Who pays for the living wage?

living wage employment law
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Q: We need to cope with the added costs of auto enrolment and the living wage. We’d like to remove a number of benefits we provide employees to save some costs but are unsure how to go about it and what the risks are. Any advice?

Kathryn Casey-Evans, partner at law firm Trethowans, answers…

Kathryn Casey-Evans
Kathryn Casey-Evans

Employers must meet their statutory requirements to auto-enrolment and to the national living wage. That may add cost, but it is essential to comply. It may be possible to reduce or remove employee benefits to make back those costs but it is unlikely to gain sympathy from an employment tribunal. The Government is reported to be very disappointed with companies that have done so and therefore, the tribunal may be directed to take a hard line on any claims that arise from such changes. As a result, it is essential that any changes made are fair and lawful to have any chance of being enforceable.

In tackling this issue, it will not come as a surprise to hear that forcibly removing benefits without consent, particularly those that relate to pay, will not be well received by your employees. Getting agreement is always the best answer. You will need to consult with your staff and this may mean that you buy out benefits with a lump sum offer.

If you can’t get agreement, an enforced amendment of any terms could result in grounds for a claim of either breach of contract or constructive dismissal. As a result, any changes should be considered carefully. Particular care is needed where a change is being made following a TUPE transfer. For the purpose of this response, that doesn’t apply.

When looking at this question, we would suggest an initial review of the benefits that you provide. If you offer externally sourced benefits, such as medical insurance or dental cover, we would recommend that you benchmark the costs of providing these. The purpose of this is to ensure that you are not paying over market rate for the benefits you provide. If you are, significant cost savings could be made without the need to remove or change any benefits.

If this is not applicable or possible, then the starting point for any employer looking to change employment terms is to try and reach agreement with their employees. As stated above, forcing through a change will not encourage a good working relationship between you and your staff and may encourage resignations or a loss of engagement moving forward.  Following a review of benefits with your staff, you may find that some of the benefits that you offer are not valued that highly by your employees and, with some persuasion, they may be happy to give up a benefit in return for another or for a pay rise.

In considering the forced route for change, you will need to look at the benefits that you currently provide and assess which benefits are statutory (required by law) contractual (required under the employment contract) and discretionary (which may be withdrawn without breaching contract). If you have discretionary benefits, then you may be able to make a reduction in that benefit, or indeed cease it altogether without being in breach of contract. So, for example, it is common for some bonus schemes to be discretionary. As a result, an amendment or complete withdrawal of that bonus scheme may be achievable. However, caution should be exercised as there are multiple cases in which a benefit was believed to be ‘discretionary’ but was found to be contractual because either it was not set up correctly or it became contractual through custom and practice. A good example is where a formula or calculation exists for deciding how much a bonus pays. If that is used, the scheme is likely to be contractual. You must be sure that any benefits are truly discretionary before varying or withdrawing them.

Your employment contract might offer you more discretion via what are termed as ‘flexibility clauses’. These are clauses which give an employer the scope to amend the benefit in that clause, using words about a right to ‘vary, amend or withdraw’ such a benefit.  Great care still has to be taken even if such a clause exists.  Whether it is lawful or fair to rely on such a clause will always depend on the circumstances of the case.

The final and least attractive option is to force the change in breach of contract. The safest way to do so is to consult and seek a change by agreement. If the proposed change is not agreed, then an employer can terminate the employment by giving notice and offering re-employment under the new terms. The risk here is that this is a dismissal and therefore, the employee could bring an unfair dismissal claim (even if they accept re-employment). The employer will want to make sure that the decision to dismiss is potentially fair for unfair dismissal purposes. Whether it is considered fair will be determined by the business reasons the employer imposed the change and what procedure they adopted, including the consultation process.

In relation to the risks, an unfair dismissal claim is expensive, in particular if claims come from multiple employees. A successful employee can achieve up to the lesser of one year’s salary or the statutory cap (currently £78,962). The potential award for a breach of contract claim is unlimited however, it is based on actual loss.

In summary, unless you get an employee’s agreement, removing a benefit to make way for the cost of new legal entitlements runs several risks. We would recommend that before you consider any changes you take legal advice from an employment solicitor.

By Kathryn Casey-Evans,  partner in employment and immigration law at Trethowans.

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