An unlawful pay freeze costs Council thousands of pounds in compensation

The law

An individual’s salary and any right to a pay increase are key terms in a contract of employment. Changing these terms may amount to a breach of contract, which may give rise to a number of employment claims.

An employment contract may generally only be amended in accordance with its terms or with the agreement of all parties.

An employer may seek to vary an employee’s contract of employment by:

• relying on an express term in the contract to make changes (such reliance is unlikely to enable an employer to make changes to pay, and may amount to a breach of the implied term of trust and confidence)
• obtaining the employee’s express agreement to the new term(s)
• unilaterally imposing the change and relying on the employees conduct to establish implied agreement to the change.

Where the employer has consulted with employees regarding the change without success, it may consider dismissing the employee for business needs on the basis of Some Other Substantial Reason (SOSR), which is a potential defence to an unfair dismissal claim.

The employer may also terminate an employee’s employment with notice, and offer re-employment under a new contract of employment, and rely on SOSR in the event of an unfair dismissal claim.

A recent case

In the recent decision of Abrahall & Ors v Nottingham City Council & Anor [2018] EWCA civ 796, the Court of Appeal ruled that the conduct of a group of employees who continued to work for two years after the council imposed a pay freeze did not amount to an agreement to vary the term in their contract which provided for a pay increase. It held that the Council was in breach of contract.

In 2010, Nottingham City Council, together with a company owned by it, informed employees that it intended to replace its pay system which used a band of points on a pay column, with a single status arrangement.

Shortly after the introduction of the single status arrangement, the council told employee trade unions that there would be a two-year pay freeze and that employees would not receive annual pay increments in either 2011 or 2012. A formal decision was made in March 2011 and the freeze took effect from 1 April.

The employees, through their trade unions, protested at the time but the pay freeze was implemented nonetheless. In 2013, the Council announced it was going to extend the pay freeze for a further period. At this point, the employees brought claims of unlawful deduction of wages and a declaration that they were entitled to annual increments in the Employment Tribunal.

The employees argued that they had a contractual right to an annual increment in each of the years, 2011 to 2013.

However, the Council denied that under the single status pay structure which provided for pay increments was a contractual entitlement. Even if it was, the employees had agreed to the variation to pay terms in their contract by continuing to work for two years without protest after the pay freeze.

The employees’ claims were dismissed in the Employment Tribunal, and they appealed to the Employment Appeal Tribunal which found in their favour. The Council appealed to the Court of Appeal.

What did the Court of Appeal decide?

The Court of Appeal held that the employees had not implicitly agreed to a variation of contract. There were no hard rules; however, the Court should consider the inferences in a particular case. The Court identified a number of relevant principles to be taken into account:

1. The inference must be clear. That is, if employees conduct in continuing to work is reasonably capable of a different explanation, it cannot be treated as constituting acceptance of the new terms.
2. Protest or objection at the collective level may be sufficient to negate any inference of acceptance.
3. The suggestion that after a ‘period of time’, the employee may be taken to have accepted the variation, raises the difficulty of identifying precisely when that point had been reached on anything other than a fairly arbitrary basis. However, this difficulty does not mean that the question has to be answered once and for all at the point of implementation.

In relation to the case itself, the Court considered that the employees continued to work without protest because they had been told there would be wide-scale redundancies if they did not accept the pay freeze. It did not mean that they agreed to the pay freeze, which was wholly disadvantageous to the employees and was not put to them as something on which their agreement was required. Further, given that the unions had protested not only up to but beyond the date of implementation, it was hard to see how the employees working could be taken as an unequivocal acceptance.

What does this mean for employers?

The Council faced the undesirable choice of either making large scale redundancies or introducing a pay freeze which would affect all employees. This case highlights the difficulties which employers face when struggling to keep their business afloat in tough economic conditions.

Employers should be cautious to rely on implied acceptance, particularly if the variation to the employees’ contracts is disadvantageous and objections have been made, whether by the employees themselves or through their unions.

It would be far better to consult with employees and obtain their express acceptance to a variation rather than to impose a change unilaterally. While an employer may not always be successful in obtaining employee consent to a variation of their contract, by having consulted with the employee first, this may assist the employer if they subsequently decide to dismiss the employee and re-engage them on the new terms.

Nonetheless, the Court of Appeal’s decision in Abrahall is likely to encourage employers to take more drastic steps and rather than seek ways to save jobs, decide to make large-scale redundancies if they cannot rely on other means to vary terms of an employment contract with certainty.

The current economic climate means that a lot of employers, particularly those in retail, will continue to face such challenging situations. Because of the complexity of these types of situations, which often have far reaching effects on employees, it’s crucial to obtain legal advice as early as possible to enable your business to make informed decisions about its future needs and requirements, which may involve redundancies, or changing employee’s terms and conditions.