Varying contracts of employment: what are the risks for employers?

Labour MP Siobhain McDonagh has suggested that thousands of M&S staff could lose their jobs in the run up to Christmas if they reject a pay deal. Staff who have not accepted new terms would have their contracts of employment terminated and be offered re-employment under new terms, as part of the bid to implement changes to pay and pensions.

Terminating staff for not accepting changes to terms and conditions seems a risky and extreme course of action, but is this the correct way to go about implementing contractual changes?

Clio Springer looks at the process to follow, and the factors to consider, for employers that are thinking about varying employees' contractual terms.

1. Contracts of employment cannot be varied without agreement

Contracts of employment are binding agreements and cannot be varied without the consent of both parties.

Employers that make changes to employees' contracts without their agreement will be in breach of contract.

The employees can sue for breach of contract, constructive dismissal and/or unlawful deductions from wages if they suffer loss as a result of the change.

Therefore, to make changes to contractual terms, employers need employees' agreement.

Sometimes, changes agreed with a union will be incorporated into the contract, in which case individual agreement will not be necessary.

• Incorporating collective agreements

2. There might be flexibility in the contract of employment

Many employers write flexibility into their employment contracts at the outset, to give themselves the discretion to make changes later, without having to get agreement.

A common example of a clause providing flexibility is a mobility clause, which requires employees to move their place of work in line with the employer's business needs.

However, the right to vary the terms of a contract must be clear and unambiguous and employers must exercise flexibility in a contract in accordance with mutual trust and confidence.

A flexibility clause will not necessarily give the employer an unfettered right to make changes.

• Contract clause: "blanket" power to vary contract
• Contract clause: power to vary place of work
• Contract clause: power to vary hours of work
• Letter to an employee in an exercise of a contractual power to vary terms

3. The variation of contract should be necessary

The process for bringing about changes to contracts can be difficult and may have a negative effect on employee relations and the employer's wider reputation.

For this reason, there should be a sound business reason for making the change.

Being able to demonstrate a good reason to employees may help the employer to achieve agreement.

4. Consultation and getting agreement to vary contracts of employment

Assuming the proposed contractual change is not covered by a flexibility clause, the employer will need to get agreement to it.

Sometimes, this can be achieved by writing to the affected employees and asking for confirmation of consent.

However, where the changes are fundamental and likely to have a negative impact on employees, this on its own will usually be insufficient.

Employers need to embark on a consultation process to try to reach agreement.

Employers can use the consultation to explain their business case, answer employee concerns, and consider the options. Employees may come up with alternatives to be considered.

Sometimes, employers "buy" agreement by offering other benefits or a one-off payment in return.

It is usually necessary to get individual agreement to change an individual contract, although the consultation might be done collectively.

Therefore, while some employees might agree, this does not mean that they all have, and there may be some dissenters.

To avoid ambiguity later, employers should ensure that consent to changes is in writing.

• How can an employer improve the chances of an employee agreeing to a change in terms and conditions?

5. Notify the employee of changes to his or her written statement

If changes are made to terms in the written statement of terms and conditions, the employee must be notified in writing within one month.

• Letter confirming details of changes to written statement
• Written statement of employment particulars

6. Termination of employment is a last resort

If the employer cannot get agreement to a change in the contract, its last resort is to terminate the contract, with proper notice, and offer a new contract with revised terms, to start when the old contract ends.

This way, the employer does not risk being in breach of contract as it is terminating the old contract lawfully.

However, it is at risk of unfair dismissal claims, even from employees who take up the new offer (although they are unlikely to claim).

To defend claims, as with other unfair dismissal claims, the employer must be able to show a fair reason for dismissal and that it acted reasonably.

For example, the employer could show that it had a good business case for the change and followed a proper consultation process, including individual consultation with dissenting employees.

Dismissals in these circumstances are normally deemed to be for "some other substantial reason".

Clearly, the more employees it terminates, the bigger the employer's potential liability.

Employers also need to consider the potential negative impact on employee relations and public opinion.

7. Collective consultation may be required

Although dismissal for refusing to agree to new contract terms tends to fall within "some other substantial reason", the employer may have to follow the collective consultation process used for redundancy dismissals.

This is because the definition of redundancy in the collective consultation provisions is wider than that for redundancy pay and unfair dismissal claims.

If 20 or more employees are to be dismissed at one establishment within 90 days or less for not agreeing to new terms, the employer must consult with the union or employee representatives.

The consultation must last for at least 30 days (for 20 to 99 affected employees) or at least 45 days (for 100 or more affected employees) before the first dismissal takes effect, to avoid the risk of protective awards.

• Duty to consult