We frequently advise employers on how to change the terms of contracts of employment, including how to reduce employees’ hours and pay. The procedure an employer must now follow all changed on 18 July 2024 with the introduction of a statutory Code of Practice on Dismissal and Re-engagement (the Code). The Code was put in place by the previous Government and Labour has vowed to strengthen it and to stop “fire and rehire”– you can read more about the future of “fire and re-hire” here.
This article covers some key points organisations need to consider when looking to change employment contract terms to reduce the risk of employees successfully bringing claims against their business. This could include claims of breach of contract, constructive dismissal and unlawful deduction of wages.
How do you change a contract of employment?
There are three main options when it comes to reducing hours and pay in a contract of employment:
- An employer may have an express contractual right to reduce pay and hours work, otherwise known as ‘lay off’ or ‘short time working’. This has its limitations and could lead to a redundancy situation (please refer to our related article for further information);
- If there is no express right then an employer can seek consent from its employees, subject to consultation obligations; and
- If consent is not forthcoming then an employer could consider consulting with employees, give notice on current terms and conditions of employment and offer to re-engage on new contractual terms (so called “fire and rehire”).
The practice of “fire and rehire” is not currently unlawful, but employers should explore other options first and make every effort to reach agreement with staff on contractual changes and should follow the Code.
Is consent necessary for changing employment contracts?
To vary the terms of an existing contract you should generally look to obtain consent from the employee.
We advise seeking express consent before reducing or changing important contractual terms like pay and hours of work. Employers might try and rely on implied consent, for example, imposing reduced hours or work and/or pay on employees. If the staff do not complain then after a period of time the employer could argue this is ‘implied consent’ to the changes. This is a risky approach with the adverse morale impact of individuals ‘working under protest’ and the prospect of them bringing a claim during employment. This is best avoided, if possible.
Some employment contracts include ‘flexibility clauses’ that purport to allow an employer to change the terms unilaterally i.e. without the employee’s consent. Such clauses are construed narrowly by tribunals and courts and unless drafted very specifically would not give the employer the right to reduce hours or pay. Doing so would risk challenge from employees and potential employment claims. Trying to reduce pay or hours by using a contractual variation clause without any consultation is likely to be looked at unfavourably by an Employment Tribunal.
What is the purpose and effect of the Code?
The Code acknowledges that employers might need to make economic decisions and change strategic direction within the business and in turn this could result in needing to change the contractual terms of employees. The Code therefore does not seek to prohibit changing terms of employment or employers dismissing employees if agreement on the changes cannot be reached. Instead, it puts in place practical guidance to encourage employers to act fairly and reasonably and to place an expectation on employers that they will engage in a meaningful consultation before making any decision to dismiss.
The overriding principles are:
- it is better to seek to resolve disputes through consultation and compromise than to resort to dismissal;
- dismissal should be an option of last resort; and
- an employer should take all reasonable steps to explore alternatives to dismissal and engage in meaningful consultation.
Even if agreement to the proposed changes or a negotiated compromise seems unlikely, the employer should seek resolution in good faith for as long as possible. It is important that the employer genuinely considers points put forward by employees, including any alternative proposals they put forward.
Failure to follow the Code is not a standalone claim but it can increase certain damages awarded.
What does the Code mean in practice?
The full Code can be found here. We have summarised the key steps below.
Providing information
The information you should provide will depend on the circumstances but should be provided as early as possible and will normally include:
- The business reasons and rationale for the proposed changes.
- The anticipated timings for the changes and reasons for the proposed timings.
- Any benefits of the changes.
- The impact on the employer if the changes do not take place.
- Who will be affected by the proposals.
- Any other options that have been considered.
Consultation
It is important that this is not just a ‘box ticking’ exercise. It should:
- Be meaningful and conducted in good faith.
- Be open about the risk that dismissal might follow but never use it as a negotiating threat.
- Genuinely explore alternatives.
- Listen to feedback and seek to understand objections.
