02 Aug 2015

Changing employees’ terms and conditions

Insights, Publications

The courts are quiet over the summer, so we thought we’d focus on one subject: changing employees’ terms and conditions.

We assume in this article that you don’t recognise a trade union. If you do, you’ll normally be able to agree changes with the union rather than each individual employee, and you’ll face the risk of industrial action if you don’t reach agreement with the union.

The fundamental principle

You can’t change the terms of a contract without the other side’s agreement. That principle applies to commercial contracts (agreements between you and clients or suppliers, for example) and to agreements with your employees. Contracts are made up of legally enforceable promises, so each side knows where it stands. And you’re protected if the other breaks their side of the deal.

But contracts can become outdated. From time to time you’ll have to think about making a few changes.

Some changes will be small and may seem inconsequential. Others will radically affect the employee’s day-to-day work or their entitlements. Perhaps they’ve been promoted, so their contract must be brought in line with their new status and responsibilities. Maybe you are relocating your business. Or perhaps you’re having to look at costs savings and need to cut back on employee benefits.

And there’s always the changing face of employment law to consider, as well as evolving custom and practice.

Step 1: Is the change beneficial to the employee?

There are some changes which you will be able to implement very quickly and without much fuss or disruption. What employee is going to object to a pay rise, for example? Where the employee stands to gain from the change, you’ll probably have an easy ride. By agreeing the change between yourselves, you’ll be able to update the contract by mutual consent – by far the safest and simplest way. It cuts out a lot of technical contractual and employment law issues.

Don’t forget to get the employee’s consent in writing. You’ll need to issue written notification of the change within one month of it taking effect. The easiest way is to simply issue a new contract, or a written addendum, and get it signed by the employee.

Not all proposed changes will be welcomed, and this is where employment law and contract law claims lurk.

Step 2: Check whether you need to change the contract

The wording of the employee’s contract is always the starting point.

Not every change will affect the express, implied, incorporated or statutory terms of the agreement. (This sounds complicated, and it can be, so it’s worth running this past us.) If it doesn’t affect those terms, then great – you should be able to introduce the change without having to get the employee to agree to it.

A word of caution about being too bullish here. Even if the change you want to make isn’t a contractual one (ie you are technically able to make it because it doesn’t affect the contract), you still owe the employee – as you do all employees – a duty of trust and confidence. Tell them about the change and why you’re planning to introduce it. Listen to what they have to say; it’s not uncommon for employees to come up with some useful new ideas relating to the change.

Ultimately this all reinforces good employer/employee relations. They’ll respect your honesty and they’ll appreciate that you’ve taken time to explain things to them. At least, that’s the plan!

Step 3: Does the employment contract allow the change?

The contract may contain a ‘variation clause’, which allows you to make certain changes.

But courts are always reluctant to allow employers to use variation clauses in a way which impacts negatively on employees’ rights. The bigger the impact, the more a court will look for a reason to declare the variation clause invalid. So it’s worth checking with us first.

Step 4: Impose the Change

Remember that it’s unlawful – a breach of contract – to change the terms without the employee’s consent. But it’s not that difficult if you know what you’re doing. You have options, but you’ll need to tread carefully.

Option 1 – get the employee’s agreement

You can’t force the employee to agree to the change, so steer very clear of duress. You should consult with the employee. There are obligations to enter into collective consultation – a specific legal process – if the change will affect 20 or more of your employees.

Explain the change and why you want or need to make it. Depending on the effect the change would have on the employee, you might need to think about offering some benefit in exchange for their agreement: a pay rise, a better bonus, or a few days’ extra holiday, for example. This sort of “consideration”, as well as being an attractive incentive, is sometimes needed to make the change legally enforceable.

If this option works and you get the employee’s agreement, make sure to put this in writing.

Option 2 – implement the change without agreement

This carries risk because it’s not what the employee wants. You don’t have the legal right to do this and so you are exposing yourself to potential claims.

In reality, deciding whether to do this involves a traditional cost/benefit analysis. Are the benefits of making the change outweighed by the risk and cost of a successful claim (or claims) against you?

The employee upon whom change is forced will have to make a serious decision.

Many, and often most won’t do anything – they’ll grumble a bit but put up with the change.

Some will choose to ‘stand and sue’. It means they carry on working for you, but make it very clear that they are not happy about what you’ve done. In doing this, they keep open their options for bringing claims against you.

And finally, some employees may decide to resign in response to a breach, and (if they’ve been working for two years) bring a claim for constructive dismissal.

Here are some of the potential claims you could face when you impose change:

(a) Breach of contract
An employee could issue a claim for direct financial loss caused by your breach. In theory, they could also get an injunction to make you do, or stop you doing, the thing that breaches their contract. But the value of these claims is small – it’s always limited to their direct financial losses suffered during the period equivalent to their notice period.

(b) Unlawful deductions from wages
Employees’ wages are protected in law. If the change you have imposed results in a pay cut for the employee, they could bring an unlawful deductions from wages claim (going back a maximum of two years).

(c) Unfair dismissal
Some contractual changes are so significant that they are deemed to be a dismissal. If that’s the case, the employee could bring an unfair dismissal claim against you. Generally, the employee needs to resign quickly in response to the change.

Bear in mind too, however, that where your action is the ‘last straw’ – in other words, there has been a series of events culminating in something that’s not a fundamental breach but which pushes the employee over the edge – then that could be enough for a constructive dismissal claim.

Option 3 – Dismiss and then re-employ the employee

This is where you terminate the employment contract, but immediately offer the employee a new contract containing the terms you’ve been wanting to introduce (but which they wouldn’t agree to).

It’s the cleanest and safest way to impose contractual changes, but it’s not entirely simple. It’s still a dismissal, so if the employee has more than two years’ employment, they can claim unfair dismissal. If they don’t accept the new role (ie their old job with the new terms), they are entitled to be paid for their full notice period.

To comply with employment law, you need to be fair, reasonable and procedurally correct if you are going to defeat an unfair dismissal claim. That involves quite a bit of consultation before you dismiss, and keeping the ‘new’ job open for them in case they change their mind during the notice period.

If you can establish a good business reason for imposing the changes, and you have consulted properly, a tribunal is likely to say the dismissal is fair. What amounts to a ‘good business reason’ varies, but if it has a negative financial impact on the workforce, a tribunal will normally expect to see the directors/owners sharing the pain by also taking paycuts, and doing everything they can to minimise the impact on the workforce.

The big message in all of this is that, while terms and conditions in any context are a protection mechanism for both parties, they’re not set in stone. If there are sound commercial or operational reasons for needing to bring about change, it’s time to look at your options. Some options carry more risk than others, and it’s the level of risk you’re prepared to accept that will determine the route you take. It’s an area we advise on regularly, so please get in touch if you’d like to discuss the options further.