Changing Terms And Conditions

Changing terms and conditions can sometimes be vital for a business. It also happens more often than you might think. Whenever you give an employee a pay rise or a promotion, you vary their contract. It feels easy because such changes are usually made with the employee's enthusiastic agreement.

But what happens when an employer has pressing business reasons to change contractual terms but the employee doesn’t agree? We covered this in detail in the July 2015 CD, ‘Changing Terms and Conditions’. Two recent cases highlight how employers can come unstuck in trying to change contractual terms unilaterally.

Background

Contractual terms can be changed only if there is a contractual right to do so, or the parties agree to the changes. The safest way to change a contract is by express agreement with the employee. Employers should record any change in writing, both as evidence of the change and to comply with the law (section 4 of the Employment Rights Act 1996 requires employers to confirm certain contractual changes in writing).

However, if changes are detrimental to the employee then getting their agreement can prove challenging. Aside from abandoning the proposed changes, which business needs will rarely allow, the employer is left with two options: to take a punt and impose the new terms unilaterally or terminate the old contract and offer reemployment on the new terms. Neither of these options is without risk.

Imposing new terms

If an employer imposes new terms without agreement, it will be in breach of contract. If the employee does nothing and continues to work without raising clear objections, their conduct might indicate acceptance of the new terms. The longer an employee delays before raising an objection, the more likely it is that a tribunal would find that their actions imply acceptance. The matter is not always that simple, though, and the recent case of Abrahall v Nottingham City Council has put this issue under the microscope.

The Abrahall case

Employees at Nottingham City Council usually received an annual pay rise. In 2011, the Council imposed a two year pay freeze. This meant that employees would not receive their normal increases during this period. The recognised unions objected and even balloted for industrial action but did not get the necessary support. The unions made their objections clear in meetings with the Council but did not raise a formal grievance.

Two years went by before the Council tried to extend the pay freeze in 2013. At that point, employees brought claims for unlawful deductions from wages based on their contractual right to a pay rise. The Court of Appeal had to decide whether the employees had accepted the 2011 pay freeze and waived their right to claim unlawful deductions from wages by continuing to work.

The Court of Appeal decided that the employees had not accepted the pay freeze. They noted that the pay freeze had not been presented to employees as something that they had to accept or decline. Despite working for two years without protest, the trade union had protested on behalf of employees, both at the time of the pay freeze and for several months afterwards. It was also relevant that employees had continued to work when the contractual change was of no benefit to them whatsoever.

The Court of Appeal said that a decision not to bring an immediate court claim or take industrial action was different from accepting new terms. They concluded that the employees’ actions did not show 'unequivocal acceptance' of the change. The employees were therefore entitled to backdated pay equivalent to what they would have earned had their pay not been frozen.

This case came as a surprise to many employers. In previous cases, employees had worked in accordance with new terms for less time and been found to have accepted them. This decision highlights that every case will be decided on its own particular facts. Employers should not mistake inaction for acceptance, especially if an employee has raised an initial objection.

'Stand and sue' and constructive dismissal

Instead of quietly continuing to work, an employee might decide to 'stand and sue' if an employer changes their contracts. The employee would carry on working but make it clear that they object to the change. At the same time, they would seek resolution by bringing tribunal proceedings for unlawful deductions from wages (if the matter is one relating to pay) or breach of contract in the civil courts. If the contractual change is substantial enough, it can also form the basis for a constructive dismissal claim if the change is a repudiatory (very serious) breach of contract.

The recent case of Mostyn v S & P Casuals explored the link between an employer imposing new contractual terms and constructive dismissal. Employees often bring constructive dismissal claims based on a breach of the implied term of trust and confidence. An employer must not behave in a way which damages trust and confidence without 'reasonable and proper cause'. This case looked at whether there can ever be reasonable and proper cause for an employer to impose a pay cut.

Mr Mostyn was employed as a sales executive whose sales figures had suffered in recent years. The company didn’t undertake a formal capability process. Instead, they asked Mr Mostyn to take a ￡20,000 pay cut. He refused but the company said they were going to cut his pay anyway. Mr Mostyn resigned and claimed constructive dismissal.

