Changing terms and conditions: A viable alternative to redundancy

There is no doubt that we are in difficult economic times and it does not seem like that will change anytime soon.  Individuals and businesses are feeling financial pressure and, for businesses, this often means having to consider redundancies or other ways in which cost savings can be made. 

An alternative to redundancy is changing terms and conditions. Whilst it may not be an alternative that many businesses wish to take, if it keeps staff in employment, it is an option which may be worth considering.  

What changes could be made? 

The most obvious change to existing terms and conditions that employers may consider is pay cuts, or a reduction in contractual benefits offered to staff. A reduction in salary is likely to be more palatable if it is accompanied by a reduction in working days or hours, so businesses could consider whether this is an option. 

Changes can be temporary, perhaps subject to review in three or four months’ time, or permanent. 

If the outcome of a review is to maintain the change, whether on a further temporary basis or permanently, businesses need to seek the employee’s agreement to the change being maintained. 

It is worth bearing in mind that if changes are made on a permanent basis and the business wishes to reverse the change, it may be difficult for employees to revert, for example if they have given up a day’s childcare in response to a request to reduce their number of working days.   

It is important to ensure employees are treated fairly in respect of changes to terms to avoid claims for discrimination and equal pay.  

Consequential impact of changes 

A reduction in pay will be likely to have a knock-on effect on other employment terms, both contractual and non-contractual, such as pension, life assurance, bonuses, commission arrangements, redundancy pay and notice pay. A reduction in working days or hours may also have an impact on holiday entitlement. 

Businesses can consider whether or not safeguards could be agreed to mitigate the consequential impact. For example, could the original salary be used for the calculation of any pension contributions or redundancy pay? 

It is important to be ready to discuss the impact of the changes with employees. 

Does the employment contract permit the change? 

Once the decision has been made as to what changes are required, the next step is to consider whether the employees’ contracts permit the change. A note of caution here – many contracts contain a clause which, on the face of it, will allow the employer to make changes to the contract without the employee’s consent. It is unlikely, however, that unilateral changes of such significance as pay cuts or changes to working hours will be found to be effective by the courts. The more fundamental the change proposed, the more scrutiny courts will apply to the clause in terms of considering whether it permits the change the employer is trying to make. 

Unless the employment contract provides for short-time working, which is rare, there is no automatic right to impose a reduction in hours.  

If employees’ contracts do not permit changes to terms and conditions, it is best to get their express written consent, given voluntarily, to the changes. Failure to obtain this consent can lead to claims including, amongst other potential claims, unlawful deduction from wages and constructive unfair dismissal (subject to qualifying service) for which the cap on compensation is the lower of a year’s pay or the applicable statutory limit (this is reviewed annually and is currently £93,878 (up to 5 April 2023)). 

Notification of proposed changes 

Employees will need to be notified of the proposed changes. This could be done in person or remotely via Teams or similar. It could also be done by email, but a live meeting or presentation would be preferable.   

The notification should not only set out the proposed changes but also explain the rationale. Whilst the reason for needing to cut pay or make other changes may seem obvious in the current climate, employees will want to know why the changes are necessary for the particular business. Is it that pay cuts (and/or adjusted work patterns) now will hopefully mean avoiding redundancies in the future? 

Employees will be more understanding and more likely to agree to the changes if they are part of the conversation. 

Consultation – individual and collective 

Individual consultation with affected employees is advisable and collective consultation may be necessary depending on the likelihood that the business may need to terminate employees’ employment and offer re-engagement on the new terms. It is important to explain the consequences if employees do not agree to the changes. 

If employees do not consent to the changes, businesses can potentially terminate their employment and offer re-employment on the new terms (“fire and rehire”) but this should be a last resort given the risk of claims, including for unfair dismissal.  A number of high-profile disputes and controversial practices around dismissal and re-engagement in recent years has resulted in the Government taking a closer look at the law and guidance around this issue. There is currently a consultation underway on a new statutory code of practice for employers considering dismissal and re-engagement and it will be interesting to see the outcome of that.   

Collective consultation in accordance with s188 of the Trade Union and Labour Relations (Consolidation) Act 1992 is required if businesses propose to dismiss 20 or more employees within a 90-day period at one establishment because they have not agreed to a change in terms. The Secretary of State must be notified of the potential dismissals on a form HR1. 

Collective consultation takes place with elected employee representatives and must last for a minimum period before any dismissals can take effect (30 days if the proposal is to dismiss 20 to 99 employees or 45 days for 100 or more employees). Failure to carry out collective consultation can lead to successful claims for protective awards of up to 90 days’ pay to all employees affected. There is also a criminal penalty for failure to notify Secretary of State of the potential terminations. 

Depending on the circumstances, businesses may feel that they have to make these changes as a matter of urgency and may be concerned that they do not have time to consult. There is a “special circumstances” defence to the failure to collectively consult but it is interpreted very narrowly and it is not enough to show that there are circumstances which render compliance with the relevant statutory requirements not reasonably practicable. A special circumstance needs to be something out of the ordinary, something uncommon such as sudden disaster.  It is well established, for example, that insolvency is not of itself a special circumstance, although special circumstances may arise during an insolvency situation.   

It is important to remember that collective consultation is not a substitute for individual consultation about the potential for termination so this must also take place (which should cover, for example the application of selection criteria and alternative employment options). 

Agree the contractual changes 

 Contractual changes, once agreed, should be recorded in writing.  This can be done by issuing new contracts for employees to sign, or letters of amendment to the existing contract to be countersigned by employees, or even (though not ideal) by an exchange of emails.   

Employees will no doubt understand businesses having to act quickly and decisively to protect their jobs but, at the same time, they are only likely to accept a significant change to their terms if there appears to be a genuine business need for it and they are properly consulted. Taking the time to make changes lawfully and through engagement with the employees will limit the potential for long term damage to employee relations as well as the risk of legal action. 

 Further information

If you have any questions regarding this blog, please contact Niki Southern or the Employment team.

About the author

Niki Southern combines technical rigour with commercial nous and a pragmatic, strategic approach to place clients in the best possible position to avoid litigation, initiate claims or, for employers, provide a strong defence to any claims and reach favourable resolutions.