Throughout the information and consultation stages you should:
- be mindful of any employees who are absent, for example, on sick or maternity leave; and
- consider carefully your type and style of communication – for example, giving consideration to adapting your communication for employees who do not have English as a first language or have a disability.
What if you cannot reach an agreement?
Dismissal and re-engagement (fire and rehire)
The Code makes clear that “fire and rehire” should only be used as a last resort. An employer needs to take all reasonable steps to explore alternatives to dismissal and carry out consultation in good faith with employees, their representatives and trade unions.
Employees should be warned that dismissal is a possibility if they do not agree to the change, but this should not be done too early in the process, as it could intimidate employees into agreeing. It is also important to note that the Code includes a new recommendation for employers to contact ACAS before dismissal and re-engagement is raised with the workforce to seek advice.
If it becomes clear that agreement cannot be reached the employer should review its business case and plans given the impact of dismissal on the employees. The Code details various factors which should be considered and reviewed:
- The objectives which it is seeking to achieve – are they still relevant and achieved by the proposals.
- The negative consequences of imposing the changes including:
- Risks to the employer’s reputation.
- The damage to relationships with workforce and representatives.
- The potential for strikes and other action.
- The risk of losing valued employees.
- The risk of facing legal claims, including cost and management time to defend those claims).
- Any other reasonable alternatives.
- Whether the proposals could be discriminatory.
- Whether you can stagger the changes, if it isn’t a single change.
- If any employees need particular support – for example, could you give a longer notice period to allow time to re-arrange childcare or in work support from access to work services.
If the decision to dismiss is reached, then you should offer re-engagement straight away and cannot use it as a tool to break continuity of employment.
The Labour Government has confirmed it wants to clamp down on fire and rehire practices, which can lead to rehiring staff on new contracts of employment with less favourable terms or dismissing existing workers and hiring a different workforce on new terms.
Under the new Employment Rights Bill it will become automatically unfair to dismiss an employee for not accepting a contract variation or to enable the employer to recruit another person (or the employee) under new terms of employment, but with substantially the same duties. The limited exception to this will be where there is evidence of financial difficulties that were affecting, or were imminently likely to affect, the organisation’s viability, where the changes were to eliminate, prevent or significantly reduce or mitigate the effects of those financial difficulties and where the employer can demonstrate that the need to make the change in contractual terms was not reasonably avoidable.
The detail of this reform is as yet unknown, but if the proposals go through, in the future employers will need more than the ‘substantial reason’ currently relied on for changing terms and conditions. So watch this space and take advice if you find yourself needing to consider using fire and rehire.
Unilateral imposition of new terms
If you seek to impose the change unilaterally then you risk claims arising for breach of contract, including the possibility that the employee/s might resign in response to the breach and claim constructive unfair dismissal. If employees do not resign, they might work under protest which can create uncertainty and lead to decreased morale in the workplace.
If employees are working under protest an employer might switch paths and move towards dismissal and re-engagement, with a view to removing disengaged employees.
If the change is imposed unilaterally employers should continually review the imposition of the changed terms and may have to seriously consider reverting back to the old terms.
Other points to be aware of when reviewing employment contracts
If the points below apply to you then it would be advisable that you seek legal advice before embarking on any reduction of pay and hours, or other changes to employment contracts. There may be additional legal considerations or consultation obligations to take into account:
- TUPE– if any of your staff have transferred to your business as a result of a business sale or service provision change then scope to make contractual changes is limited;
- Equality Act 2010– if you consider that employees with a particular protected; characteristic (for example, female or older employees) are most impacted by the proposed change to their contract;
- Trade unions and collective agreements could mean that further consultation is required;
- Pensions– if changes to pay and/or hours may impact on pension contributions then there may be additional consultation obligations;
- A sharp reduction in the number of hours or the drastic change in the shift patterns of employees could result in there being a redundancy or short time working situation; and
- If you are making the changes at scale and/or across different work locations then collective consultation could be required – there are rules around what is considered one work ‘establishment’.
If you require advice on changing the terms of contracts of employment, or have concerns about this then please contact our Employment team.