The In-House Lawyer

It is generally accepted that an employer may not unilaterally vary terms and conditions (T&Cs) of employment. In difficult economic circumstances, this presents employers with a challenge: how to impose changes on an existing workforce while limiting the risk of multiple claims, often backed by union support. Removing favourable benefits or imposing a global pay cut will damage employee morale, but these measures may be the only alternative to mass redundancies, or even failure of the business altogether. 


three typical approaches


Traditionally, employers face the following options when implementing detrimental changes to T&Cs.


Obtaining express agreement


This is the best way to go about changing T&Cs since it avoids any potential claim for wrongful or unfair dismissal, or breach of contract. Express agreement can be given orally or in writing, but written consent is preferable, particularly if the change involves a reduction in remuneration or benefits. A period of consultation is normally necessary to explain what changes are proposed, why they are necessary and how they will affect employees. In practice, it is much easier to obtain consent if some incentive is offered, such as a one-off bonus payment or an additional day’s holiday. 


The difficulty is that it would be very rare for all affected employees to agree. Therefore, to achieve a fair outcome with all employees on the new terms, the employer may have to proceed to one of the other methods to conclude the process.


Terminating employment and offering re-engagement


This will only be necessary if some or all of the employees do not accept the changes voluntarily. Provided that the employer gives notice of termination in accordance with the employees’ contracts of employment, the employees will have no claim for wrongful dismissal. They may have claims for unfair dismissal, but as long as there are sound business reasons for the change, the dismissals should be potentially fair for ‘some other substantial reason’. It will also be necessary to demonstrate that a fair procedure was followed in relation to the dismissal. An Employment Tribunal will consider: 


• whether the employer consulted employees with a view to obtaining agreement; 

• the reasons why the employees rejected the change; and 

• whether the majority accepted.


If the dismissals affect 20 or more employees, the employer must comply with all the collective consultation requirements of the Trade Union and Labour Relations (Consolidation) Act (TULRCA) 1992, including consulting with elected employee representatives for the prescribed time periods before notice of termination is given and notifying the Secretary of State of the proposed dismissals. Failure to comply with these obligations may result in the employer being ordered to pay up to 90 days’ actual pay to each affected employee.


Dismissing the entire workforce is not something that is to be undertaken lightly, as it will be very unpopular and may cause reputational damage to the employer. The need for collective consultation can result in a protracted, labour-intensive process. The importance of giving contractual notice of the dismissals may also cause a practical issue: employees will have different notice periods and so the dismissals and re-engagements will take effect at different times.


Imposing the changes without consent


An employer may decide to impose an adverse change without consent, hoping that most employees will continue to work without objection and therefore eventually be deemed to accept the change by implication. This approach is more likely to be effective if there is an immediate practical effect on the employee (such as a pay cut).


Employees in this situation can:


• comply with the new terms but work ‘under protest’, claiming damages for breach of contract or unauthorised deduction from wages;

• if the change is fundamental, such as a drastic pay cut, resign and bring a claim for constructive unfair dismissal;

• in certain circumstances, for example where changes have been made to working hours or shift patterns, simply refuse to work under the new terms; or

• accept the changes by conduct, thereby eventually waiving the right to bring a claim for breach of contract.


If an employee chooses to remain in employment under protest and brings a damages claim, such a claim would need to be brought in the civil courts as the Employment Tribunal’s power to deal with a breach of contract claims is limited to those that arise on the termination of employment. Employees would seek damages for any financial losses flowing from the breach, a declaration that the change was a breach of contract or an injunction restraining the employer from acting in breach.


This approach bears much similarity with the termination and re-engagement method. Indeed, it has been known for an actual dismissal to be inferred in circumstances where a fundamental change is imposed without consent. In Hogg v Dover College [1990] a teacher suffering from ill health was told that it was impossible for him to continue as head of department and was offered fewer teaching periods at a significantly reduced salary. The teacher worked on the new basis, but brought a claim for unfair dismissal. The Employment Appeal Tribunal (EAT) found that the old contract had actually come to an end as a result of the employer’s actions and allowed the teacher to bring a claim for unfair dismissal. 


Alternative Approach: Relying on a Contractual Variation Clause


As an alternative to the approaches already described, employers may try to impose contractual changes by invoking the variation clause typically found in contracts of employment, which authorises reasonable changes to the T&Cs on giving notice to employees. Relying on variation clauses to make significant or detrimental changes is generally thought to be risky, because the clauses are there to allow for minor or administrative changes. 


Bateman & ors v Asda Stores Ltd [2010] 


In Bateman, Asda successfully argued that a variation clause in its staff handbook provided general authorisation to change employees’ T&Cs. The clause went further than most variation clauses, allowing the entire handbook to be replaced according to the changing needs of the business or to comply with new legislation. Asda relied on the clause to justify changes to the pay structure that had been imposed on all staff. 


A new pay structure for hourly paid employees (known as the ‘top rate’) was introduced for new joiners. Under the old system, employees received a lower rate of basic pay, with premiums applied for any work out of core hours. The new structure had a higher base pay and no premiums, except for night work. Existing employees could transfer voluntarily. By late 2006 only 14% (some 18,000 staff) remained on the old structure. Of those, 9,300 employees agreed to transfer to the new structure. Asda wanted to employ its entire staff on the top rate and imposed the change on the remaining 8,700 (about 7% of the total workforce) who had not consented. Most staff were better off on the top rate and those who were not were given a transitional supplement over five to six years, to make up any shortfall.


