Rishi Sunak announced on 4 May 2020 that the Government is going to start winding down the furlough scheme as the economy begins to unlock. Unsurprisingly, paying the salaries of 6.3 million workers is costing the Government a lot of money. Businesses will need to now consider whether, after the furlough scheme ends, they need to make redundancies and/or ask employees to reduce their hours/pay.

Here are some key points businesses 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:

  1. 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);
  2. If there is no express right then an employer can seek consent from its employees, subject to consultation obligations; and
  3. 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.

Is consent necessary?

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 rely on this as ‘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 appreciated by the 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 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 an employee doesn’t agree to a change to their contract

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. The Tribunals will look at the reasonableness of the decision and take into account if the majority of employees have consented.

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

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. 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 i.e. 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 any of these apply to your business and you have concerns then please get in touch. For more information on preparing your business for the next stage, please also consider reading our ‘after lockdown’ guide, in which we offer some fixed price packages for redundancy and restructuring.