Benefits cuts: The unkindest cut of all?

Employers that are compelled to cut pay should be wary of the impact this will have on benefits provision. Employment law expert Jonathon Ions considers the implications.

Redundancies are an obvious way of taking costs out of a business, but they are also expensive and a drain on management time. Furthermore, organisations need to retain talent to ensure they are able to take advantage when the market (eventually) turns.

Unsurprisingly, companies are therefore looking to reduce costs in other ways – for example, by reducing benefits, or withdrawing them altogether. So what are the issues and risks for employers changing benefits?

Q What are the key factors to consider when contemplating making benefit cuts and withdrawals?

A The first port of call is the contract of employment, handbook or other policy documents to ascertain the status of the benefit(s) under review. Benefits usually fall into one of three categories: (1) a contractual right; (2) a right to participate in a benefit, albeit the company retains the right to withdraw; or (3) vary the level of benefit, or a discretionary benefit.

Q What type of benefits can an employer cut without risking legal action?

A Broadly, for categories 2 and 3, provided the employer does not breach the implied term of trust and confidence, it will be free to reduce or withdraw the benefits concerned. Essentially, this will involve the employer informing employees, and potentially representatives, in advance about the proposed changes, the reasons for them, and the proposed implementation timeframe.

Q What steps should an employer take to minimise risks of legal action when making such changes?

A Wise employers would also actively invite and consider employees’ representations about the proposals. Before implementing changes to medical insurances or car benefits, employees should be given sufficient time to seek and arrange alternative cover/transport. With health benefits, employers should watch out for people currently using the benefit. The change can then be documented by way of updating the relevant part of the handbook/policy, drawing attention to the relevant provisions.

Q How can an employer change contractual benefits?

A With benefits in the first category, unless employees agree to the changes, the employer essentially has two main options to effect the change: option 1 is to terminate existing contracts and re-engage on new terms (including the reduced benefits); or option 2 is to unilaterally impose the changes on employees and infer agreement from their continuing to work under the new terms. Before effecting either of these options, it is advisable for the employer to go through a similar informing process as for benefits in categories 2 and 3, save that there will be additional expectations/obligations regarding genuine consultation with staff or their representatives – where required by collective agreements or statutory collective consultation obligations.

Q If benefits are cut unilaterally by the employer, what actions might it face?

A The main risks for employers are: if option 1 is followed, claims for unfair dismissal and for a protective award. If option 2 is chosen, the employer could face claims for constructive unfair dismissal and/or for breach of contract, where employees continue working under protest and then seek to rely on the old terms. Grievances arising from facts after 6 April 2009 should be heard with the new Acas code in mind. While individually, the claims may be insubstantial, collectively they could outstrip any perceived savings from making changes. It is therefore imperative that employers are clear about the potential cost savings, the impact of not making changes, and that they effectively communicate this – not least because this will form the basis of any defence to a dismissal claim.

Q What is the employer’s responsibility where pay cuts are applied to staff who are in a final salary scheme?

A Employers should be prepared, during the consultation process, to respond to questions on the impact of the pay cut proposals on individuals’ pensions and associated life assurance benefits. Naturally, this will be of most concern to those close to retirement. The actual impact of cuts will depend on the rules of the final salary scheme. Of particular relevance will be the definition of ‘salary’ in the rules. For example, the employee’s ‘final salary’ for pension purposes may be calculated by reference to the best three-year average over the past 10 years. In which case, there may be little or no loss to the employee. As regards impact on life assurance, death in service benefit may be calculated by reference to salary at a particular date in the year, in which case any impact on the benefit may be delayed.

Q What is an employer’s duty to staff on maternity leave if it cuts contractual benefits unilaterally?

A Staff on maternity leave should be provided with the same information as their colleagues in the office. Maternity leavers should be included in the consultation process, and employers should give thought to how this can best be done. For example: arranging facilities to permit employees to dial into the consultation meetings; e-mailing minutes of meetings to such staff; or providing a central contact address for lodging questions.

Jonathan Ions, employment lawyer, Barlow Lyde & Gilbert

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