequent conduct to signify agreement to a contractual change is not recommended. 
  • Any change in the contract to the employee’s detriment must be supported by consideration (i.e. monetary or other benefit) - a necessary legal requirement for a variation of contract. Consideration is not required in Scotland.
  • Some types of consideration are obvious: a pay rise, bonus or extra holiday. It is also arguable that continuing to work without objecting to the new terms will suffice as consideration. However something more than this will be required where the employer wishes to change or introduce restrictive covenants and some designated consideration will be required such as a pay rise or promotion.
  • Salary sacrifice arrangements, whereby an employee gives up the right to receive part of their cash salary in return for the employer’s agreement to provide a non-cash benefit (e.g. workplace nursery vouchers or extra pension contributions) are a good example of consideration being given for a change in terms of employment.

COLLECTIVE AGREEMENTS

  • Problems can arise when an employee’s terms and conditions of employment are contained in a collective agreement negotiated between an employer and a trade union.
  • If the employer and union negotiate a change with which an employee does not agree, the employee may want to claim that he or she is not bound by the changes.
  • The employee's legal position will then depend on whether the collective agreement was formally incorporated into their employment contract and if so whether it was incorporated ‘as from time to time’ in force.
  • If the answer to both those questions is ‘Yes’ it will be very difficult for an individual employee to argue that he or she is not bound by the changes.
  • If the answer to either of those questions is ‘No’ then the employee will not be bound by the changes (unless they accept them - which they could do by implication if they continued to work without raising objection) and it will follow that if they are significant changes the employee will be able to resign and claim constructive dismissal.
  • The fact that the individual is or is not a member of the union concerned is not actually relevant - what matters is whether the collective negotiated terms and conditions are incorporated into that individual's contract. This may be more likely if the employee is a union member than otherwise but does not follow automatically.
  • Once a term in a collective agreement has become incorporated into an individual’s contract, it remains incorporated even if the agreement itself is terminated.

VARIATIONS ALLOWED FOR IN THE CONTRACT

  • Contracts will sometimes contain flexibility clauses purporting to allow the employer unilaterally to vary terms and conditions.
  • Alternatively, the contractual terms may be wide enough to cover any proposed changes, e.g. a minor change in role or hours may be within the job description.
  • For example, with an express mobility clause, an employer can, on the face of it, ask the employee to, say, move from London to Leeds without the employee’s consent (but in such a case reasonable notice and reasonable relocation expenses must be given).
  • An overarching term such as ‘We reserve the right to make reasonable changes to any of your terms and conditions of employment’ is virtually useless because tribunals and courts do not like them. While such a term could be used to effect relatively minor changes, it would not be of any use (without more) for more major changes.
  • Employers must remember that there is an implied duty of mutual trust and confidence in all contracts that requires them (and staff) not to act unreasonably – and an express contractual authority to act does not automatically make the employer’s actions lawful.
  • Tribunals will be unsympathetic to employers who try to use such clauses to change fundamental terms of the contract without getting employees’ consent to the changes first and giving proper notice in advance of the change.
  • If the employer in such a scenario acts totally unreasonably, a tribunal will hold it, despite the existence of a clause allowing a variation of contract, in fundamental breach of contract – thereby triggering the right for the employee to resign and claim unfair constructive dismissal (subject to two years qualifying service) and wrongful dismissal if the employee has resigned without notice.
  • Reasonable notice of making the change – and full consultation – are essential when exercising a contractual power to change terms. The effect on the employee should also be taken into account.
  • For an example of a case where an employer successfully used a variation clause in its staff handbook to unilaterally change employees’ pay and work structures, see Bateman v Asda Stores Ltd. For an example of the inadvisability of relying on such clauses, especially where they are poorly drafted, see Norman v National Audit Office.

