Altering the terms of employment contracts – July 2011

- News,

Stephen Brookes reviews the legality of attempts to vary the contracts of employment of staff – July 2011

More often than not it is the employer who will seek to impose a contractual variation upon a contract of employment and this article examines the legality of such arrangements.

Some aspects of the employment may not be contractual such as internal written procedures and the like. These can be changed easily by the employer.

But much more thought needs to be put into a change which involves contractual terms.

There can be many reasons why an employer would wish to amend the terms of employees contracts – for example there may be an urgent business reorganisation need or a need to extend opening hours to keep up with competing businesses. Profit may be falling and it may be necessary to reduce the wages bill. There are several ways the employer can bring this about:-

A. By Agreement and consent

It will be fairly easy to obtain the consent of the employee if the proposed alteration in terms is favourable to the employee. In such cases a date for the variation can be agreed and the Statement Of Terms and Conditions varied to reflect the alteration in terms.
To be binding a contractual variation needs to be supported by legal consideration which is some promise or additional agreement from both parties. One example of this is the case of extended office hours. The employee agrees to work longer and the employer agrees to pay higher wages or a lump sum to sweeten the deal.

Such variation agreements can be verbal or written or can be implied. An implied change occurs where an employee notified of the change continues to work without objection. He can be said to have waived the change and by his conduct he may well be said to have agreed to the alteration. A reasonable time must pass so that the employee can decide if the change is agreeable to him. As a rule of thumb about a month might be enough.

This route will not be available to the employer if the change is not favourable to the employee in question or, though favourable, nonetheless the employee will not agree to the alteration.

B. A Right of Variation in the contract – a flexibility clause.

Some contracts of employment allow the employer to alter or vary certain of the terms such as where the employee can be required to work or on what type of work. A contract consists of major terms and minor terms. It is said that major terms are at the very heart of the contract or at its root. It is much harder for an employer to alter a major term but everything depends on the precise wording of the variation clause and such contractual clauses allowing an employer to vary are interpreted very strictly indeed. For example it is very unlikely that a clause allowing the employer to vary the job duties would allow an employer to employ an area manager as an office cleaner. An employer must act within the precise language of the flexibility clause and act reasonably.

C Forcing through a change

If the employer is not able to extract consent because the change is unfavourable, what then are the options? This is where the employer really has to be careful because these are high risk strategies.

A number of possibilities exist:-

1. The employer tells the employee when the alteration is to occur and implements the change. The employee can

Work on regardless without complaint under the new terms – the contract is varied by implied agreement (and waiver of breach if the alteration is fundamental). The employee is saying effectively that he is not unduly bothered by the change ( and may decide to look for another job!)
Work on regardless, without complaint, under the old terms eg coming in at 9.00 am when the new agreement requires him to come in at 8.45am – the contract may be varied ( lack of objection or acceptance by waiver of breach) and the employee might be capable of fair dismissal for misconduct
Work on, where possible, under the old terms , reserving all rights the employee may be able to claim compensation from time to time – if the alteration is in the rate of pay a claim for unlawful deduction from wages can be brought, for example or a claim for breach of contract if the alteration is in holiday entitlement but the employer may not agree to this and may dismiss the employee on due notice – it will be for the employer to justify that this was a substantial reason justifying a dismissal which is a defence to a claim for unfair dismissal and it will be up to the employer to show that it followed a fair procedure.
The employee is saying effectively that the old agreement remains alive and he is holding the employer to it.
The employee can resign and claim constructive unlawful dismissal and by reason of the lack of due and proper notice, unlawful termination, if the variation goes to the very core of the contract – whether the employee will succeed depends on whether the employer can show that the variation was for a substantial reason.
Here the employee is saying to the employer you have broken the contract, the contract is at an end, you have dismissed me and I want compensation from you for the notice I should have had ( and if the employer did not act with a good substantial reason and fairly too, compensation for unfair dismissal, if the employee qualifies)

2. The employer dismisses the employee on supplying the correct contractual notice and immediately offers to re-employ the employee the day after the day the dismissal takes effect on the altered terms such that continuity of employment is preserved. In such circumstances:-
Constructive dismissal is not possible because there is a genuine dismissal
No claim for wrongful termination ( that is, a claim for short notice or no notice at all ) can be brought if the employer gets the termination date correct for all staff involved
The employer needs to use clear words of dismissal to avoid a breach of contract

The employee will need to decide what to do in such cases. The employee may:-

Work on under the new terms either signing an acceptance of the new terms or accepting them through conduct – by continuing to work under the new terms. A dismissal has still occcurred, however, and the employee may have an argument for a basic award for unfair dismissal if he can establish that it was unreasonable to dismiss the employee before ascertaining whether the employee would accept the new terms because there are two limbs to the employer’s defence of an unfair dismissal claim, namely (1) a substantial reason for dismissal and (2) acting reasonably in treating that reason as a reason for dismissal. It may not be reasonable for the employer to dismiss the employee, even if there is immediate re-employment, before the employer has identified whether that employee wishes to accept the revised terms. The employer may try to retract the notice but the employer cannot do so unilaterally except in the cases of notices given in the heat of the moment during a row, for example.

Refuse to accept the new terms, leave the employment try and bring a claim for unfair dismissal if the employee has worked there long enough because this amounts to a dismissal under unfair dismissal law though for the employee to succeed, the dismissal must be unfair or the employer must act unreasonably in treating that reason as a reason for dismissal.

Refuse to accept the new terms, stay in the new employment try and bring a claim for unfair dismissal in respect of the old employment if the employee has worked there long enough (and qualifies )because this amounts to a dismissal under unfair dismissal law though for the employee to succeed, the dismissal must be unfair or the employer must act unreasonably in treating that reason as a reason for dismissal.

So will the employee who refuses succeed? Employers frequently rely on two reason why such dismissals are justified, either redundancy or some other substantial reason justifying dismissal which is the reason often cited in business reorganisations.

As for a redundancy if the workplace has not ( and is not expected to) close, or the job has not ( nor is expected to) disappear so that the employer still needs the same number of employees as it did before it may not in fact be a redundancy situation. The employer may well be advised to plead redundancy as a second line of defence but if it does so and the tribunal agrees the employee may win on redundancy if nothing else.

Business reorganisation is normally cited by employers as the substantial reason justifying the dismissal of an employee refusing to accept the varied terms. In Ellis v Brighton Co-operative in 1976 a reorganisation which was necessary to avoid the business coming to a standstill was held to justify the dismissal. Everything depends on the circumstances as to whether it can be justified and the tribunal would have to consider whether the employer had demonstrated enough of a reason. It is likely that a tribunal would regard survival of the organisation or business as a good reason if the employer’s procedure was fair but lesser reasons can suffice. An important caveat is that the employer must offer evidence in support of his reasons and a mere statement made by the employer may not be enough. The employer may need to show why timing is crucial and that there is no better alternative open to the employer eg redundancies.
As for pay cuts these are fairly hard to justify, certainly if it is the case that the cut will make a profitable business more profitable in such cases, the tribunal will need a lot of persuading that the dismissal is justified. In other cases where the survival of the business is hanging in the balance it may be easier for the employer to succeed in defending the claim but cases are fact-sensitive and the outcome depends on the evidence.

Even if the employee does succeed in an unfair dismissal claim the compensation may not be any more than the basic award if an employee has failed to mitigate the loss by refusing to accept the new employment on the different terms.

DISCLAIMER: This is intended to be a guide only and no liability is accepted for its use. It is not a substitute for detailed legal opinion on a fact senstive case by case basis.
Stephen Brookes
Salmons
July 2011