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Contracts and Service Agreements

Varying Terms of Contracts of Employment 

The contract of employment governs the relationship between the employer and the employee and is binding on both parties. It can be oral or written (or a mixture of both) and can incorporate express terms, terms implied by custom and practice and those incorporated by statute. It is therefore not always as straightforward as it may seem when assessing an employee's terms and conditions of employment.

An employee's contract can generally only be amended if:

  • the contract itself allows the amendment, or;
  • both parties agree.

This means that certain changes to the terms of employment may be permitted by the contract itself. If this is the case, there will be no variation of the terms in the contract and the change will be lawful, provided that the changes are made using the correct procedure.

However, where the contract does not allow the changes and an employer imposes contractual change on an employee without their agreement, then this is likely to amount to a breach of contract. If the breach is sufficiently serious, and the employee has two or more years’ service (subject to exceptions where there is no minimum service requirement), they may then resign as a result and bring a claim in an Employment Tribunal that they have been constructively unfairly dismissed.

Note that special rules apply in circumstances where the employees have previously been transferred under the Transfer of Undertakings (Protection of Employment) Regulations 2006. Please seek advice from your legal adviser in such circumstances.

Varying the contract of employment pursuant to its terms

The starting point when making contractual changes is to check the wording of the contract to see if this is allowed under its terms

Contracts can contain terms permitting the employer to amend either specific terms (a 'specific flexibility clause') or amend the contract generally (a 'general flexibility clause').

Specific flexibility clauses are, generally speaking, permissible in a contract of employment and will allow employers to be able to adapt to different situations that arise by amending the employee's contract of employment. Specific flexibility clauses tend to be found in relation to an employee's place of work or working hours. In order to be legally permissible and compliant, employers must ensure that any proposed change under a specific flexibility clause is reasonable. For example, it would be unreasonable to amend an employee's place of work to require them to work in a different part of the country on short notice. However, the same change may be reasonable if you give the employee sufficient notice and, if appropriate, assistance with any moving costs that may be incurred. When using specific flexibility clauses, it is important to ensure there are proper grounds for their exercise and it is not done in such a way as to destroy trust and confidence between you and the employee. To ensure this, it is recommended you still consult with the employee about the proposed change (although you do not actually require their consent). It is also helpful for an employer to be able to show that the exercise of the flexibility clause is in line with the intention that was envisaged when the parties entered into the agreement, and it is also very useful to be able to show that these provisions are routinely relied upon.

General flexibility clauses are difficult to enforce (save in respect of minor or non-detrimental changes) as Employment Tribunals see these clauses as an attempt to circumvent the general rule that changes must be agreed between the parties. An Employment Tribunal will look carefully at how widely the relevant clause has been drafted when assessing whether its enforceability and tend to take a very narrow approach to its interpretation. Therefore, any general flexibility clause should be drafted in a clear and unambiguous way in order to limit the scope of its interpretation by an Employment Tribunal. A general rule of thumb is that the more detrimental the change to the employee, the harder the clause will be to enforce. As with specific flexibility clauses, the changes being proposed must be reasonable.

Varying the contract of employment with consent

If you wish to change an employee’s contract of employment, you should seek their express written agreement to the change and enter into a period of consultation as appropriate. It may not always be clear whether or not the flexibility clause in the contract can be relied upon, and therefore even where there is a flexibility clause in practice employers will often also seek to secure agreement to the change, notwithstanding that this is not strictly speaking required, and it is useful to secure this specific consent.

In terms of the process to follow; you should first inform the employee both verbally and in writing that you are proposing (not making) a change. You should set out in detail the nature of the proposed change and why the change is deemed by you to be important, including the business reasons behind the proposals and any alternatives that have already been considered. The employee should be invited to consider the proposed change and then revert to you with their views and any queries.

If the employee consents to the change in writing, it can then be incorporated into the employee’s contract of employment. This can usefully be done either by issuing a new contract of employment for the employee to sign or by issuing a side letter to the contract, a copy of which they are asked to sign.

Favourable contractual changes, such as a salary increase or an increase in annual holiday entitlement, should not cause any problems because the employee is unlikely to object to them. However, you should record any contractual change (whether favourable or not) in writing to ensure there is no dispute over what has been agreed. If a variation of contract affects the terms required by law to be covered in the employee’s contract then written notification should be made not later than one month after the variation is made.

If an employee is not willing to accept the proposed change, you could offer an incentive such as a pay increase, a one-off bonus or an increase in annual holiday entitlement in order to secure agreement. Alternatively, you might have to negotiate by amending your proposal to one that is acceptable to the employee.

Varying the contract of employment without consent

Where the contract does not allow the proposed change and where the employee is not in agreement, then the 2 options open to the employer to go ahead and make the change are either:

  • Impose a unilateral variation of contract; or
  • Dismissal and re-engagement

Unilateral variation

Where an employee does not accept a proposed change but you impose it on them anyway, if the employee then continues to work under the new terms and conditions without making their objections known to you, they could be deemed to have impliedly accepted the change and it would then be incorporated into their contract of employment. Exactly how long an employee must work before being taken to have impliedly agreed depends on the facts of each case but could often be a number of months. The position on this will be different if the change does not have an immediate effect on the employee's work. Changes like this could include amendments to sick pay provisions or post-termination provisions, when the effect will only be felt once the terms are operated. For example, an employer may unilaterally impose a variation to an employee's contract reducing their sick pay entitlement. The employee may not have any sickness absence for a few years after that change, however, if at the point they are on sickness absence they do object then an employer would not be able to successfully argue that they had effectively agreed the change by not objecting at the time it was made.

