In difficult economic times employers will inevitably look to reduce the costs of employment. However, achieving this in practice can be fraught with legal, practical and also emotive issues. In some circumstances contractual change may be achieved by employees agreeing changes to their contracts, or some flexibility may be built in to the contracts themselves. If not, however, an employer cannot unilaterally change an employee’s contract without risking breach of contract or even claims of dismissal or discrimination.

One option for employers facing a stale-mate situation will be to engage in consultation over proposed changes, where possible seeking employee agreement, but to then terminate existing contracts in accordance with their notice provisions and offer new, revised terms in their place. In the recent case of Slade v TNT [EAT/0113/11], a case in which Eversheds advised TNT and was involved from the outset, the actions of an employer embarking on this course were considered by the Employment Appeal Tribunal. The conclusions of the EAT provide useful insight for employers into the careful balance involved in such actions but also the relevance of broader commercial interests, particularly against the current financial backdrop.

Background

In the Slade case, the employer operated a contractual bonus scheme which it wished to reduce. Negotiations with its employees regarding a revised scheme failed to reach agreement with a sizeable minority. Eventually, the employer gave formal notice to the staff, with a view to lawfully terminating their existing contracts but, at the same time, offering new contracts excluding the bonus provision. A number of employees claimed unfair dismissal. The EAT considered the lawfulness and reasonableness of the employers’ actions in the context of ensuing unfair dismissal claims.

Termination of the employment contracts on notice was clearly, in legal terms, a “dismissal”. The questions for the employment tribunal, therefore, were whether one of statutory reasons for dismissal applied (in this case the relevant reason being “some other substantial reason”) and whether the dismissals were fair in all the circumstances including the procedure adopted.

Reasonableness

The tribunal was satisfied that potentially fair reason for dismissal was established (here, SOSR). Section 98(4) Employment Rights Act 1996, then requires it to consider fairness, dependent upon “whether in the circumstances (including the size and administrative resources of the employer’s undertaking) the employer acted reasonably or unreasonably in treating [that reason] as sufficient reason for dismissing the employee” and “in accordance with equity and the substantial merits of the case”.

In addressing the overall fairness of the employers actions, the tribunal acknowledged the importance of balancing the advantages to the business of the employer’s course against the effects on the employees. The main focus nonetheless had to be the reasonableness of the employer. Having satisfied itself that the reason for the dismissals had been substantial and one which either was (or the business believed to be) sound and that the employer had endeavoured to negotiate with the staff and highlighted the implications of failure to agree, the ET concluded the dismissals were fair in all the circumstances. The tribunal also made clear that they were not of the view the employees had acted unreasonably in refusing to accept the employers’ proposals, merely that this could not be the focus of their considerations.

Withdrawal of settlement offers not “unfair”

A novel and somewhat controversial issue also arose in the Slade case. The employer, having acknowledged the loss in which the change resulted to the employees, had offered to “buy out” the loss of bonus in the course of settlement negotiations. However, the employer did not pay an equivalent sum to those who had rejected the original offer when it terminated their contracts.

The employees argued that, in the context of the overall fairness, it cannot have been equitable for the employer, in conducting a balance between the benefit to the business of the contractual change and the adverse effect on the workforce, to withdraw the “buy out” lump sum when offering re-employment following termination. If it had been deemed appropriate to mitigate the impact of the change through negotiated settlement, it must similarly be reasonable to offer such mitigation on imposing the change.

The tribunal and EAT rejected this argument. The employer was entitled to take the view that a sum it had offered to secure an agreement, in this case removing the risk of litigation, need not be offered where no agreement was reached and no consequential benefit resulted for the employer, they found. To conclude otherwise and to require a “reasonable” employer to honour a settlement offer in these circumstances would furthermore inhibit any sensible negotiation between employer and employee.

Conclusion

Enforced contractual change through termination of employment and offer of re-engagement are not steps which employers enter in to lightly. As the Slade case demonstrates, however, tribunals are prepared to recognise the commercial realities and difficulties faced by the employer. Tribunals will certainly examine the reasoning of the employer, the way in which communications with the employees proceed and the course which employers then take in imposing the changes. None of these are to the exclusion of the effect upon the employees but it is clear that that this is but one element of the balancing exercise involved in assessing reasonableness on the part of the employer.

Notwithstanding this case, employers must not forget that different circumstances will give rise to different issues and considerations. In particular it will be important to take care following a TUPE transfer, where opportunity for contractual change is limited if connected with the transfer. It can also be difficult to determine whether changes to a job are effectively a redundancy situation or merely changes in terms and conditions of employment. As a final word of caution, it is important to remember that , if an employer wants to change the terms and conditions of 20 or more employees it may be necessary to consult with employee representatives and notify the Secretary of State, as proved to be the case in Slade.