IMPOSING CHANGES UNILATERALLY

  • If staff refuse to agree to changes, employers may try to impose contractual variations unilaterally.
  • While this means that the employer is in breach of contract, such an approach may work because the employee might be taken to have impliedly agreed the variation by his or her conduct, e.g. by continuing to work without protest.
  • The implied agreement test is more likely to be met if the change has an immediate impact, e.g. a pay cut, than if the change is not felt for some time, e.g. changes to pension or redundancy pay.
  • The implied agreement route is very risky and an employee in such a scenario has a number of options:
    • stays and sues - continues to work under the new terms but makes clear that he does not accept them and is working under protest, and reserves the right to sue for breach of contract
    • resigns and claims constructive dismissal and breach of contract – if a breach is serious enough (i.e. fundamental), and the employee resigns as a response to it, he may be able to claim unfair constructive dismissal and breach of contract (up to £25,000 in an employment tribunal) or an unlawful deduction from wages
    • refuses to work the new terms – thereby forcing the employer to dismiss him or let him continue on his old terms
  • Any breach of contract action that results from an employee standing and suing must be brought in the High Court or county court (as a contractual claim can only be brought in an employment tribunal once the contract has been terminated).
  • Employers should remember that there is a much longer time limit for bringing a claim in the civil courts – six years from the date of the breach as opposed to three months (plus up to six weeks to comply with the ACAS Early Conciliation rules) in tribunals. So as long as the employee has made it very clear that he does not accept the new terms and is working under protest, he can take his time in deciding whether or not to sue.

DISMISSAL AND RE-ENGAGEMENT ON NEW TERMS (FIRE & REHIRE)

  • In the absence of agreement or contractual flexibility, employers may find it safer to dismiss staff and offer to re-engage them on revised terms and conditions (sometimes called 'fire and rehire').
  • Such an approach is not without its risks – the risk of losing staff altogether, the risk of tribunal claims and the near certainty of an adverse impact on staff morale.
  • Provided proper notice of dismissal is given or a payment in lieu of notice is made, affected staff will not have a claim for breach of contract (but they may have a claim for unfair dismissal).
  • The revised contract must be offered to start immediately the old one comes to an end.
  • The employer must also have a genuine business need for making the change – it is not necessary to show that a change is essential (i.e. that the business will collapse without it) but just that there is a sound business reason for making the change. Simply asserting that a change is necessary will not suffice – the employer must be able to demonstrate it to the tribunal’s satisfaction.
  • The business need does not need to be a financial one – it could, for example, include inserting restraint clauses in a contract to prevent staff taking the employer’s customers away when they leave or dismissing someone because they earned disproportionately more commission that their colleagues.
  • Where an employer can show that it had sound business reasons for dismissing an employee who refuses to accept changes to his terms and conditions, this may be sufficient to establish ‘some other substantial reason’ (SOSR) for the dismissal, i.e. a potentially fair reason for dismissal.
  • Ordinary considerations of fairness are relevant here. The employer must be able to show a potentially fair reason for dismissal, that it acted reasonably in treating that reason as a sufficient reason for dismissal, and that the dismissal was overall and procedurally fair in all the circumstances. Reasonableness will depend on a number of factors, including whether:
    • genuine consultation took place
    • the changes had been clearly explained
    • the employer responded reasonably to any employee objections
    • a union recommended the changes
    • a majority of staff accepted the changes
    • alternative jobs/locations were considered
    • the disadvantages that the employee would suffer because of the changes were considered
    • the disadvantages outweighed the advantages to the employer in implementing the changes
  • An employee who is offered a new contract on reasonable terms and without substantial changes is unlikely to be awarded much, if anything, by way of compensatory award if he succeeds in claiming unfair dismissal. A tribunal will however normally award the basic award in full. Knowing this, employers and staff sometimes agree cash sweeteners calculated by reference to the basic award formula in return for accepting changes in terms and conditions.
  • If dismissal and re-engagement could lead to 20 or more staff being dismissed, the employer will have an additional duty to consult with union or employee representatives and to notify the Secretary of State by completing Form HR1. This is because the definition of redundancy for the purposes of collective consultation covers any dismissal for a reason or reasons not related to the individual. If an employer requires the same number of staff but dismisses and re-engages them on new terms, the employees will have been dismissed for reasons unconnected with them as individuals. They will be redundant for the purposes of collective consultation but not entitled to redundancy pay.
  • Following the outcry in 2022 when P&O used ‘fire and rehire’ to dismiss nearly 800 British crew and replace them with agency staff, the new Labour Government is using the Employment Rights Bill to clamp down on this practice. A new provision will be inserted into the Employment Rights Act 1996 to stipulate that it is unfair to dismiss an employee if the principal reason for dismissal is either that the employee refused to agree to a variation of contract sought by the employer or to enable the employer to recruit another person (or rehire the employee) under new terms but with substantially the same duties - essentially a blanket ban on the practice of fire and rehire.