Asda faced multiple claims for unauthorised deduction from wages, breach of contract and in some cases unfair dismissal. It argued that it was entitled to impose new T&Cs because of this clause in its staff handbook: 


‘The company reserves the right to review, revise, amend or replace the content of this handbook, and introduce new policies from time to time to reflect the changing needs of the business and to comply with new legislation.’ 


The T&Cs in the handbook were incorporated into the claimants’ contracts of employment. 


At first instance, the Employment Tribunal found that the introduction of the new regime was a significant change affecting how much employees would be paid for their work at particular times of the day and night, as well as removing certain benefits. As such, Asda was required to obtain the employees’ consent. The Employment Tribunal accepted that an employer may reserve to itself the contractual power to vary T&Cs in a contract of employment without consent, under the principles established in Wandsworth London Borough Council v D’Silva & anor [1997]:


‘The general position is that contracts of employment can only be varied by agreement. However, in the employment field, an employer, or for that matter an employee, can reserve the ability to change a particular aspect of the contract unilaterally by notifying the other party as part of the contract that this is the situation. However, clear language is required to reserve to one party an unusual power of this sort. In addition, the court is unlikely to favour an interpretation which does more than enable a party to vary contractual provisions with which that party is required to comply.’ (Lord Woolf in Wandsworth.)


Applying this principle to the facts, the Employment Tribunal held that Asda:


‘Acted in this case in pursuance of a clear and unambiguous power to vary contractual terms. The Tribunal has considered carefully how the clause should be interpreted, in view of its wide-ranging effect, but it is entirely unambiguous. However unusual and broad this power was, and however unfettered, the Tribunal has no doubt that it permitted the respondent as a matter of contract to do what it did.’


The Employment Tribunal agreed with Asda’s motivation and concluded that the reason for the amendment was a response to ‘the changing needs of the business’. It was also relevant that the claimants did not argue that Asda had acted capriciously or arbitrarily, or in any way that breached the implied term of trust and confidence, in imposing the new regime. This was largely due to the intensive consultation exercise over eight months. Asda had arranged an internal campaign on the benefits of the top rate system, had engaged in collective consultation with the union and its own staff consultation body, and had scheduled one-to-one meetings with all of the affected employees.


At the EAT, the claimants argued that none of the employees of Asda could have expected the clause to permit the supermarket the unilateral right to reduce their pay or change their hours of work without notice. The claimants argued that Asda should have explained the full effect of the variation clause to the employees, many of whom were not well-educated. That argument failed, but only because of the claimants’ concession at first instance that Asda had not acted capriciously in imposing the change. 


The EAT upheld the Employment Tribunal’s decision, finding that the words of the staff handbook must be construed objectively, and that the particular words in the staff handbook were indeed clear and unambiguous. 


Variation clauses:


• must be clear and unambiguous;

• the employer must comply with the term;

• the employer must not act arbitrarily or capriciously in doing so; and

• can only be relied on to the extent that there is no breach of the implied term of trust and confidence in the way changes are effected.


If the above criteria are met, the employer may implement changes to T&Cs, including those relating to remuneration. However, any significant pay reductions, imposed unilaterally, are likely to be construed as a breach of the implied term of trust and confidence.


The importance of not breaching the implied term of trust and confidence cannot be overstated. This usually involves: 


1. having in place and communicating cogent business reasons for the change; and 

2. engaging in an effective, comprehensive consultation procedure, which is both collective and individual. 


The collective consultation procedure should follow the model of TULRCA 1992, even though no dismissals are contemplated. This will militate against protective awards being imposed if unfair dismissal claims arise at any stage of the process. 


Malone & ors v British Airways plc [2010]


Bateman was discussed in Malone, which was brought about by 5,000 employees of British Airways (BA) after the airline unilaterally reduced the number of cabin crew on certain flights to save costs. Malone centred on whether collective agreements made between BA and the unions were incorporated into the employees’ contracts of employment. However, BA argued in the alternative that it had the power to make unilateral variations to T&Cs of employment for most of the claimants due to an express variation clause included in its contracts since 1994. The High Court upheld this argument based on Wandsworth but the claimants appealed, arguing that Bateman had been wrongly decided by the EAT. The Court of Appeal declined to address this issue, finding that it was not necessary to do so, and so Bateman remains good case law.


Conclusion


Bateman is regarded as a controversial decision and could be misinterpreted by employers as providing carte blanche for unilateral changes to T&Cs. In reality, Bateman has not changed the law but simply clarifies what can be done if an employer has the benefit of a clear and unambiguous variation clause. Employers should ensure that such clauses in standard employment contracts are as clear and precise as possible, allowing the argument to be run in future that any reasonable changes have been authorised.


Employers should keep in mind the judgment of the Court of Appeal in Wandsworth, which held that even where there is a clear right to vary, if the unilateral change could produce an unreasonable result, the courts in construing the contract would seek to avoid such a result. 


The real implication of the decision is that in any situation involving imposing significant adverse changes, the most important consideration is ensuring that the implied term of trust and confidence is not breached. This generally means following a robust consultation process and having sound business reasons for the change. 


By Daniel Myers, solicitor, Mishcon de Reya.


E-mail: daniel.myers@mishcon.com.