Recent weeks and months have seen a number of news reports of employers implementing pay cuts and freezes and other saving measures affecting their staff and their contractual entitlements.

Both Southampton City Council and Shropshire County Council are reported to have implemented pay cuts by terminating employees’ current contracts and offering to re-engage them on revised (and less favourable) terms – or ‘firing and rehiring’ as it is often known.

Changing terms and conditions of employment (such as reducing working hours and pay) can be a useful alternative to redundancies where there is a good business reason for doing so – but what is the legal basis for doing this and how can you go about achieving it?

Check the contract
If there is a flexibility clause in the contract permitting you to make changes it will tend to fall into one of two categories – general (wide) clauses or specific clauses.

General clauses do not generally help the employer when looking at changing terms and conditions as the wording is not specific enough. These clauses will only allow the employer to make minor changes. However, where the wording is very specific and relates to a contemplated change, such clauses can allow the employer to make that change.

But – even if the wording in the contract is very clear, you still need to follow a proper process (including consultation) before you impose the change. This is because of the implied term of mutual trust and confidence, which is implied into every contract of employment. This implied term means that the parties must not act in such a way as to destroy the relationship of trust and confidence.

So, if you just impose the change, and try to rely on the clear wording, without consultation and without trying to reach agreement, employees are likely to be able to resign and claim constructive unfair dismissal because you have breached that implied term.

Agree the change
The first step is to try and agree the change with the employees, whether there is a specific clause in the contract which helps you or not.

The process usually involves speaking to employees and explaining the proposed change and the rationale for it. Your aim is to obtain their agreement to the change.

If agreement can be reached at this early stage, write to the employees confirming the new arrangements and ask them to sign and return a copy of the letter. It may be necessary for the letter to be signed as a deed – to avoid any arguments about there being a lack of consideration to make the change binding.

If you aren’t able to reach agreement with the employees at this early “informal” stage, you will need to move on to deal with matters through a more formal process.
Formal process

In essence this will involve writing to the employees, explaining the proposed change and the rationale for it, explaining the likely impact on the individual employee and asking whether they are willing to agree to the proposed change or if they want an initial meeting to discuss it in more detail.

If employees do not agree, you will need to meet with them to discuss their concerns.
There may be good reasons for not agreeing to the change. If so, you should explore with them their reasons for not being able or willing to agree – and try to accommodate their concerns as best you can without prejudicing what you are trying to achieve by making the changes.

If some employees still won’t agree, the options are:

  1. Do not make the change for all or some of the employees
  2. Dismiss the ‘objecting’ employees and offer to re-engage them on the new terms
  3. Impose the change.

1. Do not make the change.
Once you have taken the decision to make the change for genuine business reasons, you will usually be unlikely to withdraw because some or all of the employees have not given consent. However, this may depend on whether you are confident with your reasons for wanting to make the change, including any follow-up arising from consultation. It is also likely to depend on the numbers of employees who have objected as this will help to assess the risk of claims. You may decide to impose the change for those who have given consent but not for those who have objected, but be mindful that other employees may have given consent on the basis that everyone else does and they may withdraw consent if they discover that others’ contracts were not varied.

2. Dismiss and offer to re-engage
Strictly speaking, this is the correct legal option where an employer feels it has genuine business reasons for imposing the change. However, it is not without risk to the employer since there is a direct dismissal and it can result in unfair dismissal claims even if the employee accepts the offer of re-engagement.

However, it may be possible to defend any unfair dismissal claim (for the potentially fair reason of ‘some other substantial reason’) provided there is a good business reason for making the change, you have followed a fair procedure and considered issues raised by employees and tried to accommodate individual needs. Please remember that you must act reasonably in relation to both the decision and the process followed.

Also – if you are considering dismissing and re-engaging 20 or more employees in this way, the collective (group) consultation obligations would apply. This involves a complicated process and should be planned carefully from the outset.
An offer of re-engagement will assist an argument to reduce compensation in the event of a successful unfair dismissal claim as the tribunal will assess the employee’s attempts to mitigate loss.

3. Impose the change
The law clearly provides that an employer is unable to unilaterally vary an employee’s contract unless there is clear wording in the contract which allows this. However, even where there is no express power to vary the contract, employers often follow this route as the risk of a claim is usually lower – this is because there has been no ‘direct’ dismissal as with option 1. above and so the employee will have to resign and claim constructive dismissal, refuse to work under the new terms (and thus potentially face disciplinary action which could eventually result in a dismissal or loss of wages) or otherwise work under ‘protest’ and claim unlawful deductions from wages if their earnings reduce.

As such, again this option is not without risk and the employer could well end up facing claims which it will be less equipped to defend owing to its breach of contract. Please also remember that even where the contract expressly reserves the right to make changes, this still needs to be considered in context and you are expected to consult with each employee.