UK: Changing Contracts: The Easy Way Out?

Last Updated: 20 October 2009
Article by Sophie Whitbread

Originally Published in July 2009

Many employers are looking ahead and realising that, in order to ensure their businesses can cope when the economy recovers, they need to retain the staff they have worked so hard to recruit and train. They are therefore considering alternatives to redundancy, such as flexible working, sabbaticals and pay cuts. Whilst this is an attractive alternative approach, employers need to be aware that exploring these sorts of options can involve just as many, if not more, legal pitfalls as undertaking a redundancy exercise. So what should you do to ensure you stay on the right side of the law when looking at creative alternatives to redundancy?

Avoid contractual changes altogether

Look at what you can do without employee consent. Most contracts of employment will not give a right to an annual pay rise. However, before announcing a pay freeze, you should carefully review contracts for any rights to a pay increase, particularly where employees are unionised.

Removing discretionary benefits can also save money. Do be aware though, that, even where gym membership or a subsidised canteen is described as discretionary, it is possible that it has gained contractual status through custom and practice. Removing such a benefit without consultation with employees would therefore be a breach of contract.

Look for volunteers

Find out whether any of your staff want to reduce their working hours, take some additional unpaid holiday or take a sabbatical. Getting employees to volunteer for these sorts of changes will avoid the need for consultation, although you should still ensure that any changes are clearly documented.

Engage in open consultation

If you do want to change an employee's terms and conditions, for example by requiring them to take a pay cut or reduce their working hours, you must have their consent. An open and honest consultation process, which gives genuine opportunities for feedback from employees, will be the most effective way to get employees on side and to minimise claims. The following tips should help you through the process:

  • As any consultation exercise may result in you having to dismiss employees and offer to reengage them on revised terms (see below), you need to be aware that a minimum period of collective consultation with employee representatives or trade unions could be necessary if at least 20 staff are affected.
  • Explain your reasoning to employees openly and emphasise that you are seeking to avoid redundancies by reaching agreement.
  • Get employees to suggest ways of avoiding redundancies – they may come up with innovative solutions to help your business.
  • If you do reach agreement with employees, make sure that the contractual changes you agree fit your business' needs. Consider whether you want any changes to be temporary or permanent.

What to do if you cannot reach agreement

Where agreement cannot be reached, employers will need to consider seriously the possibility of dismissing employees and offering to re-engage them on new terms. This can be risky, but if the consultation process has been carried out properly and if there is plenty of supporting documentation in place, there is no reason why an employer should not be able successfully to defend an unfair dismissal claim. It is therefore essential to keep good notes of meetings and to document properly the reasoning behind business decisions.

If it all goes wrong ....

Failure to consult on changing terms and conditions could at best result in you having to pay back pay cuts or give compensation for lost benefits. At worst, you could face an order to compensate a former employee for lost earnings, which could be significant if the employee finds it difficult to obtain alternative employment. A failure to abide by collective consultation obligations could result in an award of up to 90 days' pay and, on top of all this, any discriminatory decisions made in the course of such a process could lead to further claims.

Changing terms and conditions and working with employees to find creative and flexible solutions to the recession is an attractive option and one that will pay dividends in the future for many businesses who have had the foresight to hang on to loyal employees. However, employers should not see this as an easy alternative to redundancy. It can lead to similar legal claims to a redundancy situation, and in many cases can actually be more onerous. It therefore deserves proper time and consideration from senior leadership and their HR advisers.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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