Varying contracts: checklist

Naomi Flynn of Osborne Clarke continues a series of articles on varying contracts of employment with a checklist to help employers comply with their legal obligations when varying contracts. Employers should consult with employees with a view to reaching agreement on changing terms and conditions before implementing changes, or risk being found in breach of contract. 

1. Do not make unilateral changes to contracts. 

An employer that changes the terms of an employee's contract of employment without first obtaining his or her agreement will be in breach of contract. There are significant potential consequences for employers that change terms without agreement. For example, the employee could argue that the breach of contract is fundamental, in which case, provided that he or she has at least one year's continuous service, the employee may bring a claim against the employer for constructive unfair dismissal. Regardless of the employee's length of service, he or she may bring a breach of contract claim, seeking damages. In addition, all existing provisions in the employee's contract of employment (such as restrictive covenants) will fall away, and the employer will no longer be able to rely on them.

2. Weigh up the benefit to the business of making changes against the potential damage to relations with staff.

Aside from the legal implications, it is important for employers to consider the knock-on effect that making detrimental changes to employees' terms and conditions is likely to have on employee relations. Employers need to weigh up the benefit to the business of making changes against the potential detrimental effect on morale, staff retention and performance, before attempting to vary terms.

3. Include a degree of flexibility when drafting contracts.

Employers should make clear in employees' contracts of employment that terms may be revised and amended in future, if, for example, the needs of the business require. It is easier to bring about changes to contractual terms if there is a flexibility clause on which the employer can rely if it wishes to do so. However, flexibility clauses need to be as specific as possible, for employers to be able to rely on them to enforce changes without employees' agreement.

4. Check contract for flexibility in terms.

Before trying to change an employee's contract, the employer should check whether or not there is a provision in the contract that allows it to vary terms (ie a flexibility clause) without the employee's agreement. However, the employer is likely to be able to rely on a flexibility clause to change a contractual term only in the case of a change that is minor and/or not detrimental to the employee.

5. Comply with the implied duty of mutual trust and confidence if exercising flexibility in contracts.

If a contract of employment does include a clause allowing the employer to vary the terms of the contract without the employee's agreement, the employer needs to take care not to breach the implied duty of trust and confidence that it owes to the employee when making the change. The employer must act reasonably when making changes to terms and conditions. For example, if the employer enforces a pay cut without the employee's express consent, it is likely to be in breach of the obligation of trust and confidence because pay is a fundamental aspect of the employment relationship.

6. Agree changes to contracts with employees.

Employers should agree changes to contracts of employment with affected employees before making the relevant changes. Failure to do so will result in the employer being in breach of contract if it imposes the change unilaterally, unless it is relying on an enforceable flexibility clause. The employer must obtain the agreement of each employee, to be able to change his or her contract. If an employee does not agree to a potential change at the outset, the employer can attempt to secure agreement through consultation (see below).

7. Consider tying in detrimental changes with beneficial changes.

A helpful tactic for employers trying to reach agreement to a change in terms is to offer employees an additional benefit as a trade-off in exchange for their agreement to a detrimental change. The beneficial term does not necessarily need to be financial in nature. For example, employees may be prepared to agree to a reduction in pay in exchange for the introduction of flexible working hours.

8. Consult with individual employees about proposed changes.

If employees do not agree to a proposed change at the outset, the employer should consult with them individually, to try to secure their agreement. This involves consulting with affected employees about the nature and scope of the change, the reason for the change, when the change needs to be made, and the likely outcome if the employer does not make the change (for example that it will need to make redundancies in future). The employee should be given the opportunity to give his or her point of view and explain why he or she is unwilling or unable to agree to the change. The employer should try to resolve the matter with the employee and reach agreement amicably. The employer may need to be flexible about imposing the change, where extenuating circumstances justify this (for example where an employee is unable to agree to a change in hours or shift patterns due to caring responsibilities).

Before commencing consultation, the employer should check whether or not there is a collective agreement in place under which it has agreed to carry out consultation in a certain way and within a certain time limit.

9. Do not assume that employees have agreed to changes to terms and conditions and ensure that written agreement is obtained before effecting changes.

It is important that employers obtain written agreement to changes to terms and conditions before bringing about those changes. Employers should not assume that employees have agreed to changes, by their silence on the matter. An employer that obtains written agreement to a change to terms is more likely to be able to defend a claim that it has breached an employee's contract by varying terms.

10. Issue an amendment to the written statement of terms and conditions.

Where there are changes to an employee's terms and conditions of employment, as set out in the written statement of terms issued under s.1 of the Employment Rights Act 1996, the employer must, under s.4, give the employee a written statement containing details of the change to the main statement of terms. This must be done within one month of the change.

11. Where agreement cannot be reached, warn employees of the potential risk of dismissal.

If, following consultation, there are some employees who have not agreed to the proposed change, the employer may be left with no option but to dismiss those employees and re-engage them on new terms to bring about the change. The employer should notify the relevant employees, in writing, that if a voluntary agreement cannot be reached, it may have no option but to dismiss them and offer them re-employment with new terms. Therefore, the employer should emphasise that a voluntary agreement is favourable.

12. Terminate contracts and re-offer employment on new terms.

If it is necessary to dismiss employees and re-engage them on new terms and conditions, the employer should give them written notice of termination (after following a fair dismissal process), and a new contract of employment. Employees must be informed that the new terms will take effect following the expiry of the notice period and that they have a right of appeal against the termination of their existing contracts.

Employers need to be aware that there is a significant risk that dismissal in these circumstances will be unfair. Employers can reduce their liability by ensuring that they follow a fair procedure and exhaust all alternatives to dismissal.

13. Comply with collective consultation provisions if they apply.

If an employer proposes to dismiss 20 or more employees at one establishment within 90 days (to bring about a change to terms), both the collective consultation obligations and the duty to notify the Secretary of State arise (see the Informing and consulting prior to redundancies section of the XpertHR employment law manual for more details). Failure to comply with these obligations can result in significant penalties for employers of up to 90 days' pay per employee and potential criminal liability for failure to notify the Secretary of State. Therefore, if the dismissal of 20 or more employees is a potential outcome for an employer, it is essential that it complies with these obligations from the outset.

Next week's article will be a case study around varying contractual terms, and will be published on 16 August.

Naomi Flynn (naomi.flynn@osborneclarke.com) is an associate with the employment team at Osborne Clarke.

Further information on Osborne Clarke can be accessed at www.osborneclarke.com.