Changing contract terms by dismissing and re-engaging employees

Draft Code of Practice for Employers Published

The BES has, this week, published a draft Code of Practice on the process that employers should follow when changing contract terms of employment through the means of dismissing and re-engaging employees.

The draft Code sets out the benchmark of good practice for when employers are proposing to make changes to staff contracts.  It contains practical guidance for employers on how to manage the process of changing employment terms in a way that minimises conflict, recognising that the practice of “firing and re-hiring” is one that frequently gives rise to disputes.

The Code will not become mandatory for employers to follow but, as with the Acas Code of Practice on Disciplinary and Grievance procedures, a failure to follow the Code could give rise to an uplift of up to 25% in compensation if an employee is dismissed and subsequently brings a claim of unfair dismissal.

Why is a Code needed?  

For many employers, the Code will provide welcome guidance in an area that is challenging and where there is a high risk of conflict.  

There are many reasons why a business may need to make changes to the terms and condition of its staff. 

Where major contractual changes are proposed (e.g. to pay, hours of work), the consent of the employee will need to be sought in order to avoid a potential claim for breach of contract.   However, where agreement is not forthcoming, this puts the employer in a difficult position.  In most cases it will not be possible for the employer to decide not to make the changes.   This leaves the employer with limited options, none of which are ideal.  

One option is to impose the change on employees, but this carries a high risk because imposing a change without the employee’s consent will constitute a breach of contract.  If the change is to a fundamental term of the contract, the employee will be entitled to treat the contract as terminated and pursue a claim of constructive dismissal.   

The other option is to end the current terms of employment by serving the employees with their contractual notice period and offering re-engagement on the new terms.   Although this option still carries a fair degree of risk (the termination of the existing contract still constitutes a “dismissal” for unfair dismissal purposes), it is generally seen as the “safer” route to take, providing a fair consultation process is followed.   However, as recent headlines have shown, it is a process that can be difficult to get right and, if not managed appropriately, can not only give rise to claims but also can cause reputational damage.

What does the Code say?

The Code sets out the factors that should be considered and the practical steps that should be taken at each stage when making changes to employees’ terms of employment.

The Code emphasises the importance of first carrying out meaningful consultation with employees, or unions, as the case may be, about the proposed changes with a view to obtaining their agreement to the changes.  It contains practical guidance on how to carry out the information and consultation process with employees/union representatives to try and achieve agreement.  

In the event that negotiations are unsuccessful and agreement is not forthcoming, the Code sets out the factors to be considered by employers before deciding on the next course of action, including re-assessing its business needs and exploring whether there are potential alternatives to changing contract terms that could achieve the same desired result.   It then goes on to provide practical guidance on what steps an employer should take, depending on whether it decides to unilaterally impose the contractual changes on its employees or terminate their existing terms and offer re-engagement on new terms.

Action to Take

The draft Code is in the consultation stage and businesses and individuals alike can provide their views by submitting them online via the government website:  

Draft Code of Practice on dismissal and re-engagement – GOV.UK (www.gov.uk)

In reality the government has codified what is already regarded as good industry practice when changing employee terms and conditions.   Nonetheless, even in its draft form, it provides a good source of reference for employers and, once implemented, will hopefully reduce the number of incidences where employees are fired and re-hired without consultation or notice. 

Whilst the draft Code may not be breaking any new ground or making any changes to the law, what will be new, if implemented, is the ability for tribunals to increase an employee’s compensation if an employer has unreasonably failed to comply with the Code.   There will therefore be a greater onus in the future on employers to carry out a fair process in line with the Code to avoid the risk of being financially penalised.  

Codes aside, changing employees’ terms and conditions of employment is not easy to do.  It is an area that carries a high degree of risk and there are many legal issues to consider, not only in terms of employees’ contractual rights but potentially collective consultation obligations as well.   We therefore recommend seeking legal advice at an early stage to ensure that you meet your responsibilities and minimise the risk to your business.