Guides & Advice

Changing the terms of an employment contract – how do you do it and what are the risks?

Published: 22nd April 2021
Area: Employment

Following the economic disruption resulting from the lockdown measures that have been in place throughout the pandemic, many employers have been faced with difficult decisions in order to ensure the survival of their businesses, or are considering what their post-Covid workforce will look like.

As a result, the number of businesses attempting to renegotiate terms and conditions of employment via ‘fire and re-hire’ exercises has drastically increased. The practice has attracted heavy criticism, with some voices calling for the practice to be abolished altogether.

So, why is it considered controversial and what do employers need to know if they are planning to go down this route?

Can an employer change an employment contract?

When seeking to change an employee’s contract of employment, an employer should first look to the contract to see if it authorises the change. For example, a contract may contain a clause, which reserves the right to make changes to the relevant area in which the employee works. However, caution needs to be taken when relying on such clauses as they are generally interpreted narrowly and any fundamental change is unlikely to be covered.

Where a change is not authorised by the contract, there are three ways in which an employer can vary the contract of employment.

  1. Getting the employee’s express agreement;
  2. Unilaterally imposing the change and relying on the employee’s conduct to establish implied agreement to the change; or
  3. Terminating the employee’s employment and offering re-employment on new terms.

Where an employee refuses to agree to a change and given the legal risks associated with imposing the change on employees, an employer’s best option is likely to be terminating the existing contract and offering continued employment on the new terms.

What is fire and re-hire?

Traditionally known as dismissal and reengagement, the practice has been in place for many years and is generally used to allow employers to adjust the terms and conditions of some or all of their employees’ contracts. It is often seen as a better alternative to redundancy; however, this perception has begun to shift as a result of the pandemic.

A number of high-profile companies, including British Airways and Centrica, have recently attempted to push through changes to employees’ contracts by terminating their contracts and offering re-employment on new terms. However, these so-called ‘fire and rehire’ tactics have faced significant opposition from trade unions.

Why is it controversial?

Research from the Trades Union Congress (TUC), revealed that almost one quarter of the population have experienced a downgrading of their terms during the crisis and as a result, many trade unions are calling for fire and re-hire to stop. Concerns have been raised that some companies are using the pandemic as a smokescreen to push through negative changes to contracts that have been in the pipeline for quite some time.

However, even though some businesses may be acting dishonestly, ‘fire and rehiring’ has been commonplace in many businesses for a number of years and does have a legitimate function when looking to change specific contractual terms.

What are the risk of using a fire and rehire strategy?

Terminating an employee’s contract, and then offering them a new one on reduced pay or benefits, could leave employers open to tribunal claims for unfair dismissal, as the employee will have to be dismissed before being re-engaged.

In order to defend an unfair dismissal claim, an employer must establish a potentially fair reason for dismissal in the first instance. In the context of changing terms of employment, employers usually rely on the potentially fair reason of some other substantial reason (SOSR). However, redundancy is sometimes pleaded in the alternative where the change gives rise to, or was proposed in, a redundancy situation (for example, a change in workplace). An employer must also show that it acted reasonably in dismissing the employee for failure to agree to the change in terms.

As long as the employer has a sound business reason for dismissing an employee who refuses to accept a change to their terms of employment, it should be able to establish SOSR. This does not have to be a reason that the tribunal considers sound, but one which a reasonable employer would consider to be sound.

Also it is worth noting that if the proposed change is likely to mean that employees’ agreement will be difficult to obtain, and that notices of termination may need to be issued to at least 20 employees, an employer should consider starting collective consultation (and notifying the Secretary of State) at the outset of the process.

This is a difficult choice, as British Gas recently found, when the Unions criticised them for not trying to agree before formally starting collective consultation.

Other issues to consider

Aside from the legal implications, taking such a step, especially without exhausting other options first, can damage relations between the employer and its workforce.

This can affect not just to those who are directly affected, but also the wider workforce, which in turn can have a knock-on-effect on staff morale. It can also be damaging for employee relations in the long-term, particularly if the process is managed insensitively.

Similarly, fire and rehire tactics can damage the external reputation of a business because, now more than ever, consumers are more likely to shun businesses that put profit before people.

Consider the alternatives

While terminating an employee’s contract and re-engaging them on different terms is a feasible option, it is advisable to look at all other possible options first and use the ‘fire and re-hire’ option only as a last resort.

Download our free webinar on this controversial topic for more information on what you need to consider if planning to go down this route.

We’re here to support you

If you are considering dismissing and re-engaging employees on different terms, then our team of team of employment lawyers can guide you through your options.

Our employment team is ranked as a Leading Firm in the Legal 500 2021 edition.

Our updated guide to recovery and resilience covers everything you need to navigate your business out of lockdown, unlock your potential and make way for a brighter future. Further advice in relation to COVID-19 can be found on our dedicated coronavirus resource hub.

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