Change employment contract terms
- Alex Kleanthous
- Updated: Fri, 27th Jan 2017
If employers change an employment contract’s terms, whether expressly or implicitly, they risk an unenforceable contract or a claim for breach of contract.
We enable employers to successfully alter employment terms, and defeat any resulting employment law claims.
Change employment contract terms services include:
- Why change employment contract terms
- Change employment contract terms: common mistakes;
- Employment contract changed without employee’s consent;
- Change employment contract with employee’s consent;
- How to change employment terms;
- Change bonus terms;
- Change employment terms: custom & practice; and
- Employment contract term change: track record.
Why change employment contract terms
Instead of redundancies, employers could change working conditions e.g. working hours, reduce benefits such as bonuses, sick pay, private medical/life assurance or pension entitlement.
Such changes probably constitute changes to employees’ existing contractual terms. It doesn’t matter if the employment contract doesn’t specify the condition or benefit. For example, the provision of a subsidised staff canteen could become a contractual entitlement over time.
Generally, material contract changes must be agreed to be enforceable. If employers want significant cost savings, then they require substantive changes. The greater the change, the less likely employees will agree.
Employers can impose change where there is a reasonable commercial rationale. With careful handling, e.g. consultation, employers won’t incur significant legal liability. Unfortunately, employers still risk the departure of staff they want to keep.
One solution is to draft contracts that allow as much flexibility as possible in respect of working conditions and benefits. Employers should have the discretion to make specific changes to particular working conditions and benefits.
However, a general overarching right is probably ineffective, except for minor changes. Carefully drafted provisions that give the employer discretion to make changes are subject to limitations. Exercising such clauses creates legal disputes.
Instead employers should focus on whether the benefits are provided at all.
Employers often provide benefits in excess of the minimum statutory entitlements, e.g. contractual sick pay, holiday, maternity pay and pension entitlement. Usually employers provide these benefits to all employees, after a qualifying period of employment.
Employers could make such entitlements performance based. Employers gain significant cost-savings, if only the better performers receive generous benefits. However, it may be difficult to move to this position.
Change employment contract terms: common mistakes
Employers often fail to appreciate three points:
- Unilateral changes, however justifiable, may be a breach of contract;
- A Tribunal or Court may not uphold contract clauses that purportedly grant you discretion;
- Day-to-day conduct may alter an employment contract’s terms.
Employment contract changed without employee’s consent
If an employer changes an employee’s employment contract, without their express or implied consent, this is a:
- Breach of contract; and
- Repudiatory breach, possibly.
Employees have four options:
1. Work under the new employment terms in protest
Sometimes termed standing & suing. The employee chooses to work under the new terms, but protests, i.e. makes clear they do not accept the terms. Then the employee:
- Tries the new arrangements, for a reasonable period before, perhaps, objecting;
- Has an ongoing claim for breach of contract;
- Can claim for any financial loss;
- Can claim for losses going back six years. Potentially, a significant liability.
2. Claim constructive dismissal & breach of contract
An employee can first resign, then claim constructive dismissal. However, the breach of contract must be a fundamental or repudiatory breach, i.e. goes to the root of the contract. Examples include lower pay or a significant change to the workplace. Then the employee could:
- Accept the breach;
- Claim constructive dismissal.
- Claim for breach of contract and, if eligible, unfair dismissal
3. Refuse to work under new employment contract terms
The employee could refuse to accept the new terms and continue to work under the old terms. This situation is different to where an employee works under the new terms, but clearly protests.
Employers have to manage the obstructive employee. Often, the result is low staff morale. Sometimes employers dismiss the employee, restore order, and implement the change.
Risks when dismiss employees who work under old terms
Dismiss an obstructive employee, and the employer risks unfair and even wrongful dismissal claims. i.e. it is a also a breach of contract if an employer dismisses without notice.
However, employees can only remain in employment, and refuse to work under the new terms, if the terms just affect day-to-day working arrangements, e.g. job duties or working hours.
Pay, which the employer firmly controls, doesn’t count.
4. Accept the change
Alternatively, the employee might do none of the above, and accept the change.
Change employment contract with employee’s consent
Ideally, employers seek voluntary agreement. This avoids forced changes, compulsory redundancies and litigation.
By voluntary agreement
The law stops employers using their greater bargaining position to impose contractual variations on employees against their will. Employers should obtain employee’s voluntary agreement to alter employment terms for,e.g.:
- Working hours;
- Working practices;
- Combined, possibly, with voluntary redundancies.
Employment contracts are no exception to the rule that contracts may only be changed:
- In accordance with its terms; or
- If all parties agree.
We manage mediation processes, which often succeed in these situations. What’s more, employers who offer or attend mediation reduce their risk of losing at an Employment Tribunal or Court.
Employment contract authorises change
Employers don’t have to vary the employment contract to implement every change in terms or relationship. It is much easier for employers if the desired change:
- Doesn’t affect the employment contract;
- The employment contract authorises the change; which
- Requires careful drafting of the original contract.
How to change employment terms
Employers can more easily change employment terms if, e.g. they:
Change policies & procedures
The law considers that e.g. staff handbooks, policies and procedures are separate from the employment contract. Employers can usually change these without breaching the employment contract.
Nevertheless, putting everything in policies rather than the employment contract won’t work. In employment law, it’s the substance, not the label, that counts.
Define amendable policies
Employment law evolves. Amendable policies enable employers to manage, e.g.:
- Restrictive employment covenants
- Internet and social media use;
- Bribery and corruption.
