Changing an employee's contract is a risky business

Bosses who cut pay or alter conditions can land themselves in court, writes Ian Hunter

Constantly changing market conditions in different sectors of the economy are likely to ensure that at any one time some employer is keen to make amendments to his workforce's contracts. These could vary from introducing post-termination restrictive covenants to changing final pension schemes to money purchase.

The employer's ability to effect the desired changes depends to a large extent on the strength of his bargaining position. However, every employer should be aware of the potential dangers of changing an employee's terms of employment without consultation and agreement.

The courts have established that unilateral reductions in an employee's pay, even to a small extent, amount to a serious breach of contract. Changes in a contract, such as the loss of a car, a reduction in salary or a suspension of employer's pension contributions, are also likely to constitute a serious breach of contract, the consequences of which could be very expensive for the employer.

Employees have a choice when such changes are introduced: they can ignore the breach of contract; accept the changes and continue to work normally; or they can leave. This gives employees the option of treating the contract as having been unlawfully and summarily terminated. This is known as constructive dismissal.

Employees' rights to treat themselves as having been constructively dismissed are not restricted to situations where they suffer a financial detriment. A demotion or unwarranted distant relocation can give rise to such a claim. It is not uncommon for executives to find their budget cut or their workforce pruned as part of a sideways promotion.

Employers usually have to weigh up the risks involved in pushing through changes to employees' contracts of employment. The deciding factor is often the extent to which the benefits outweigh the risks involved.

The best way that employers can protect themselves is by getting employees to agree to any changes imposed. One way is to introduce such changes in conjunction with a pay rise or promotion. It is important to obtain if possible the employee's clear agreement to any changes introduced. Simple delivery of a revised contract may not be sufficient to show that the employee has agreed to the changes imposed, particularly if they do not take immediate effect.

Employees who feel they have sufficient grounds for constructive dismissal do not have to walk out as soon as the changes are introduced. They are entitled to a reasonable period of thinking time in which to reach a decision.

What constitutes reasonable thinking time varies according to circumstances. In one case, an employee who delayed two months before deciding he was not prepared to move to a new site was judged to have waited too long. He failed in a claim for constructive dismissal. However, in a Court of Appeal case, a foreman who was told that his wages would be reduced at the end of the month and who protested was able to leave three weeks after the end of the month and still claim he had been dismissed.

Unhappy employees who remain at work while they consider their position should indicate to their employer, preferably in writing, that they do not accept the changes. Employees unwilling to take the constructive dismissal route should seek to minimise the effect of changes to their contracts by negotiating short-term amendments on the understanding that when the employer's financial position improves, full rights will be restored.

If an employee can establish that he has been dismissed, there are two potential claims: one contractual and the other statutory. In a case of constructive dismissal, the contractual claim relates to the employer's failure to give the employee proper notice of dismissal. In the last resort, such claims are normally pursued through the courts, although the industrial tribunal can now make awards of up to pounds 25,000 in breach-of-contract cases. Claims statutory or contractual must normally be submitted to the industrial tribunal within three months of the date of dismissal.

The starting point for the calculation of damages for breach of contract is the value of the net salary and other benefits the employee would have received in that notice period.

The statutory award is usually made up of two parts. First, there is the basic award, which depending on the employee's age and length of service is a maximum of between pounds 105 and pounds 315 for each completed year of employment. The second part, the compensatory award, is limited to a maximum of pounds 11,300. The precise amount awarded is decided by the tribunal based on a range of factors including the likelihood of the employee finding a new job.

However, as many workers have decided, keeping a job may be preferable to compensation and a P45.

Ian Hunter is an employment specialist with the City law firm Bird & Bird.