This month’s problem concerns:

“Our CEO is concerned about rising costs, especially with the increase in National Insurance costs coming in April. We currently offer generous employee benefits and these have been identified as areas for cost savings. I am concerned that we will be changing our employees’ contractual terms – how do I handle it?”

Concerns around the upcoming increase in national insurance costs have been well publicised, with many employers, particularly small businesses, faced with the challenge of addressing the financial implications. This may naturally involve reviewing and cutting other employment related costs, such as staff benefits or previously planned salary increases.

Your first consideration should be the terms of your employment contracts and identifying whether your employee benefits have contractual status or whether they are provided on a non-contractual, discretionary basis.

It may be the case that the employment contract only provides the right to participate in benefit schemes which you may operate from time to time, with wording that states that you retain the discretion to change or withdraw particular benefits at your discretion.

If employees do have a set contractual right to a particular benefit, removing or decreasing them is a “negative variation” of their terms and conditions of employment. These changes require employee consent, which should be supported by some form of “consideration” to ensure they are legally binding. Consideration can be monetary (such as a one-off payment or “buy out”) or non-monetary (such as providing a less expensive benefit as an alternative).

An alternative approach is to implement the changes unilaterally – without employee agreement – and seek to rely on the employee’s continued performance of their contract as demonstrating their acceptance of the changes. This approach is less appealing, as employees may decide to “work under protest” and not accept the changes, or in the worst case, claim that they have been constructively unfairly dismissed. The more attractive and central the benefit is to the employee’s overall terms, the higher this risk will be. More practically, removing a contractual benefit without employee agreement has clear relationship implications. It is usually best to try to obtain employee agreement first.

The third and most extreme approach to changing contractual terms and conditions is “firing and rehiring” if you cannot reach an agreement. If this would result in 20 or more dismissals within a 90-day period, it will trigger collective consultation obligations. This is a very risky approach which has clear legal and reputational risks – you should take specific advice before it is seriously considered.

It is common for employment contracts to contain clauses which state that the employer can vary its terms. These are known as “general variation” or “flexibility” clauses. You should be cautious when relying on these clauses to make material or negative changes to employees’ terms and conditions; the established case-law position is that using these clauses is subject to the implied duty of trust and confidence, and you cannot make changes which are unreasonable. It is unlikely that these clauses could be relied on to remove contractual benefits.

However, if the benefits you provide are not included in the employment contract, or the employment contract makes clear that they can be altered or withdrawn at your discretion, you could decide to take that step as a cost saving measure. In this circumstance, there is a residual risk that employees could argue that a particular benefit has been provided consistently over enough time that it has become an implied contractual right through custom and practice.

In most cases, it should be easy to identify which benefits are potentially “contractual” and which are not, by referring to your employment contracts, offer letters and other formal documents. Some fringe benefits, such as staff lunches, wellness programmes or other perks are less likely be part of the employment contract (though you should check). Other benefits, such as company sick pay or car allowances are more likely to be “contractual” while others, like private medical insurance, commission or productivity bonuses, will depend on the precise contractual wording.

If cost-saving is the priority, you might consider whether you currently provide any discretionary enhanced schemes for employees taking statutory leave for maternity, paternity etc which can be reduced or pared back to the statutory minimums. As during the pandemic, you might also consider whether you should freeze your salary and promotion cycles while the business reviews its financial position. You may be able to take other cost saving measures such as limiting overtime or restructuring teams to make efficiencies – though being aware that the latter could lead to redundancies. 
It is worth keeping in mind that certain benefits are subject to statutory minimums. For example, you cannot reduce your employer pension contributions below the minimum rate for auto-enrolment.

Overall, you will need to carefully identify the status of any benefits that may be removed, before deciding your approach with affected employees. If contractual changes are required, you should consider the most effective method of obtaining employee agreement, which might involve a one off “buy-out” payment in return for longer-term cost savings. Any proposals should be made on a consistent basis across affected employee groups, to avoid allegations of discriminatory treatment. You should also consider any other measures you can take which would avoid having to remove existing benefits – such as pausing salary increases, freezing overtime or stopping other non-contractual perks.