With the economy in a down turn, many businesses are looking to cut costs, and this includes employment costs. As an alternative to redundancies, some employers are choosing to retain staff but reduce their outlay on remunerating staff by cutting pay, hours or benefits.  

This approach can avoid the problems of low morale and talent loss associated with redundancies. However, it is not a simple process and is likely to entail amending employees’ terms and condition of employment. As such, employers need to be aware of the legal issues involved.  

Identify contractual terms

To change a contractual term of employment without the consent of the employee would amount to a breach of contract. It is therefore vital to identify the terms of the contract. An employee’s terms and conditions of employment may be express, implied or incorporated from other sources.  

Express terms can be agreed orally or in writing, and are commonly found in offer letters, written contracts of employment and written statements of particulars issued under section 1 of the Employment Rights Act 1996. Terms set out in employee handbooks may be contractual if they have the characteristics to make them apt for inclusion in the contract. Terms relating to pay and benefits are more likely to be contractual than working rules or policies.  

A term may be implied into a contract where it is obvious that both parties would have regarded it as a term, or if it is necessary to imply the term in order to give the contract business efficacy. Examples of implied terms are the duty of mutual trust and confidence between employer and employee.  

Provisions contained in collective agreements can also become incorporated into employees’ individual contracts. This is often the case where a trade union negotiates pay and benefits through collective bargaining.  

Flexibility permitted in the contract

Generally, changing an employee’s terms of employment requires consent, either express or implied.  

However, it may be possible to amend a particular term if an employee’s contract explicitly gives the employer this power. For example, a clause may expressly allow an employer to alter an employee’s shift pattern. However, a court will interpret such provisions strictly and any ambiguity in the scope of a flexibility clause will be resolved against the employer if they are seeking to rely on it, particularly if the change is to the employee’s detriment. The implied duty of mutual trust and confidence will require the employer to act reasonably in using any such clause.  

If an employer wishes to rely on a clause which will result in a reduction in an employee’s salary this will not be permitted unless the wording specifically allows such an outcome, because the level of remuneration is such an important part of the employment relationship.  

An employer seeking to reduce an employee’s bonus entitlement or the terms of a bonus scheme should also carefully consider what the relevant clause or scheme permits.  

General flexibility clauses, purporting to give the employer the right to change any term of the contract, are only likely to be useful for implementing minor and/or non-detrimental changes.  

Mutual agreement

The safest way to vary employees’ employment terms (particularly where it is to the employees’ detriment and especially where it concerns pay and benefits) is by agreement, preferably in writing, however there are some situations where even agreed variations may be challenged and detailed advice should be sought.  

Consultation either individually or collectively will be required. Where there is a recognised trade union in the workplace, collective bargaining is commonly used to negotiate such changes. There may be other consultation requirements, depending on individual company arrangements.  

If the change is to the employee’s detriment, an employee should be given some consideration for the change to terms and conditions. This can be through the employee continuing in employment, which if the change has immediate effect may be taken to be implied consent to the change.  

Unilateral changes

If an employer changes a term of employment unilaterally it will be in breach of contract. Should the employee continue to perform his or her side of the contract there is a possibility that he or she will be taken to have impliedly agreed to the variation. However this is a risky strategy.  

The employee could:  

  • work under the new terms under protest and claim for breach of contract or unlawful deductions from wages arising from the changes
  • resign and claim constructive dismissal, if the breach is sufficiently fundamental. Most changes to remuneration would be considered fundamental
  • refuse to work under the new terms (if this is possible, for example if there is a change to hours of work).

Dismissal and re-engagement

If an employee refuses to agree to a change, the employer could terminate the existing contract and offer continued employment under the new terms. Provided the employer has served due notice on the employee (or made a payment in lieu of notice) it will not be liable for a wrongful dismissal claim.  

The employee may, however, have a claim for unfair dismissal resulting from the termination of the existing contract. To avoid this, the employer will have to show a fair reason for the dismissal, which is typically the sweep-up “some other substantial reason” where termination and re-engagement is involved. The employer will also need to show that a fair procedure was followed (this could be the statutory dismissal procedure, where this applies).  

The employer should also follow collective consultation procedures under s.188 Trade Union and Labour Relations (Consolidation) Act 1992 if 20 or more employees in any one establishment will be dismissed and re-engaged within a period of 90 days.  

This method is likely to be administratively burdensome, and may also have a significant impact on industrial relations.  

Finally, employers should ensure that all variations made to terms and conditions are not discriminatory in any way.