Changing contractual benefits

A significant feature of the current recession in the UK is that employers are considering options to cut labour costs. These include introducing part-time and flexible working hours, asking employees to take unpaid leave or sabbaticals, and sending employees on secondment. How does this affect contractual and non-contractual benefits?

Terms such as salary, benefits and working hours will generally be an express term of an employee’s contract or, if not, may be implied by custom and practice or incorporated into agreements such as company policies. Unless provided for otherwise in the employment contract or under the terms of a collective agreement, any attempt by an employer to change contractual terms of employment, whether express or implied, will usually require employees’ consent. (Such a request was recently made by British Airways which appealed to staff to work without pay for up to a month.)

Strength in mnumbers

If 20 or more employees may be affected by proposed changes and it is possible that they may be dismissed and offered re-engagement on the new terms, the employer should collectively consult appropriate employee representatives. They will be either from a recognised trade union, or where none exists, employees who have been elected by their colleagues for the purposes of collective consultation.

If less than 20 employees may be affected by the proposed changes, the employer will still need to hold individual consultation meetings. Any feedback or objections from the employees or their representatives should be considered and, if appropriate, incorporated into the proposals.

Whether an employer is able to impose a pay freeze will depend on the wording of the relevant provision in employees’ contracts. If a contract provides for a regular salary review (eg annually), as opposed to a contractual right to a periodic increase in salary, then an employer can implement a salary freeze.

Non-contractual benefits such as discretionary bonuses and other incentives may be withdrawn by an employer.

Contractual rights

However, care must be taken to ensure that the employee has not gained a contractual right to such benefits. Where an employee has a contractual right to a bonus or incentive and has accrued the right to benefit under that scheme, an employer must obtain their consent before varying their entitlement. An exception to this rule is where an employee is on sabbatical (see below) and the bonus scheme provides that it is only payable to employees in active service. In these circumstances, the European Court of Justice has confirmed that bonus payments may be withheld.

Recent case law has introduced much uncertainty about whether a “discretionary” bonus is in fact a contractual entitlement. For example, in Small v Boots Co plc it was held that an employee may have a contractual right to a discretionary bonus if the bonus did not specify what the discretion applies to – the amount of the bonus, the method of calculating it or the decision of whether or not to pay it at all. If the employer is satisfied that the bonus entitlement is discretionary it must exercise its judgment reasonably and in a way which is not capricious, perverse or irrational when deciding whether any bonus payment should be made, and if so, how much.

Time off for good behaviour

Employers can also cut employee costs by temporarily reducing employee headcount by means of secondments and sabbaticals. Secondments are generally internal placements or placements at a client’s offices. However, BT has recently made the controversial suggestion of loaning its employees to its competitors, although this has significant confidentiality implications and may be an unattractive prospect for many employers.

It is advisable that the original employer, the “host employer” and the employee enter into a tripartite agreement which sets out the terms of the secondment, including who will be responsible for the employee’s salary and other benefits in detail. It should cover whether the employee will be entitled, on their return to their original employer, to any salary increases or other enhanced benefits which they would have received if they had remained with the original employer.

Any changes to the employee’s contractual entitlements to pay and other benefits such as company sick pay, bonuses, pension and private medical insurance must be agreed by the employee in advance.

Employers may also offer employees the opportunity to take extended leave or a sabbatical. Such arrangements may be unpaid or at a reduced level of pay. For example, 750 of KPMG’s 11,000 UK staff recently took up offers of 4- to 12-week sabbaticals on 30% of their normal pay. Unless the employee’s contract, a contractual policy or the terms of a collective agreement allow the employer to place the employee on unpaid leave, the employee’s consent to this variation to their terms of employment will be required.

Contracting out

In most cases, the employee’s contract will continue during the break, but the employer will need to consider which terms and conditions, such as pay and benefits, will be suspended or varied.

