Many methods of reducing costs whilst avoiding redundancy have been tried out by employers during the recession. One such method is that of varying terms and conditions of contracts. This might sound like an attractive option for those wishing to reduce pay or holiday entitlements for example, but employers should be mindful of the risks involved also.

Like most aspects to employment law a proper procedure must be followed in wishing to vary the terms of a contract, namely consultation. This is a relatively complex area of law and one which requires a balancing between the needs of the business and the employees. An existing contract can only be varied with the agreement of both parties involved. If the proper procedures are followed it can actually be a very beneficial process for both parties. The agreement may be reached either through collective consultation, for example, with a union or on an individual basis. The employer should explain to the employee the reasons behind the change.

The employer should ensure that it gives written notification of the changes within a month of the changes taking place.  Whether or not an employer is able to vary terms may be expressly written into the original contract or they may attempt to do so without such an express term. If this is the case then the affected employee may continue to work under those conditions and be considered to have accepted the new terms. However, depending on the nature of the variation, it may be deemed a fundamental breach which brings the contract to an end. If this is the case, the employee may leave.

It was recently reported that 10,000 council workers at Doncaster Council could have their contracts terminated with an offer to re-employ on revised terms, with a similar exercise at Southampton City Council. The latter has resulted in some 900 unfair dismissal claims being lodged at the Southampton Employment Tribunal.

Whilst not following procedure could attract a claim, on the other side of the coin, the Employment Appeal Tribunal (EAT) decided in the case of Slade v TNT that an employer did not act unfairly when they terminated existing contracts with an offer of re-employment on  new terms. Negotiations had taken place, which discussed an offer to "buy out" certain existing terms. The offer to re-employ, however, did not include the “buy-out” payment.

It was deemed in these circumstances that TNT had legitimate business reasons as to why it wished to remove a bonus payment previously afforded to staff. In return it had offered to make a one-off compensation payment to staff. If the deal was declined then existing contracts would be terminated and re-employment would be offered. The EAT considered that the correct approach was to look at the reasonableness of the employer's decision and  to balance the advantages to the business with the effect on the claimants. They considered that it was possible for a reasonable employer to conclude that they should not offer a lump sum on re-engagement when it would not achieve any of the benefit of the agreement for which the lump sum had been offered.

Whether or not the breach is a fundamental one, the employee may sue for damages for breach of contract in the civil courts; or if the employment has terminated, the claim can be made to an employment tribunal, which can award damages. It is therefore advisable that an employer be clear on what it is doing and that there is a legitimate business reason if it wishes to avoid potential issues.