We also use non-contractual provisions to address benefits and policies that exceed the statutory minimum, e.g. a staff canteen, or the grievance policy
Problems with contractual policies
Some policies become contractual. Just expressly stating that certain benefits or polices are non-contractual doesn’t work. Employers may breach the implied terms of trust and confidence when:
- Removing a benefit;
- Adapting a policy to the employees’ detriment.
If, when viewed objectively:
- The employer’s conduct is calculated, or
- Likely to seriously damage the degree of trust and confidence that:
- An employee is reasonably entitled to have in the employer;
Then employers could face a constructive unfair dismissal claim.
Discretionary clauses that allow changes to employment terms
If the contract’s terms authorise the change, it is possible to:
- Interpret a term sufficiently broadly to accommodate the change;
- Have an express right to change the employment relationship covered by the clause,
- Termed a specific flexibility clause;
- Have a general power to vary employment contract’s terms,
- Called a general flexibility clause.
Fair and reasonable alterations to employment terms
However, Employment Tribunals or Courts may not consider some contract terms fair or reasonable. Employment Tribunals or courts often interfere and/or overrule express terms.
Note that the Tribunal or Court resolves any ambiguous term against the party relying on it. Often this issue arises with job title and job description changes. Employers of use these changes to implement cost reductions and flexibility.
Specific flexibility clauses permitting the altering of employment terms
Employers use specific flexibility clauses to reserve the right to makes changes without obtaining employees’ acceptance. Specific flexibility clauses commonly arise in:
- Workplace mobility clauses;
- Job content;
- Hours of work.
The law restricts employers’ ability to make unilateral changes. Tribunals and courts give a restrictive interpretation to flexibility clauses. The employment contract’s implied terms often curtail express flexibility clauses.
Narrow interpretation for employers
Specific flexibility clauses are narrowly interpreted. Any ambiguity or laxity in expression will be decided in the employee’s favour.
General flexibility clauses
Employers may write employment contracts to grant them carte blanche to change any contract term. Courts and tribunals rarely enforce such clauses, as they evade the general rule that changes must be mutually agreed.
In practice, employers can rely on general flexibility clauses only for reasonable or minor administrative changes that are not detrimental to the employee. For example, to change healthcare provider, where a specific provider is stated in the contract and the new provider delivers identical benefits.
Change bonus terms
Bonuses are a significant part of the remuneration package, frequently exceeding base salary. The issues are complex and numerous.
Key questions when contemplating an alteration to bonus terms
A bonus may be a contractual entitlement, or at the employer’s discretion. There are two questions for employers:
- Can you cut the bonuses?
- Do you want to cut bonuses?
Contractual entitlement to a bonus
For a contractual entitlement the bonus may be fixed or calculable, e.g. a percentage of a sum, such as the increase in value of a fund over the course of a year.
Employees are entitled to the bonus if there is a contractual entitlement to a fixed or calculable sum. Usually it isn’t that simple, as entitlement to a bonus and the bonus amount, is at the employer’s discretion.
Use of discretion by employers
The employer is not entitled to use its discretion and declare a “zero bonus”. Although, employers are not specifically required to act “reasonably” when exercising discretion, the employer cannot destroy the implied term of trust and confidence between him and the employee.
Hence employers cannot exercise discretion in bad faith, arbitrarily, capriciously or irrationally. It is prudent to ensure that bonus criteria are transparent and easy to ascertain.
For example, say it is clear either as an express term, or through custom and practice, that the bonus is based on the employer’s performance over the last 12 months. Then it is not possible to cut the bonus because you anticipate poor performance over the next 12 months.
Trap for employers altering bonus terms
Many employers are caught out when relying on an express discretionary bonus clause. Employees have successfully argued that custom and practice over many years has, in reality, resulted in a more narrowly constrained discretion than the employer believed to be the case.
Whether employers can make savings by cutting bonuses depends on the employment contracts’ express terms, and the employer’s custom and practice.
Alter employment terms: custom & practice
Employers don’t always instigate employment contract changes. Often employees argue:
- Their job role or working conditions have changed from the contract’s express written terms;
- That in reality, they’ve been doing a different role to that listed in the contract;
- That an initial informal period of partial home working has become a contractual right.
Watch point for employers where custom and practice is in play
As an employer you should be wary. Custom and practice may be considered to amount to contract alterations. You can prevent such issues occurring by making clear that any periods of change to the strict contractual position does not constitute an agreement to vary going forward. Careful and ongoing appraisal of these issues is important.
Employment contract term change: track record
We work with employers to successfully help them avoid employment law claims. Some of our recent instructions include:
Replaced contractual bonus entitlement
Altered senior executive employment contract and guided the employer through the process. The employer successfully replaced their contractual bonus entitlement with a separate discretionary scheme.
Reversed contract changed by conduct
Re-negotiated employee’s employment contract. The original contract permitted the employee to work from home one day a week. The employee gradually increased this to every day. This continued for over a year.
The employer had unwittingly accepted the employee’s conduct. Thus the employer accepted a change to the employee’s employment contract. We enabled our client to renegotiate and execute a new employment contract, that limited working from home.
Employment contract maintenance
Draft and maintain client’s employment contracts. Typically we alter discretionary clauses, employee policy and bonus scheme documents.
It is quite possible to alter employment contracts. Admittedly, it is a minefield. We take the required care, attend to the detail, tell you how to manage the process, what to say and when.
Alex is a sharp and tenacious problem-solver with many years of experience in employment law. For advice on changes to an employment contract or a dispute which has already arisen please do get in touch.