Varying Contracts of Employment

For most employers, regardless of sector, the new year will bring new challenges as well as new opportunities. We often get back to work in January with a new sense of vigour and a focus on ‘getting the house back in order’. 

At the very basic economic level the past year’s cuts in funding and worsening economic climate has forced employers in all sectors to look at rationalisation. For many this meant redundancies in 2011. 

Most of you will now be familiar with the necessary steps when considering redundancies. Rationalisation is possibly not as familiar territory. (It may start with considerations such as the content and flexibility of contracts of employment and whether a variation in terms such as pay, benefits or working hours may be a viable alternative to redundancy). 

Variation of contracts can be a difficult and complex process, however it is becoming more common within our client base and it is therefore the focus of the HR Clinic this month. 

Where to Start?

Unilateral changes to employment contracts cannot be made without an employee’s consent. It is important to note that contractual terms are binding in law and any change without consent may lead to claims for breach of contract and the potential for claims for constructive dismissal. Employers who vary terms without consent also risk being unable to rely on other contractual terms given that the original contract will no longer be valid if breached.

1. Consider the business case for changing terms

The first step will always be to undertake a robust review of the operation, including assessing income versus costs and full year projections and other strategic reasons for changing, e.g. harmonisation. If the review presents significant concern, produce a number of scenarios for achieving a planned outcome, e.g. freezing overtime and /or premium pay, reducing salaries / pay, reducing working hours / shift working or reducing subsidies and benefits. Against each scenario consider the potential impact on morale, retention of key personnel and productivity levels. Prior to commencing any plans for varying terms, ensure that the business case is clear and justifiable.

2. Do contracts include a flexibility clause?

Check existing contracts for a term known as a ‘flexibility clause’ which allows an employer to vary terms without the employee’s express agreement. It should be noted however that these clauses usually refer to minor changes only or those which are not detrimental to the employee and cannot be relied upon if you are looking to make more significant changes. It is a good idea to include such clauses in any new contracts to make clear from the outset that a level of flexibility is required. In any event the employer must always act reasonably if they are to avoid breaching the implied duty of mutual trust and confidence when making contractual changes.

Obtain Agreement

3. Seek to agree changes

Prepare your proposal for change based on the business case, and taking into account that employers are expected to act reasonably. Changes may be agreed via consultation on an individual basis or in some instances through a collective agreement. The proposed changes should be discussed via consultation with each employee or his or her representatives and agreement obtained in writing. 

There may be an implied or express agreement in place between the employer and employee that relevant changes in terms and conditions can be agreed via a collective agreement with a Trade Union or workforce representative group. This agreement may in some instances document the method and length of the consultation period. If the process impacts on 20 or more employees, it is also wise to refer and comply with the collective redundancy consultation requirements, in the event that the consultation leads to the dismissal and re-engagement of the affected group (see below).

Where the employer has also proposed redundancies as part of the rationalisation process, the consultation can be run in tandem, covering both proposed contractual changes and redundancy. When consulting about contractual change it is often a smoother process if detrimental changes can be offset in some way, or tied in with beneficial changes, for example introducing more flexible working or increasing annual leave. 

Where agreement has been reached on contractual change, and the change concerns particulars which must be included in the written statement of terms and conditions, the employer should give written notification of the change to the employee, within a month of the change taking effect.

If Agreement Cannot be Reached

4. Dismissal and re-engagement on new terms

If, following consultation, there are some employees who have not agreed to the proposed change, the employer may consider the option to dismiss those employees and re-engage them on new terms to bring about the change. As is the case with collective redundancies, you must inform DEL of plans to dismiss 20 or more employees, even if the plan is to re-engage them. 

This should be a final resort where there is a compelling business case to do so. The employees should be notified, in writing, that if a voluntary agreement cannot be reached, you may have no option but to dismiss them with reasonable notice as specified in the employee’s contract or the minimum statutory notice period and offer them re-employment with new terms. In this case, the dismissal should follow fair procedure as outlined in the LRA code of practice, including the right to appeal. There are a few situations involving groups of employees where all aspects of the statutory procedures do not have to be used.

This can be a complex and high-risk process depending on the nature of the changes and the employee response. I have attempted to introduce the high-level steps and considerations. Detailed planning and assessment of the risks before starting can minimise the potential issues along the way. Companies that are planning to implement contractual changes may find it useful to contact us for detailed advice.