We frequently advise employers on how to change the terms of contracts of employment, including how to reduce employees’ hours and pay.
This article covers some key points organisations need to consider when looking to change employment contract terms to reduce the risk of employees successfully bringing claims against their business. This could include claims of breach of contract, constructive dismissal and unlawful deduction of wages.
How do you change a contract of employment?
There are three main options when it comes to reducing hours and pay in a contract of employment:
- An employer may have an express contractual right to reduce pay and hours work, which is known as ‘short time working’. This has its limitations and could lead to a redundancy situation (please refer to our related article for further information);
- If there is no express right then an employer can seek consent from its employees, subject to consultation obligations; and
- If consent is not forthcoming then an employer could consider consulting with employees, give notice on current terms and conditions of employment and offer to re-engage on new contractual terms.
The recent guidance from Acas gives advice that the third option, sometimes referred to as ‘fire and rehire’ should be last resort and has significant legal risks for organisations. This practice is not unlawful, but employers should explore other options first and make every effort to reach agreement with staff on contractual changes.
Is consent necessary for changing employment contracts?
To vary the terms of an existing contract you should generally look to obtain consent from the employee.
We advise seeking express consent before reducing important contractual terms like pay and hours of work. Express consent is where you would ask the employee to confirm verbally or in writing that they agree to the change. We advise that any contractual change is documented in writing.
Employers might try and rely on implied consent, for example, imposing reduced hours or work and/or pay on employees. If the staff do not complain then after a period of time the employer could argue this is ‘implied consent’ to the changes. This is a risky approach with the prospect of potential claims plus individuals ‘working under protest’. This is best avoided, if possible.
Some employment contracts include ‘flexibility clauses’ that purport to allow an employer to change the terms unilaterally i.e. without the employee’s consent. Such clauses are construed narrowly by tribunals and courts and unless drafted very specifically would not give the employer the right to reduce hours or pay. Doing so would risk challenge from employees and potential employment claims. Trying to reduce pay or hours by using a contractual variation clause without any consultation will not be looked at favourably by an Employment Tribunal.
The importance of consultation
Before making the change you should carry out a process of consultation. This is important because if there is a claim from an employee for constructive or unfair dismissal, you want to be able to show that the process was fair.
You will be setting out to employees your objectives and your good business reasons why you need to make the changes. If agreement is not reached then you may need to consider the option of termination on the current terms and conditions of employment and re-engagement on a new contract of employment.
If less than 20 employees are affected then individual consultation should be sufficient.
If the changes to hours and pay will affect 20 or more employees who may refuse to agree to the change voluntarily it will be necessary to commence collective consultation. This would also apply where redundancies or dismissals and re-engagement are being proposed as potential alternatives.
If appropriate union or employee representatives are not already in place, then employee representatives would need to be elected and the Secretary of State notified using a Form HR1. Using the correct collective consultation process is important, otherwise this could result in protective awards being made for up to 90 days gross pay per employee.
Confirming agreement to the change
If your employees agree, ensure you get a copy of the amended terms signed and returned by the employees. Then sign and return a copy on behalf of the employer. This makes it clear that all parties have agreed to the change and it has therefore taken effect.
If an employee fails to return a signed contract then follow up and find out why they haven’t signed it – you need to know if they are working under protest or if there is something else wrong.
If employees don’t agree to change their employment contracts
If an employee does not agree and rejects the proposal then it may be sensible to do another round of consultation with that employee. Please note you can still go ahead and put in place the changes for all of the employees who have agreed.
If employees still refuse then you could consider a ‘fire and hire’ solution. This means dismissing with notice and offering re-engagement on new terms (i.e. reduced hours and pay). This course of action carries the risk of an unfair dismissal claim, but you could choose to do so after minimising the prospect of a successful claim.
If you have properly consulted with the employee (individually and/or collectively if required), tried to get their consent and you have a sound business reason for your contractual changes then you may be reasonably confident in defending such a claim on the basis of some other substantial reason. Tribunals will look at the reasonableness of the decision and take into account if the majority of employees have consented.
Other potential risks for employers of ‘fire and hire’ as identified by Acas include:
- It may be harder for an employer and employee to reach a negotiated solution if the employees feel “threatened” by the employer;
- Expensive discrimination claims from employees;
- Reputational damage that can make it harder for an organisation to recruit employees;
- Damage to trust with the workforce and union relations;
- Losing valued staff if they do not accept the offer of a new contract, or leave due to discontent over the change or way it was made.
What about employees working under protest?
Some employees will decide to work under protest. That is when the employee lets an employer know that they are going to continue working temporarily under the new terms, but they are doing so under protest and do not accept the purported changes to their terms of employment. These employees will not have consented to the change and may then start a grievance process and/or bring an employment claim, which could be to recover their reduction in pay and/or unfair dismissal.
Other points to be aware of when reviewing employment contracts
If these points apply to you below then it would be advisable that you seek legal advice before embarking on reduction of pay and hours, or other changes to employment contracts. There may be additional consultation obligations to take into account:
1. TUPE – if any of your staff have transferred to your business as a result of a business sale or service provision change then scope to make contractual changes is limited;
2. Equality Act 2010 – if you consider that employees with a particular protected characteristic are most impacted by the proposed change to their contract e.g. mostly female or older employees;
3. Trade unions and collective agreements could mean that further consultation is required;
4. Pensions – if changes to pay and/or hours may impact on pension contributions then there may be additional consultation obligations;
5. A sharp reduction in the number of hours or the drastic change in the shift patterns of employees could result in there being a redundancy or short time working situation; and
6. If you are making the changes across different work locations then collective consultation could be required – there are rules around what is considered one work ‘establishment’.
If you require advice on changing the terms of contracts of employment, or have concerns about this then please contact us.