The Chartered Institute of Personnel and Development’s (CIPD) chief economist Dr John Philpott recently wrote an article that appeared on SMT Online warning of an “avalanche” of redundancies over the winter as more and more employers prepare to make job cuts.
How far, though, can employers go when it comes to changing employees’ Terms and Conditions in the current economic climate?
Employers might be thinking of changes that include altering shift patterns or reducing overtime, cutting back on pay or benefits (such as contractual sick pay, holiday pay and private medical insurance) freezing wage levels or perhaps minimising bonuses [The Editor says: The banks might like to consider the latter, given the amounts that have been handed out these past few years]
Some of these changes may be authorised by the employment contract. A slight change in role or hours may still fall within an employee’s job description. There is usually no guarantee of an annual pay rise, or the contract might allow the employer to withdraw a discretionary benefit at any time.
Benefits provided consistently over time
However, it’s worth remembering that even if a benefit is described as non-contractual or discretionary (private medical insurance, bonuses, overtime or the like), the employee may still be entitled to that benefit if it has been provided consistently over time. Even if the employment contract permits some changes (in that it expressly allows the employer to change the employee’s role or benefits), the employer must still act reasonably – for example, by giving employees reasonable prior notice of any changes.
Of course, the safest route is to seek the employee’s agreement to the change. Employees are perhaps more likely to respond positively if the employer is open with them about the business rationale, and can point to some other benefit (such as avoiding the need to make redundancies).
Alternatively, or if employees refuse to agree, employers may try to impose a change unilaterally, arguing that those who continue to work without protest have agreed to the change by implication. The implied agreement test is more likely to be met if the change has an immediate impact – a pay cut, for example – than if the change is not felt for some time (such as cuts made to redundancy pay or pension allowances).
However, employees who object to the changes may resign and claim constructive dismissal. Alternatively, they might refuse to work under the new Terms and Conditions, forcing the employer either to dismiss them or let them continue on their old terms. Perhaps more likely in the current climate is for an employee to agree to work ‘under protest’, and seek damages for any loss they suffer as a result of the change (for instance, the salary lost from a pay cut or reduced hours).
Claims over breach of contract
Employers with cogent business reasons for cutting pay or benefits may perhaps find it safer to dismiss employees and re-engage them on revised Terms and Conditions if their earlier attempts to persuade employees to consent to the change have failed. Provided employees are given proper notice of dismissal, they’ll have no claim for breach of contract.
Conversely, employees may have unfair dismissal claims, but employers who have acted reasonably by consulting with employees about possible alternatives, etc will have a better chance of defending these, particularly if the credit crunch means that the employer can show that jobs would be at risk or the business would suffer if cutbacks aren’t made.
If the cutbacks could lead to 20 or more employees being dismissed, or resigning and claiming constructive dismissal, the employer will have an additional duty to consult Trade Unions – if deemed appropriate – or employee representatives before taking the decision to make the cutbacks.
Battening down the bonus hatches?
Can employers facing financial difficulties cut back on staff bonuses? This question is highlighted by the recent proposals put forward by the Government and the Financial Services Authority to crack down on the city bonus culture following the credit crunch.
The answer depends largely on whether the bonus is contractual. If it is, and the employer has promised to pay a particular bonus, it is difficult to go back on that, even in the current climate. Chancellor Alastair Darling said as much on the BBC earlier this week.
It’s worth remembering that an entitlement to a bonus might be found not only in the employment contract, but also in a verbal promise or an e-mail from a manager (or even through custom and practice whereby the bonus has been paid year on year). In these circumstances, failure to pay is likely to be a breach of contract, affording the employee the right to claim damages or resign and claim constructive dismissal.
On the other hand, if the bonus is discretionary, employers will usually have greater scope for reducing its scope. Provided objectively justified factors are considered and clearly documented, it will be difficult for an employee to challenge the size of a discretionary bonus.
Having clear and objective reasoning for any bonus decision will also help shield against discrimination claims. Nevertheless, employers who anticipate awarding smaller bonuses than in previous years many want to manage staff expectations to avoid disappointment when the bonuses are announced.
Discretionary schemes and nil payments
Employers should remember that even discretionary bonus schemes may not allow nil payments: depending on the bonus criteria and targets, any refusal to pay a bonus at all may be an unreasonable exercise of the employer’s discretion.
Difficulties may also be faced by employers who wish to change their bonus structure part way through the bonus year. The risk here is that employees will have an expectation of being rewarded for their efforts based on the existing structure.
Therefore, it’s much easier to introduce changes at the start of a bonus year. If a change to the bonus scheme affects 20 or more employees, the employer may face the aforementioned additional consultation duty.
Reducing hours: a quick fix?
Reducing the hours that staff work may be another way of cutting salary costs and overheads. That said, unless the employment contract specifically allows for this, it can only be done by agreement with employees.
In the current economic climate, employees who are otherwise facing large-scale redundancies may be prepared to agree to a temporary reduction in hours and pay. Workers at JCB, for example, have reportedly agreed to work a four-day week for the next 13 weeks and take a pay cut in order to prevent the loss of 350 jobs.
Without agreement, forcing employees to work reduced hours and take a pay cut would, almost certainly, give employees the right to resign and claim constructive dismissal. If the reason for the reduction is redundancy, employees may also be entitled to statutory redundancy pay. Employers proposing pay cuts should communicate the business rationale to staff clearly and explore alternatives with them in an effort to ‘get them on side’.
Employers looking for an alternative to cutting hours and pay might be tempted to lay staff off (ie stand them down temporarily without pay) for a period of time. However, a lay-off would breach the employment contract unless the contract allows the employer to lay staff off, which is uncommon. Employees may still be able to claim a statutory redundancy payment where the lay-off continues for an extended period.
Sabbaticals and unpaid leave
Other practical ways of temporarily reducing salary costs may include encouraging staff to take sabbaticals or unpaid leave. Provided any company policies are followed, employers are free to agree with employees what benefits – if any – will continue during unpaid leave, and what rights the employee will have upon their return to work.
Alternatively, employers can seek requests from staff to work flexibly through part-time working, home working or job-sharing. However, employers who actively encourage flexible working requests will then need to have clear and objective grounds for accepting and rejecting them. Staff whose requests are turned down may become de-motivated or even bring discrimination claims if they feel they’ve been treated unfairly.
In addition, agreeing a flexible working request would normally result in a permanent change to working practices (that is, unless the parties involved specifically agree otherwise). Therefore, employers should be clear even if only agreeing to a temporary arrangement.
Anna West and Adam Rice are specialists in employment law at City solicitor Travers Smith
