Variation of employment contracts

Rationale

Examples of situations in which businesses may need to change employment contract terms include the following:-

• to make sure contracts are up to date with new laws or regulations;
• to better reflect someone’s job role, if it has changed;
• to introduce or change terms and conditions, for example providing company sick pay, maternity or paternity pay or varying details of a pension scheme (where applicable – see separate note on pensions here [link note on P for Pensions]);
• to reflect changes to the business or its structure – for instance, if it is moving to a new location, changing who people report to or adopting a new legal form (eg converting from a professional partnership to a limited company);
• helping the business better adapt to changing customer needs; and
• economic reasons, for example if considering a restructure or other changes to stay competitive in a changing market

Existing contract terms

The starting point in varying an employment contract is to be sure of the existing terms, which seems obvious. However, even where there is a detailed written contract, it is possible for terms to be varied or supplemented orally or by means of implied terms, including those based on “custom and practice”. Terms implied through custom and practice can arise where there is an established basis on which the parties deal regularly that they treat as legally binding. In the words of the relevant cases, the term must be “reasonable, notorious and certain[1]” and “followed because there is a sense of legal obligation to do so”[2]. In some industries and businesses, collective terms may be agreed – eg through a union – which have effect, by incorporation, into individual contracts.

The other thing to look out for in existing contracts is whether they contain a “flexibility” clause. This is a provision reserving to the employer the right to vary the terms and conditions of employment, which may assist with the process of implementing changes. However, this will depend on the circumstances and there are limitations to how useful such a provision can be (see further below on flexibility clauses). Moreover, just having a contractual power to vary does not address the employee relations issues that may be triggered by attempting to vary terms and conditions. If changes are not handled well then risks may include workplace relations being damaged, a decrease in performance and commitment, “silent” quitting, increased levels of stress and absence and, ultimately, claims of breach of contract/constructive dismissal or discrimination. Discrimination claims may occur if, for instance, the changes introduced apply to a group of workers but put those with a protected characteristic at a disadvantage.

Flexibility clauses

For a flexibility clause to be enforceable, there are two main requirements.

Firstly, clear wording is required to create a power to vary in favour of the employer, with any ambiguity being construed contra proferentem (ie against the interests of the party seeking to rely on it – this means giving employees the more favourable interpretation). For reasons of certainty and fairness, variation wording which indicates the specific terms that the employer is entitled to change is more likely to be enforceable compared with a general power to vary any term.

Secondly, case law has established[3] that the courts will be reluctant to enforce a flexibility provision which does more than vary the terms with which the employer is required to comply. For example, it is anticipated that the courts would be reluctant to give effect to a clause that purported to allow the employer to take away a right given to employees (such as a contractual right of appeal) where this would produce an unreasonable result. However, assuming that the variation wording is found to be enforceable, there does not appear to be any bar to the power of variation acting over even significant terms such as pay[4].

Caution is advised, nevertheless, in relying on such provisions and the coordination of a strategy which also takes account of the employee relations angle is recommended, with the input of professional advisers as necessary.

Changes by consent

Where there is no flexibility clause (and no other contractually agreed mechanism for bargaining), changes must be agreed, otherwise any variation imposed by the employer is likely to amount to a breach of contract. Consent to a contract variation may be express eg a verbal agreement to the change or, better still, the employee consenting in writing. Consent may also be implied such as where the employee continues to work for the employer under the new term(s) without protest for a significant period of time. Employers should be aware, though, that if the terms substituted are radically different, it may leave the door open for employees to claim that they have, in effect, been dismissed under the existing contract and re-engaged on new terms (called a Hogg dismissal[5]).

From a practical point of view, how the employer goes about making changes will depend on (a) the number of employees potentially affected and (b) whether there are any established ways of consulting employees. If only one employee is affected, it should be possible to discuss and agree the changes with them directly (or with their representative). On the other hand, if a number of employees are affected, it may be most effective and administratively smoother to combine both individual and collective consultation. Having an ad hoc employee consultative group and/or inviting employees to group meetings can help bring together a consensus position on the changes and make managing the exercise easier. Conversely, it can also give employees a platform and collective force to resist, so the approach needs to be planned and executed with care.

Options in the absence of consent

If, despite a reasonable attempt to agree the changes and having followed a consultation process, it is not possible to implement a consensual variation, then an employer can give notice to terminate existing contracts and offer to re-engage on revised terms and conditions (also known as “fire and re-hire”). It would be important in such circumstances to terminate in accordance with the contract (eg by giving the correct period of notice) in order to avoid potential liability for wrongful dismissal. Additionally, in terminating to replace with an alternative contract, the employer would be relying on the “some other substantial reason” or “SOSR” ground as the potentially fair reason to dismiss (see our note on “Reasons for Dismissal”).

The SOSR ground is one of a number of potentially fair reasons for terminating an individual’s employment which cover, in addition, capability/qualifications, conduct, redundancy and illegality. Ultimately, it is for the employer to show that the reason related to one of the above-mentioned grounds or was on account of “some other substantial reason of a kind such as to justify the dismissal of an employee holding the position which that employee held”[6].

When terminating for SOSR, an employer has to act reasonably in treating the basis for its decision as sufficient to justify dismissing the relevant employee(s). The question as to what amounts to a “substantial” reason is a factual one that rests, ultimately, with the employment tribunal and it is not possible to give an exhaustive list of matters which may come within this category. SOSR does arise from time to time in the context of changing business needs or reorganisations and may be a valid ground on which to dismiss an employee who refuses to accept a change in terms and conditions, provided the employer has a sound business reason for needing to implement the variation.

Besides relying on SOSR as the potentially fair reason for termination, the employer must show that a fair procedure has been followed. In most cases, this means that the employer will need to explain and consult with the employee(s) or their representative, give them time to consider the proposals and make comments as well as explore alternatives to dismissal.

Again, in terms of consultation, and for best prospects of successfully implementing the change process, it may be helpful to deal with employees as a group. If the employer can convince the majority of the cohort to agree changes, it should make it more justifiable to rely on SOSR in the event that it comes to firing a remaining “rump” of non-consenters to achieve the legitimate business aim driving the changes.

Complete the paperwork!

Once changes have been made, it is necessary to confirm and document them appropriately, both as an evidential record of the currently applicable terms and conditions and also to comply with the requirements relating to written particulars of employment (see our separate note here). It also helps to reinforce any change of requirements in the minds of employees, so is recommended as part of an effective communication strategy.

You can ask us to: advise on change strategy and the legal and practical steps to implement contract variations, draft side letters and addenda to existing employment documentation and assist in managing collective bargaining processes for optimum results.

_______________________________________________________________________________

References:

[1] Bond v CAV Co [1983] IRLR 360/ Henry v London General Transport Services [2001] IRLR 132

[2] Solectron Scotland v Roper [2004] IRLR 4

[3] Wandsworth London Borough Council v D’Silva [1998] IRLR 193

[4] Bateman and others v Asda Stores Limited UKEAT/0221/09

[5] Hogg v Dover Council [1990] ICR 39 EAT

[6] Section 113(2) Employment Act 2006