Are redundancies the only option to save employee costs after the furlough scheme comes to an end?

The Government has confirmed that the job retention scheme has been extended until the end of October 2020. From 1st August, furloughed workers will be able to return to work on a part-time basis and the Government expects employers to pay a percentage of an employee’s salary in order to ensure they continue to receive 80% of their salary (up to £2,500). What does this mean for your business and your staff?

Inevitably, in the near future, businesses will be required to cover the costs of paying staff their full salary. The question for many will be whether they can afford this, and if not, what they can do.

Unfortunately, for many businesses, trade is unlikely to return to pre-lockdown levels for the foreseeable future, as consumers look to buy only what is ‘essential’. Reduced revenue but the same level of costs will no doubt test a business.

In these circumstances, making staff redundant is an obvious approach for reducing costs. However, it is not the only option.

An alternative to making staff redundant is changing their terms of employment. For example, you could change an employee’s salary or reduce their working hours. This approach has the same purpose as redundancies (i.e. reducing costs) but doesn’t require you to let staff go. An additional benefit to this approach is that when business eventually picks up you still have a full workforce and don’t have to spend time and money recruiting new staff.

So how do you go about changing terms of employment?

The following practical steps should be taken in the first instance:

• Identify the employee’s existing terms of employment;
• Check whether the terms provide an existing contractual right to make the change you wish to make; and
• Check whether there are any express provisions in the terms on how to vary the contract.

Most contracts of employment will contain a generic clause stating that the employer reserves the right to make changes to the terms. The purpose of such a clause is to allow you to make minor and administrative alterations to the contract (i.e. changes that aren’t detrimental to the employee). You cannot rely on this clause to make fundamental changes to the terms, such as reducing rates of pay and working hours. What you can do to make such changes is set out below.

In the exceptional and unusual case where the contract provides that the employer has a specific right to make a fundamental change, you simply need to comply with the relevant provision in order to make the change (e.g. you may be required to provide written notice). This is, however, unusual and should be treated with caution. Any ambiguity over whether the clause actually allows you to make the change will be construed against you as the employer and the change may as a result be unenforceable.

Unless you have an express right in the contract, you have three options for making the change:

1. Obtain express agreement from the employee to vary the terms (preferably in writing);
2. Unilaterally impose the new terms and rely on the employee’s conduct (i.e. continuing to work) as implied agreement to the change; or
3. Terminate the existing contract and offer re-employment on the new terms.

Each of these methods pose risks. For example, if you impose the changes unilaterally, the employee may continue to work “under protest” and bring a claim for breach of contract or unlawful deduction of wages, and if you terminate an employment contract and offer re-employment on new terms, you open yourself up to potential unfair dismissal or wrongful dismissal claims.

There are also additional issues that arise and steps that must be taken (e.g. a consultation process) before changes can be made in certain circumstances, such as before making redundancies.

Ultimately, changing terms of employment needs to be done correctly otherwise you risk exposing your business to claims and costs which could ultimately defeat the purpose of making the changes in the first place. It is therefore advisable to plan and receive proper legal advice before making changes to your employees’ terms of employment.

Please get in touch with our specialist employment team if you have any questions about anything discussed in this article or around employment law generally.