BONUSES

  • Particular problems can arise with bonuses. In most cases the contract of employment will make clear that any bonus award is discretionary and therefore an employer is entitled, in theory at least, to pay no bonus or very little during tough economic times.
  • The seminal case of Clark v Nomura held that the employer was in breach of contract when it refused to pay a discretionary bonus to a senior trader. Although the contract said that the bonus was not guaranteed in any way and was ‘dependent on individual performance’, the court said that Nomura’s discretion was fettered by the implied term that it would not exercise its discretion irrationally or perversely. The court did not use the word ‘unfairly’ or ‘unreasonably’ – the word ‘irrational’ means a decision where there is no rational basis for it.
  • Provided objectively justified factors are considered and clearly documented, it will be difficult for an employee to challenge the size of a discretionary bonus.
  • Having clear and objective written reasons for any bonus decision will also help shield the employer from discrimination claims – and is recommended in the Code of Practice on Equal Pay.
  • Even discretionary bonus schemes may not allow nil payments. Depending on the bonus criteria and targets, a refusal to pay a bonus at all may be an unreasonable exercise of the employer’s discretion.
  • If a change to a bonus scheme affects 20 or more staff, the employer may face the additional consultation obligations.
  • Bear in mind also that discretionary benefits such as bonuses may, albeit in rare cases, become contractual entitlements through custom and practice. But, for this to occur, the term must be industry-wide, notorious and longstanding.
  • Also, an entitlement to a bonus may be found not only in the employment contract but also in a verbal promise or an e-mail from a manager.

TUPE

  • The TUPE regulations make it extremely difficult to change contractual terms when the change is connected with the transfer of an undertaking.
  • The only variations of contract that can be agreed are those done for a reason unconnected with the transfer or for a reason connected with the transfer that is an economic, technical or organisational (ETO) reason entailing changes in the workforce or the change is otherwise permitted under the terms of the contract.
  • Time itself will not break the link with the transfer but the longer the gap between the contract change and the transfer, the more likely it is that some event will have occurred to break the link.

 

Business rescues

  • Where a transferor is subject to ‘relevant insolvency proceedings’ (any collective insolvency proceedings in which the business is transferred to another entity as a going concern), TUPE, reg. 9 allows employers and employee representatives to agree changes to the terms of employees’ contracts by reason of the transfer (i.e. changes for which there is no ETO reason which would make them potentially valid in any event).
  • These changes are permitted so long as they are made with a view to ensuring the survival of the business and preserving jobs and are not otherwise illegal (e.g. do not breach minimum wage law).
  • This applies only in insolvency situations and is an exception to the general prohibition (in TUPE, reg. 4) on changing the terms of an employee’s contract by reason of the transfer.
  • The threat of a looming insolvency may be used to persuade staff to accept changes to their terms before proceedings become a reality. In practice employees may find that when ‘relevant insolvency proceedings’ are underway, unions will in any event agree to these proposed changes on their behalf.
  • The aim of reg. 9 is to make troubled businesses a more attractive proposition to potential buyers. It offers them an opportunity to reduce liabilities through making permitted variations to existing terms and conditions of employment. While there are obvious practical problems, among them persuading employee representatives and the possibility of increased employee dissatisfaction due to reduced terms, the alternative of a liquidated business should go a long way to mitigating these feelings.

ACTION POINTS

  • Examine affected employees' contracts - do you have an express power in the contract to require the change? If not, include some flexibility in existing and new starters’ contracts.
  • Consider the following practical steps to getting employees’ agreement to any changes: explain fully the reasons for the change and the consequences of staff not agreeing; do not rule out a staggered implementation of any changes (especially if there is more than one change being made); perhaps use a sweetener (e.g. a one-off payment to buy out a contractual right); and think about the timing of any changes (e.g. postpone any detrimental changes until the annual pay review).
  • When exercising a discretion or power to change terms, comply with the implied duty of mutual trust and confidence.
  • Do not assume that staff have agreed to a change because they have not objected – obtain unequivocal proof of acceptance.
  • In the absence of an express power, do you have an implied right to require the change?
  • In the absence of either an express or implied right, obtain relevant employees' consent (i.e. informed and express consent) to the proposed change.
  • In the absence of the right to require the change or the consent of employees, give notice to terminate the contracts containing the old terms and offer to re-employ affected employees on the new terms.
  • Where 20 or more staff are affected, follow the collective redundancy consultation procedure.
  • Alternatively, continue with the old terms but phase in the new terms as new staff are recruited and existing employees are promoted, leave or retire.