Varying contracts: overview

Nicola Doran of Osborne Clarke begins a series of articles on varying contracts of employment by looking at employers' legal position if they vary employees' contracts and the procedure that they must follow if they wish to avoid being in breach of contract. 

Introduction

Terms and conditions of employment are often subject to change, perhaps because of an employee's career progression or the need for employers to make changes to comply with developments in legal requirements. 

Changes that are advantageous to employees, such as a pay increase resulting from an annual pay review or a promotion, are straightforward for employers to implement, with dissent from employees unlikely. However, economic pressures may require employers to vary contracts to save costs and avoid having to make redundancies. It is much more difficult to obtain employees' consent to changes to their contracts that are detrimental.

The terms that employers typically need or want to change include terms relating to pay and bonuses, hours of work, holiday rights and benefits, including company cars. However, employers have limited power to change employees' contractual terms.

Flexibility in employment contracts

Some contracts of employment allow employers to make changes to employees' terms and conditions. Flexibility to alter terms may be limited to specific clauses. For example, a clause relating to a job title may require the employee to carry out other duties within his or her capability as the needs of the business require. Alternatively, a contract may include a general power for the employer to vary its terms.

However, flexibility clauses tend to be narrowly construed by the courts to protect employees, who have weaker bargaining power than employers. If a contractual term is ambiguous, it is likely to be interpreted in favour of the employee. Consequently, employers cannot rely on widely drafted, non-specific clauses to make changes to withdraw or reduce employees' contractual rights. The more detrimental a change, the harder it is for the employer to rely on the clause. General variation clauses are unlikely to be enforceable, other than when they are used to make reasonable or minor administrative changes that do not have a negative impact on employees.

In addition, even where a clause is well drafted, the employer may still be in breach of the implied term of trust and confidence inherent in all employment contracts, if it removes a benefit or substantially changes terms and conditions to an employee's disadvantage.

Unilateral change

In the absence of an enforceable variation clause, an employer may attempt to impose contractual changes unilaterally. By doing so, it will be in breach of contract and, as a matter of contract law, the original terms of the contract will subsist. An employee who has been subject to a unilateral contractual change has a number of potential claims at his or her disposal.

Constructive dismissal: Where the contractual change amounts to a repudiatory breach of contract, the employee may resign and bring a claim for constructive unfair dismissal in an employment tribunal. A repudiatory breach occurs where a change to the contract indicates that the employer no longer intends to be bound by one or more of the contract's essential terms, including the implied duty of trust and confidence.

In most circumstances, employees must have at least one year's continuous service to claim constructive dismissal. For a constructive dismissal claim to succeed, the employee must show that the employer's breach of contract caused him or her to resign and that he or she did not affirm the contract by continuing to work under it for a period after the breach.

Compensation for constructive dismissal is the same as that for unfair dismissal (see Compensation in the Unfair dismissal: rights on termination section of the XpertHR employment law manual).

Breach of contract: An employee whose employer has changed contractual terms unilaterally may bring a damages claim for breach of contract. The amount of damages will equate to the loss that the employee has suffered as a result of the employer's breach. Damages claims may be brought even where the contractual breach is not repudiatory, or where the employee did not resign but chose to work under the new terms while making it clear that he or she did not accept them (known as "working under protest"). Claims for damages can be brought in the civil courts. If the contract has ended and the claim arises from, or is outstanding on, termination, the ex-employee may bring the claim in an employment tribunal.

Unlawful deductions from wages: Where a contractual change results in a reduction in wages, the employee may be able to bring a claim for unlawful deduction from wages, provided that he or she has not accepted the change by continuing to work under the changed terms without making it clear that he or she is doing so under protest.

Agreement to change

The simplest way for an employer to vary contractual terms is to obtain agreement to the changes. An express agreement will legally vary an employment contract provided that the employee agrees voluntarily and not under duress.

