How can employers best achieve necessary contractual changes? In this article Stuart Chamberlain, senior employment law author and consultant at Croner-i, examines the legal issues in varying a contract.
A contract of employment is a legally binding agreement: the two parties are bound by its terms and it is enforceable in law. The general rule is that a contract of employment may be varied only in accordance with its terms or with the agreement of the parties. However, not all changes during the employment relationship will require the contract itself to be amended. Some will be changes in practice, rather than in the terms of the contract.
A change in a contract may apply in the following situations:
Where there is a contractual right for the employer to vary the contract.
Where there is agreement between the parties to effect the changes, including the position over collective agreements.
Where the employer chooses to vary the employees’ contracts unilaterally.
Special (and often complex) rules govern contract variation in the context of a TUPE transfer. Further details of these can be found in the TUPE topic.
Reasons for wanting to change terms and conditions
An employer may wish to change an employee’s contract of employment for a number of reasons:
there may be a need for a pay cut
there may be a need to amend hours of work or even the work location
it may want the employee to carry out different work from that they were originally employed to do
the employee may also seek to vary their contract — for example, to change it to suit their work-life balance, including the extended right to request flexible working that came into force on 2014.
Where there is a contractual right to change the contract
There may be a specific clause in the contract that gives the employer a power to vary its terms without asking the employee, or a general power to allow the employer to change the terms of the contract.
Specific (or express) clause
This will usually consist of a flexibility clause allowing the employer to change the person’s job duties or a mobility clause entitling the employer to change the work location.
The employer is required to exercise the flexibility clause on reasonable grounds. Reasonable notice of the change should certainly be given, and the employer should consult with employees or their representatives on the implementation of the contractual variation.
If there is a dispute on this issue between the parties, the courts and tribunals will take a strict approach to the interpretation of a flexibility clause. Any ambiguity in its construction (and in any mobility clause) will count against the person seeking to rely on it — in other words, the employer.
A general power to vary
Where there is a contractual clause providing the employer with a general power — as opposed to a specific right outlined above — then this is probably limited to contractual changes of a minor nature. Such permitted changes to the contract would encompass reasonable or minor administrative amendments, which were not detrimental to the employee. Any major or significant changes, however, could lead to resignation and a claim of constructive dismissal.
Necessary changes to Written Statement
The permitted contractual changes should be included within a new Written Statement of Particulars of Employment (a legal requirement under s.1 of the Employment Rights Act 1996) and issued to the employee within a month of the changes.
Where there is agreement to vary the contract
The employee may give express agreement (preferably in writing, as this reduces the scope for dispute) to the employer’s proposals. In return, the employer may offer “consideration” or an incentive for the employee to change — usually extra holiday or a pay rise although, in many instances, continued employment may itself constitute enough consideration.
A collective agreement is an agreement between an employer and trade union(s) covering matters such as terms, conditions and pay. The terms of collective agreements can be incorporated into individual employment contracts.
The employer cannot unilaterally change the terms of a collective agreement. There will be an agreed variation where the collective agreement containing the change is agreed by the trade union and is then incorporated into the employee’s contract of employment.
If there is an express agreement to incorporate provisions of collective agreements as varied from time to time, then any variations will vary automatically the individual contracts. This may be the case whether or not an employee is a member of the recognised trade union(s).
Temporary changes to a contract
The employer and employee can agree to deal with a temporary situation, without that changing the overall package of the employee’s terms and conditions.
Where the employer chooses to vary unilaterally
The final situation is where there is no contractual right to vary and no employee agreement to a change is forthcoming. The employer may then seek to follow one of the following options:
vary the contracts unilaterally — regardless of the possible consequences
serve the employees with notice on their present contracts and re-engage them on new contracts.
These options, with their implications for the employer, are considered in turn below.
The employer may seek to vary the terms and conditions unilaterally — that is, without employee consent. Unfortunately for the employer this is a high-risk strategy, as it opens up the possibility of claims for breach of contract and for constructive dismissal. This strategy is more likely to be effective if there is an immediate practical effect on the employee (for example, a pay cut) and they continue to work without objecting. However, employers should not automatically assume that silence is sufficient to indicate implied agreement, especially if there is no immediate impact on the employee.
The potential risks to the employer
If the employer imposes the change it will be a breach of contract. The employee in these circumstances has a range of available options as follows.
Comply with the new terms but work “under protest” and claim for breach of contract or (if the wages have been reduced) unlawful deductions from wages. This is sometimes known as “standing and suing”.
If the change is sufficiently fundamental, then resign and bring a claim for constructive dismissal. This will involve early conciliation by Acas, followed by a hearing in the employment tribunal if no agreement is reached.
Where there is, for example, a change in duties or hours, the employee could refuse to work under the new terms.
Of course, if the employee waits too long before resigning (they cannot protest indefinitely), the employer could then claim that the employee’s actions show that they were affirming the breach — that is, agreeing to the contractual variation.
Dismissing and offering re-engagement on new terms
The final option, literally the last resort where consultation with employees has failed, is to give notice to the employees to terminate their “old” contract and offer a “new” contract on changed terms.
There are, however, still some risks for the employer in this course of action:
the employee may be able to claim wrongful dismissal if the employer does not give the required period of notice
unfair dismissal, unless the employer can show that it can establish a potentially fair reason for dismissal and acted reasonably ( see below) in deciding to dismiss the employee for failure to agree to the change.
If the employer is using this approach to make changes to several employees' contracts, the dismissals will be treated as redundancies for certain purposes. If it is proposing to terminate the existing contracts of 20 or more employees, it must notify the Secretary of State and comply with the collective consultation obligations under the Trade Union and Labour Relations (Consolidation) Act 1992.
Failure to comply with the collective consultation obligations may result in the employer being ordered to pay up to 90 days' actual pay to each affected employee, while a failure to notify the Secretary of State is a criminal offence.
The need to act reasonably
For the employer to act reasonably it must follow a fair procedure and provide the employee with sufficient information about the reasons for the possible dismissal, and the opportunity for the employee to state their case at a hearing. A tribunal will also look at other factors such as the reasons why the employee has rejected the change, and whether most employees have accepted.
Advice to employers
Employers can reduce the risk of claims to an employment tribunal in these circumstances by ensuring that:
they have a good business reason for wanting to make the changes to the contract
they follow a fair policy, with a right of appeal against any dismissal
employees are given sufficient information about the reasons for the proposed change and informed that they may be dismissed if they do not agree to them. A refusal to agree to a change in contracts will normally amount to Some Other Substantial Reason (SOSR) for dismissal under s.98 of the Employment Rights Act (ERA) 1996;
they consult with the employees and give them the opportunity to state their case —as a result, consider compromising on any non-essential changes or offer greater incentives to staff who agree to the changes
they seek to obtain the agreement of the majority of the workforce to the changes
they consult individually with those employees who hold out against the changes; and
if they still will not agree, terminate their contracts on notice and offer re-engagement on the new terms.
In its leaflet Varying a contract of employment, Acas, the advisory service, points out that changes occur in working relationships for all kinds of reasons. It stresses that problems can be avoided or resolved through proper discussion between employer and employee. Agreement, where it is possible to obtain, is best: it avoids the possibility of bad employment relations, compulsory dismissals and expensive litigation.
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