COVID-19 EXPERT LEGAL INSIGHTS

Changing terms and conditions:
when furlough is not enough

21 May 2020

It has recently been reported that as many as one in three employees are on furlough leave. It is a staggering statistic and indicative of the need for and success of the government’s Coronavirus Job Retention Scheme.
 

Some employees cannot be furloughed, however, because they are critical to business continuity, even if that continuity is at a reduced level. It is a condition of the current scheme that those employees for whom an employer claims 80% of salary (to a cap of £2,500), do no work for the employer at all. The scheme in its current form will end on 31 July and we await details of how it will work going forward. It seems that under the new version of the scheme which will take effect on 1 August and run until at least October 2020, employees may be able to work part time and that employers will be expected to share salary costs. Details of the new version of the scheme are expected to be released by the government by the end of May.

So what are the options for businesses which cannot claim the support now and/or which face the sudden return to partial/full responsibility for salaries in August and yet have suffered and will continue to suffer reduced levels of revenue?

Difficult decisions are being made by businesses. Redundancies will be unavoidable in many sectors. For those businesses that want to retain employees, however, changing employees’ terms and conditions, particularly cutting pay is another option. What are the steps required to change terms lawfully and what other considerations are there? 

What changes could be made?

Many employers are taking the decision that employees will have to take pay cuts now or soon. 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 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 currently £88,519.

 

Notification of proposed changes

Employees will need to be notified of the proposed changes. Currently this is likely to be globally by email or in a virtual presentation by Skype/Teams or similar. This 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 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 but this should be a last resort given the risk of claims, including for unfair dismissal.

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 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.

Many businesses will have to make these changes as a matter of urgency and will 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. Whilst there is the potential that the current pandemic may fit the criteria, even where the defence is applicable, the employer needs to take such steps towards compliance as are reasonably practicable.

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

Securing signatures is problematic at the moment but businesses should make sure that any changes to the employment contract are agreed in writing, even if it is just by email.

 

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 would like any further information or advice about the issues explored in this blog, please contact Niki or another member of our employment law  team.

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We welcome views and opinions about the issues raised in this blog. Should you require specific advice in relation to personal circumstances, please use the form on the contact page.

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