Verbal agreement is sufficient to effect a change. It is also likely to be assumed that an employee who continues to work within the terms of a varied contract, without protest, has impliedly agreed to its terms. However, employers should not assume from silence that employees have consented to changes. Employers that obtain written consent to changes will be in a better position to defend subsequent breach of contract claims. Setting out the changes in a letter and ensuring that employees confirm that they agree to them by returning a signed copy is best practice. However, a positive response to an email summarising the changes is also sufficient.

It is often easier to obtain agreement to detrimental changes by offering advantageous changes in exchange. For example, an employer that seeks employees' agreement to updated restrictive covenants at the same time as changing contracts to reflect an annual salary increase is likely to meet less resistance than one that merely seeks agreement to change the covenants.

If comprehensive contractual changes need to be made to cut costs within the business, the employer should make this clear to employees. Employees are more likely to agree to changes to contracts if they are aware that the alternative is an increased risk of redundancy.

Aside from the recommended practice of obtaining written agreement to changes to contractual terms, employers must also give affected employees a written statement containing details of the change to their written statement of terms and conditions, within one month of the change (s.4 of the Employment Rights Act 1996).

Termination and re-engagement

Where it is not possible to agree changes with employees, the employer may be left with no alternative but to terminate their existing contracts and offer re-engagement on new terms. This course of action should be treated as a last resort, and contemplated only after consultation aimed at achieving agreement to changes has failed.

Where dismissal and re-engagement is a potential outcome, the employer should continue to consult with affected employees, giving them reasons for their possible dismissal and the opportunity to state their case about why they do not agree to the suggested change to the contract. Employers should effect dismissals in a fair manner, and offer employees the right of appeal.

The collective consultation obligations and duty to notify the Secretary of State that apply in relation to redundancies will arise if the employer is envisaging dismissals in these circumstances, where 20 or more dismissals may take place at one establishment within 90 days. (See the Informing and consulting prior to redundancies section of the XpertHR employment law manual for more details.) Failure to consult collectively may result in a claim for a protective award of up to 90 days' pay per employee. Failure to provide notification to the Secretary of State is a criminal offence subject to a fine.

When an employer first seeks agreement to changes to employment contracts, it will not know how many employees will agree to the change or whether or not it will need to dismiss and re-engage employees, and if it will, how many. In light of the potential liability and penalties involved in failing to consult collectively, it is prudent for employers to consult collectively from the outset, where the changes will affect 20 or more employees.

Again, where contractual changes are agreed, the employer must provide the affected employees with a written statement of those changes within one month of their taking effect.

Claims

Employers that dismiss employees and offer re-engagement on new terms risk having claims of unfair dismissal brought against them. Even if an employer has offered re-engagement, its employees may still claim unfair dismissal (provided that they have at least one year's service). To defend an unfair dismissal claim in these circumstances, the employer will need to be able to show that:

  • there was a fair reason for dismissal (employers usually rely on the potentially fair "some other substantial reason");
  • it had a sound business reason for requiring the change and acted reasonably in dismissing the employee to effect it; and
  • it followed a fair procedure by consulting about the changes, and in the dismissal process.

Where a claim is successful, when making an award, the employment tribunal will need to examine whether or not the employee's failure to accept re-engagement was a failure to mitigate his or her losses and if this should be taken into account for the purpose of assessing compensation. If the employee's decision not to accept re-engagement was unreasonable because the terms offered were more favourable or not unduly onerous, the tribunal may take this into account in its assessment.

If an employer dismisses employees without giving the correct contractual notice, it could be liable for wrongful dismissal claims.

It is also important for employers to bear in mind that, if they state an intention to dismiss on notice in the future, this may result in employees asserting that there has been a breach of the implied duty of trust and confidence and claiming constructive dismissal.

Next week's article will be a checklist of the steps that employers should take if they wish to vary contract terms, and will be published on 9 August.

Nicola Doran (nicola.doran@osborneclarke.com) is a solicitor with the employment team at Osborne Clarke.

Further information on Osborne Clarke can be accessed at www.osborneclarke.com.