Varying your employees’ terms of employment

Gill Wilkinson

If you have to scrutinise headcounts and wage rolls, with a view to cutting costs, there are alternatives to making redundancies. Many employers are changing terms and conditions of employment as a way of reducing payroll costs, without losing staff or having to pay redundancy costs. As ever, it is important to follow the correct procedures and look out for a number of pitfalls.

What sort of changes can be made?

Examples of changes to terms of employment include:

  • scaling back working hours by moving the finish time from 5pm to 4pm;
  • reducing the number of days of work from five to four per week; or
  • cutting pay by 10 per cent.

Bonus payments are usually discretionary so fall outside the contract and may not require consent, depending on how the scheme is worded.

Take particular care with pensions, as there is a separate duty to consult with employee representatives in relation to changes to most pension schemes, with fines payable if the employer fails to do so.

How can changes be made?

You can vary a contract of employment in two ways. The first is if the contract of employment allows you to do so and the second is with the agreement of the employee. If the financial situation of the company means that the alternative is a formal restructuring, possibly resulting in job losses, tell employees this. They are more likely to accept the change rather than lose their job.

The terms of the contract may be broad enough to cover what you want to do, for example the hours of work clause may state that the employee has to work the hours that are required by the employer, but this is unusual. It is more likely that the contract includes a specific right to vary some of its terms, such as the hours or days of work. If this is the case, you may be able to make the changes you wish. 

Many contracts give the employer a general power to vary any terms on giving a certain amount of notice to the employee, often 30 days. However, this power must be exercised reasonably and can only be used to make minor administrative changes that are not detrimental to staff; you could not use it to make substantive changes such as attempting to reduce pay by 20 per cent across the board.

If your contracts do not include any of these terms or only include terms which, upon taking legal advice, are unlikely to be enforceable, you will need to obtain agreement from your employees to the changes you wish to make. This can be done in three ways:

  • You can seek express agreement either with the individuals affected or, if you recognise a union, via a collective agreement. This will involve going through a consultation process to ensure that staff understand the change and why you are making it, and which allows them a chance to comment on it.
  • You can impose the change and rely on implied agreement, which is shown by employees continuing to work. This can be difficult, as employees can object by resigning and claiming constructive dismissal, or by bringing claims for breach of contract or unlawful deduction from wages while they continue to work.
  • You can give notice to terminate existing contracts and offer re-employment on the new terms. This is sometimes referred to as 'the nuclear option' as it is risky and can lead to claims for unfair dismissal and wrongful dismissal. You will have a defence if you have a good reason for dismissing employees and you follow a fair procedure; it will help if the majority of employees accept the new contract. Offering some type of benefit, such as additional holiday pay, in return for a detrimental change is often effective in securing agreement. In any case, it is wise for employers to allot some form of consideration to the change, such as tying it into a pay increase.

Potential traps

As well as the possible employment claims outlined above, there are some other potential traps for the unwary employer:

  • If 20 or more employees are affected by the change and could be dismissed and offered re-engagement on new terms, you will have to carry out collective consultation with employee representatives, including the election of employee representatives if necessary, and notify the Department for Business, Energy and Industrial Strategy. A failure can result in additional claims and a fine. As part of the consultation process you will need to gain employee feedback on your proposed change, either directly or through their elected representatives. Take note of any objections to the change and why staff have objected. See if the proposed change can be varied in some way to allay any concerns raised.
  • You may face discrimination claims from disgruntled staff if they feel that the changes impact unfairly on them by reason of their sex, race, disability, religion or belief, sexual orientation or age. The compensation for such claims is unlimited and can be substantial.
  • If you reduce the rate of pay, watch out that you do not accidentally take it below the national minimum wage (currently £6.95 per hour rising to £7.05 from 1 April 2017 for adults) or the national living wage (currently £7.20 per hour rising to £7.50 from 1 April 2017) for workers aged 25 and over.
  • Remember that employees have the right to be given a new written statement of particulars of employment if you make any change to their terms and conditions.

The attitude of the courts

The employment tribunals are generally sympathetic to employers who have a good reason for making a change to contracts and who consult meaningfully with employees before making the change. There have been some cases in the Employment Appeal Tribunal (EAT) that have been helpful to employers:

  • In one case, the EAT decided that Asda was entitled to rely on a statement in its staff handbook reserving the right to vary contracts to introduce new pay terms, without having to get express agreement. Asda had consulted with its staff and taken steps to ensure no employee would suffer a loss due to the changes. 
  • In another case, the EAT held that TNT had not dismissed employees unfairly when they refused to accept new contracts without a bonus scheme; TNT had a good reason for making the change and had acted reasonably and followed a fair procedure.

In the last case, the EAT gave guidance to tribunals when deciding whether a dismissal for refusing to accept a pay cut was fair. It said that the tribunal should focus on the reasonableness of the employer's decision, rather than the reasonableness of the employee's refusal. Helpfully, it also stated that the change sought by the employer does not have to be crucial to the survival of the business.

Conclusion

It is possible to vary employees' terms of employment as an alternative to making redundancies but it can be risky and you should always take legal advice at the planning stage to minimise the risks.

For advice on varying contracts of employment, or any other employment law matter, please contact Gill Wilkinson on 01653 692247 or email Gillian.Wilkinson@warekay.co.uk.