Alternatively, the employee could work under the new terms and conditions under protest, in which case there is no acceptance by the employee; the employer is still in breach of contract and the employee can still issue a claim for this breach. Employees will have a reasonable amount of time to try out new working arrangements before deciding whether to object. You should not therefore assume that, in the absence of a specific objection, the employee has accepted the change; however, it will be more difficult for an employee to claim they were working under protest if they do not raise any objections with you in a timely manner.

If your breach of contract is sufficiently serious, the employee could resign and claim constructive dismissal before an Employment Tribunal (if they have been employed for at least 2 years or in certain circumstances where there is no minimum service requirement). A constructive dismissal claim operates in the same way as if you had expressly dismissed the employee for objecting to a change to the contract of employment. Fundamental breaches would include reductions in wages and working hours and probably changes to work location. Note that there will be a limit on the time an employee can continue to work under protest before they will lose their right to claim. This is not definitive and will be fact dependent.

Finally, an employee may claim that there has been an unauthorised deduction from their wages if the change affects pay.

In summary, imposing a unilateral variation to the contract is the highest risk approach in these circumstances and therefore not one that is recommended in the vast majority of circumstances.

Dismissal and re-engagement

Dismissal an re-engagement is a safer way to effect any changes in the absent of a contractual right to do so, or consent. If there is a change that you must make to the contract for good business reasons but the employee does not agree to it, you may decide to go through this process. The employer should consult with the employee on the reasons for the change, focussing on the strong business reasons for that, and take into consideration the specific reasons why individuals are not prepared to agree. If the individual does not agree by the end of the consultation process then you may decide to terminate the employee's contract of employment on notice with an offer of re-engagement on the new terms and conditions to commence immediately after that notice comes to an end.

This approach should be used as a last resort; even though the employer is terminating the current contract of employment on due notice and therefore are not in breach of contract, that termination still constitutes a dismissal and hence can still be an unfair dismissal. This is the case even if you have offered to re-engage the employee on new terms and the employee has accepted that offer of re-engagement. As you are dismissing the employee, you should ensure that you comply with the fair dismissal process, including offering a right of appeal.

In deciding whether a dismissal in these circumstances is fair or unfair, an Employment Tribunal will look at your reasons for wishing to vary the terms and conditions, the consultation process you went through, the efforts you made to reach a compromise and the employee’s reasons for objecting to the change. You must adduce evidence of the reason for this desired change, which must be one that a reasonable employer would consider sound. The Employment Tribunal will look at all the circumstances of surrounding the change and the reasons for it and weigh the reasonableness of you dismissing the employee with the reasonableness of the employee in refusing to accept the change. Employers should be particularly cautious where an employee gives the reason for not agreeing the change and/or refusing the offer of the new contract is based on caring responsibilities.

Where a change affects several staff, a key factor will also be whether a substantial proportion of the employee’s colleagues agreed to the change.

Consultation is essential and at an early stage you should hold a meeting with affected employees and explain the nature of the change, the business reasons for it and the timeframe. You should present revised terms of employment for consideration. Always confirm meeting discussions in writing. Employees should be given an opportunity to discuss any questions or concerns over the proposed change and put forward alternatives. Attempts should be made to reach a compromise. You should then respond to employee representations and hold further meetings as necessary.

The next stage is to set a deadline for obtaining written agreement to the change and to warn employees that if agreement cannot be reached by the deadline, you will contemplate serving notice of termination of current contracts and immediately offering re-engagement on revised terms.

If agreement cannot be reached, you will need to send written notice of termination of employment to the affected employees and at the same time enclose an offer of employment on revised terms. This will identify the potentially fair reason for dismissal (likely to be ‘some other substantial reason’), the effective date of termination of employment and state that the new terms will take effect on expiry of the notice period, provided the employee accepts the offer of re-engagement by a specified date.

Additionally, if 20 or more employees may be affected by the proposed change and dismissal and re-engagement is a possible outcome, you must comply with the statutory collective consultation obligations from the outset as you would in the case of collective redundancy, even if you believe most of the employees are likely to agree to the change (see Redundancy Toolkit – Statutory Collective Consultation [T1.03] for further information).

Another potential risk area here is in relation to individual reasons

Legal advice should be obtained before carrying out a dismissal and re-engagement process.

Demotion

Demotion is the act of reducing an employee’s status or contractual entitlement. An employer has no automatic right to demote an employee, even if they are not performing their job properly or even if disciplinary action has been taken against them. The principles set out above in relation to changes to contractual terms apply equally to demoting an employee.

Occasionally, a contract of employment will contain a power of demotion linked to disciplinary proceedings. For example, demotion may be specified to be an alternative to, or additional to, a written warning or dismissal as a disciplinary sanction. If this is the case, demotion may be permissible, but this should usually be as a temporary sanction rather than on a permanent basis. In the absence of a clear, written term in the employee’s contract of employment permitting demotion, it should not be attempted. Instead, the employer should address the issue which has given rise to the need to demote the employee as follows:

  • If the employee is not performing as expected, implement a performance review: FS7.02: Managing Poor Performance Issues.
  • If the employee has committed an act of misconduct, they should be disciplined in accordance with the employer’s disciplinary procedure: FS5.02: Managing Disciplinary Issues.

This document has been created by, or on behalf of ESP Ltd, as a general document and as a guide in relation to its subject matter and has not been bespoke drafted for you or the specific circumstances in which you are looking to use it. Prior to using this document and undertaking any HR process you must consult your organisation’s own policies and procedures to ensure that you do not do anything in conflict with your own policies and procedures.  If in any doubt as to how to use this document or, if you require any legal advice, please feel free to contact ESP Ltd on 0333 006 2929 and our legal team will be more than happy to assist.  ESP Ltd will not be liable in any way for any actions undertaken by you or your use of this document unless we have been consulted regarding your use of this document as legal advisor to your business or have bespoke drafted any documentation in response to a specific support request.