Mr Mostyn lost his constructive dismissal case at the employment tribunal. The tribunal found that the employer had behaved in a way which could damage trust and confidence. However, they said that the company had reasonable and proper cause for cutting his pay. The tribunal took into consideration Mr Mostyn’s bad sales figures and his lack of action to address this poor performance. Mr Mostyn appealed to the Employment Appeal Tribunal.

The EAT agreed with Mr Mostyn and said he had been constructively dismissed. In cutting Mr Mostyn's pay, the employer had also breached an express term of Mr Mostyn's contract – the term relating to his pay. The question of reasonableness was therefore irrelevant. The EAT said there can never be 'reasonable and proper cause' for breaching the implied term of mutual trust and confidence where the breach consists of a unilateral pay cut.

So, what is the lesson in this case? The employer's issue with Mr Mostyn was his performance. The company should have followed its capability procedure to address Mr Mostyn's performance instead of imposing a pay cut which breached his contractual terms. That process would have resolved the issue one way or the other – either his performance would have improved or he would have been potentially fairly dismissed. The company would have been much better equipped to defend any legal claims.

How do we avoid tripping up?

Employers should use their best efforts to reach agreement with employees on changes to contractual terms. So how can you make employees buy into your plans, even when they are detrimental to them?

Changes to terms are often prompted by financial constraints. If the alternative is potential redundancies, tell your staff. It might make contractual changes seem like a more attractive option. Be creative and look at how you can sweeten a bitter pill. If you need to cut pay, can you be more flexible on core working hours or working from home? Can you phase in any pay cuts to lessen the immediate impact? Be clever about timing too. If you need to change a bonus scheme, can you implement the change at the same time as you do pay reviews so that there is a trade off? Be innovative. Create a clear sales pitch.

And if that fails?

If you cannot secure agreement by any means, the safest way to effect a contractual change is to terminate the old contract and offer to reengage the employee on new terms. This option is not without risk. You must give the correct notice period to avoid wrongful dismissal claims. However, an employee can still bring an unfair dismissal claim even if they carry on working to the new terms. This is because the dismissal is from the original contract.

How can we defend the dismissal?

The test is the same as for any unfair dismissal case. The employer must show a potentially fair reason to dismiss and show that it acted reasonably in dismissing the employee for failing to agree the new terms. Usually, claims of this nature are defended on the basis of 'some other substantial reason' ('SOSR'). For this defence to succeed, the employer must show that they had a sound business reason for the dismissal and provide evidence of that business reason. It doesn't need to be something which saves the business from ruin – just a sound business reason as judged by a reasonable employer, and something which is not trivial.

It is also important to follow a fair procedure, including consulting the employee with a view to getting their agreement to the changes. Although the ACAS code of practice doesn’t technically apply to these type of dismissals, it is worth adopting the procedures set out in the Code to bolster any unfair dismissal defence. It shows you have adopted best practice.

Keep your eye on the prize

Making changes to employment contracts is an essential part of running a business and adapting to its changing needs. With a little forward planning, and an open and honest approach with your staff, you can drive forward those changes whilst also minimising the risk of litigation.

TOP TIPS FOR CHANGING CONTRACTS

• Try to reach agreement with the employee, be creative and 'sell' them your plan;
• Give the employee as much information as you can. Explain why changes are being made and highlight potentially worse alternatives;
• Follow the ACAS code and your own procedures, keep careful notes;
• If dealing with mass contractual changes, remember that you will have specific collective consultation obligations if you dismiss and reengage more than 20 employees within 90 days. This includes the imposition of major contractual changes which leads to resignations so take care;
• Scrutinise your proposal to make sure it doesn’t indirectly disadvantage a particular group based on protected characteristics such as sex, race or age;
•  Don’t fudge performance issues – face them fairly, but head on;
•  Make sure any changes to terms are put in writing, both for clarity and legal compliance.