In addition to any written sabbatical policy operated by the employer, it is advisable for employers to enter into a sabbatical agreement with the employee to avoid any misunderstandings or disputes as to the employee’s entitlements.

In particular, a sabbatical agreement should include provisions to deal with the following issues:

  • whether the employee will be paid during the sabbatical and if so, how much
  • what benefits the employee will continue to be entitled to
  • whether the employee will continue to accrue their statutory entitlement to paid annual leave
  • whether the employee will be entitled, on their return, to any salary increases or other enhanced benefits which they would have received if they had remained with the original employer during the secondment period
  • whether the employee must pay back any money or the value of any non-statutory benefits received while absent if they do not return or do not remain in employment for a given period of time=d
  • a mechanism for reviewing the employee’s pay or promotion should a review occur while they are absent.


To reduce employee costs, employers may decide to close down final salary pension schemes, reduce the level of their contributions and/or reduce the membership of pension schemes by restricting the conditions of entry.

Regulations in the UK state that before they can introduce any such “listed changes” employers must comply with prescribed information and consultation requirements in respect of the affected employees, or their representatives. Where appropriate representatives do not already exist, it is possible to consult with the affected members directly. However, this is likely to be a cumbersome process and employers should consider arranging elections for appropriate representatives.

The information and consultation process must last at least 60 days and should be carried out in a spirit of co-operation, taking into account the interests of both sides, although the employer is not obliged under the regulations to seek employee consent. The Pensions Regulator may impose a fine on the employer of up to £50,000 for failure to consult.

If employees have a contractual right to membership of a particular pension scheme, any changes to this by their employer may result in a breach of contract. If an employer is concerned about this issue, the risk can be removed by seeking employees’ written consent to the variation of their contracts. In any event, the employer must ensure that the changes are permitted under the trust scheme documents and approval from the pension scheme trustees may also need to be obtained.

Finally, when making cost-saving changes to employees’ terms of employment, it is essential that employers take into account their various legal obligations, such as obtaining employee consent and undertaking information and consultation exercises, as well as the commercial implications of such changes, both in terms of internal employee morale and external public perceptions of the organisation.

Impact of changing terms on employment contracts

Section 1 of the Employment Rights Act 1996 requires employers to give employees a written statement of particulars of employment, which must include information such as the rate of pay, hours of work and any terms and conditions relating to holiday.

If these terms and conditions change, section 4 requires employers to give the employee a written statement recording particulars of the change. Such a statement must be given at the earliest opportunity, and in any event, not more than one month after the change. However, case law has confirmed that if an employer fails to issue a section 4 statement, this does not affect the validity of the new term of employment.

“Refuseniks” and redundancy selection criteria

The issue of whether employers can treat employees who refuse to accept proposed changes to their terms and conditions (refuseniks) differently when carrying out a redundancy exercise is yet to be considered by the Tribunals.

The selection criteria used by an employer when making redundancies must be reasonable. This means that it must be objective and independently verifiable. The Tribunal will only find criteria to be unreasonable if it considers that no reasonable employer would have used the criteria. Selection criteria that are discriminatory, either directly or indirectly, are likely to render any dismissal unfair.

An employer may seek to justify such selection criteria on the grounds that it wants to reward loyalty and it is in the interests of the business to retain those employees who are willing to sacrifice their personal interests for those of their employer and the workforce as a whole. However, this argument will need to be offset against the impact of the criteria at an individual level.

 In particular, care will need to be taken to ensure that the criteria do not penalise individuals whose personal circumstances make it more difficult to accept the change to their terms and conditions where the reason is related to a potential ground of discrimination. For example, a woman who has just returned from a long period of maternity leave may be less able to accept a period of unpaid work for financial reasons and the Tribunal may accordingly find the criteria to be indirectly discriminatory.

Lisa Mayhew, employment partner, Jones Day

Carlisle council staff to be disciplined if they complain about pay cuts

Pay cut pitfalls

Comments are closed.