Can employers still make changes to contracts after the Employment Rights Bill?

The short answer is yes but it will be much more difficult for employers following the introduction of the Employment Rights Bill because their ability to fairly dismiss employees who do not agree contractual changes is being restricted.

Currently, employers wanting to make changes to employees’ contracts of employment can effect these via three methods:

• Agreement with the employees (directly or via a collective agreement)
• Unilaterally impose the change and rely on the employee’s conduct to show they have impliedly accepted the change
• Terminate the existing employment contract and offer employment on new terms

In practice, option 2 is rarely used as unilaterally imposing changes will be a breach of contract unless the change has an immediate practical effect and the employee continues working without objection. Save for these limited circumstances, employees would potentially be able to bring claims for breach of contract, unlawful deduction from wages and constructive dismissal.  Also, practically, if the change involves changes to working arrangements, the employee may simply refuse to work them.

Given the risks with option 2, if employees do not agree to changes, organisations may look to consult with the employee with a view to terminating their contract and offering reengagement on the new terms (fire and rehire).

Following the Employment Rights Bill coming into force, there will effectively be a two-tier system for this fire and rehire practice with a difference drawn between ‘restricted’ and ‘non restricted’ changes.

Restricted changes relate to reductions in an employee’s pay or time off, pension changes, and changes to working hours or shifts (with the Secretary of State being able to add to these via regulations). Non restricted changes would be anything else such as changes to work location or duties.

The usual rules will apply to non-restricted changes, so these can be progressed in the usual way.  Bearing in mind, as usual, the tests for unfair dismissal and the statutory Code of Practice of dismissal and re-engagement which was brought into force in July 2024.

However, for restricted changes, it will be automatically unfair to dismiss an employee for failing to agree a contract variation relating in whole or in part to a restricted change unless the employer can show:

• that the change was needed to eliminate, prevent, or significantly reduce or mitigate the effect of any financial difficulties
• that the financial difficulties were affecting (or were likely in the immediate future to effect) the employer’s ability to operate as a going concern (or in the public sector (excluding local authorities) to carry out the employer’s statutory functions); and
• that it could not reasonably have avoided the need to make the variation.

There are separate provisions for local authorities.

If an employer does meet this test, the dismissal will not be automatically unfair, but the employer would still need to follow the current rules to ensure the dismissal is not unfair under ordinary principles.

The Bill goes on to set out relevant factors to be considered when assessing the fairness of any dismissal under the ordinary principles including the consultation carried out with the employee/representatives and anything offered to the employee in return for the variation. These can be added to by further regulations.

Timeline

The government has suggested that it will consult on this in Autumn this year, and that changes will take effect in October 2026.

It is imperative that employers engage in the consultation to ensure Government understand the impact on their ability to amend terms of employment, such amendments being reasonable and necessary to meet the agile nature of business.  Such engagement can be directly or via industry bodies such as the CBI.

Practical Impacts

In reality, the restricted changes are the ones that usually cause the most controversy and attract disagreement from employees and unless an employer is able to demonstrate severe financial difficulties it will not be able to make these changes without agreement.

There’s still a lot of uncertainty over the financial difficulties test, including what evidence employers will need to provide to demonstrate this, how tribunals will assess this and what test will be applied to assess if the business is a going concern, for example will this apply to the whole business or will it be sufficient that only part of the business is in financial difficulty.

We could, as a result of the changes, see a rise in breach of contract claims where employers force through changes but given the inherent risks with this approach, this seems unlikely. Instead, the most likely practical impact is that businesses needing to make these changes will look at redundancies instead (or will be forced to make redundancies if they have been deterred from making necessary changes to the detriment of the business) or having protected discussions with employees with a view to them either exiting the business under a settlement or being offered a one off payment in exchange for agreeing to the contract changes proposed and waiving any potential breach of contract claim.

We may also see employers seeking to rely on flexibility clauses (to the extent permitted) being cautious with salary increases and making benefits non-contractual.

Steps to take now

Employers should consider their contractual terms and whether they have any planned or desired changes to these.  They may want to action any proposals prior to the new provisions coming into force so as to be subject to the current rules.

They should also consider their contract terms to see if changes are already permitted by the contract or if new flexibility clauses need to be drafted.  However, under the Bill, flexibility clauses in contracts relating to the restricted changes will be treated as a restricted change, although it is unclear if this only applies to new flexibility clauses inserted after the Bill has been passed or if existing ones would also be caught.

It’s important for businesses to give this consideration, otherwise they risk being left constrained by unfavourable contract terms or claims for unfair dismissal if they seek to make changes down the line.  Employers will be needing to relook at contracts in any event as a result of the other ERB changes.