Can an employer retain the contractual right to vary the terms of an employment contract?

In an attempt to retain flexibility, clauses are often included in employment contracts which grant rights to the employer to vary the terms of the employee’s contract. For example, employers might typically include mobility clauses whereby an employee can be required to work at a new location. Similarly, employers might retain the right to withdraw certain benefits such as enhanced redundancy pay or life assurance. Employers might also seek to retain discretion as to the application and operation of bonus schemes.

Given the stark difference in bargaining power between employer and employee, it is perhaps unsurprising that the appeal courts have had a lot to say on the matter. In particular, it can be difficult for an employer to rely on a contractual clause which appears to grant the employer a general right to vary any of the terms of the contract.

To stand a chance of being effective, a term containing a power to vary must make it clear who has the right to exercise the power and in what circumstances.

Thus, in a case decided last year, the Employment Appeal Tribunal ruled that an employer could not rely a letter of appointment which stated that terms and conditions of employment

“are subject to amendment; any significant changes affecting staff in general will be notified by… policy circulars… while changes affecting your particular terms and conditions will be notified separately to you”.

It was ruled that the language of the clause did no more that state that clauses could be amended and specified the way in which certain changes would be communicated. Crucially, the clause did not clearly reserve to the employer the right to amend the contract unilaterally. Even where a contractual clause grants the employer with an unrestricted discretion to act in a certain way, that discretion must not be exercised ‘arbitrarily, capriciously or irrationally’.

Further, the term of mutual trust and confidence implied specifically into employment contracts may impose greater constraints. Thus, it has been held that a mobility clause had to be exercised in accordance with that implied term: the employer would be in breach of contract if he failed to give reasonable notice before transferring an employee.

In another case it was ruled that that the implied term restricted an express right to transfer an employee to alternative work and treated this obligation as different from and additional to the obligation not to act capriciously or irrationally.

If an employee continues to work under a varied contract, an employer might be able to persuade the court that the employee has accepted the variation. However, because there is no set period of time in which the employee must continue to work before it can be said that he or she has accepted the variation, it is uncertain whether an employer could successfully defend a claim on this basis. If an employee makes it clear that he or she is continuing to work “under protest” or while “reserving his rights”, the employer’s attempts to impose the new terms is likely to amount to a continuing breach of contract.

Undoubtedly, a prudent employer will wish to retain as much discretion as possible in a contract of employment in order to vary contracts of employment and retain maximum flexibility. However, it is vital that the relevant contract clauses are carefully drafted so that the rights are clearly reserved. It is also vital that variations are not implemented in a way that breaches the implied term of trust and confidence and that discretion is not exercised in a perverse, capricious or irrational way. Further legal complications can arise where an employer wishes to make fundamental changes to the contractual terms of 20 or more employees in a period of 90 days or less.

Finally, employers should also be aware of the potential for flexibility clauses to contravene anti-discrimination legislation. Employers should consider seeking a professional review of their existing contractual provisions and are advised to take specialist legal advice in individual cases.

This content is correct at time of publication