by David Cabrelli, Professor of Labour Law, University of Edinburgh
Should the law lend legal validity to a clause in a contract that empowers one of the parties to unilaterally vary its terms? And should there be any difference in the applicable rule if the contracting party who has the power to vary is in a superior bargaining position, such as an employer in an employment contract? These are the two principal questions that this post will consider.
In the view of John Stuart Mill, everyone should have the right to consent (or not to consent) to change their mind in the future and to have that position respected by the law.[1] Up to a point, Mill’s position reflects the current law, since the point of departure is that contracts can only be varied by mutual consent, irrespective of whether the bargain concluded is a commercial contract[2] or employment contract.[3] However, there is an exception. For example, in the case of a unilateral variation clause – where the employee has exercised their autonomy to agree to a provision that permits the employer to change the terms of the contract of employment without the approval of the employee – contract law recognises that mutual consent is superfluous.[4] This is controversial for the reason that the employee is in an unequal bargaining position vis-à-vis the employer as well as subordinate to the employer and subject to the latter’s commands. Thus, there is the temptation to reform the law to invalidate unilateral variation clauses. But in this post, I make the claim that this temptation should be resisted, albeit not as a matter of principle, but for doctrinal reasons.
I will argue that law reform of this nature is both unnecessary and counter-productive: unnecessary, in light of existing legal rules that circumscribe the extent to which employers can rely on unilateral variation clauses; and counter-productive insofar as reform would simply incentivise employers to dismiss and re-engage – or in more colloquial parlance, “fire and rehire” – the employees on the new terms. In fact, the reality of existing legal doctrine is that the more difficult the law makes it to vary the terms of the contract of employment, the more relevant and significant the rules on dismissal and the termination of the employment contract become. Tightening up the rules on the variation of contractual terms would result in perverse outcomes, as the current policy expressed by the UK Government’s Department for Business and Trade (DBT) in a draft Code of Practice is to strongly discourage “fire and rehire”, which it is stated should be a strategy of last resort.
The Law Regulating the Variation of the Contract of Employment
Where a contracting party A fully removes their future autonomy by agreeing to a contractual term empowering the other contracting party B to vary or revise the terms of the contract without A’s consent, orthodox principles of contract law treat this as legally valid.[5] And the common law governing the employment contract follows contract law, i.e. where A is the employee and B is the employer.[6] However, the law appreciates the dangers inherent in such unilateral variation clauses. As such, contract law subjects B’s exercise of a unilateral power of variation to judicial control via the implication of an implied term. In BT plc v Telefonica O2 UK Ltd., Lord Neuberger explained that the contracting party B must exercise the clause in good faith, not arbitrarily or capriciously, and consistently with the contractual purpose of the unilateral power of variation.[7] As such, if B invokes the unilateral power in a manner which transgresses this standard, the purported variation will be invalidated by the courts. Likewise, to guard against any exploitation of the employee where unilateral variation clauses present themselves in employment contracts, the courts adopt a dual approach.[8] First, the courts insist on clear language to reserve a unilateral power of variation of such a kind to the employer.[9] For example, in Bateman v Asda Stores Ltd,[10] the parties had agreed a contractual provision reserving a right to the employer “… to review, revise, amend or replace the contents of this [contract] and introduce new [terms] from time to time reflecting the changing needs of the business” without the employee’s consent. When the employer changed its payment arrangements and systems and the employee challenged the variation, the Employment Appeal Tribunal (EAT) upheld the change on the basis that the clause was wide and clear enough in its terms. The decision in Bateman is not unremarkable; but the outcome will come down to a judicial assessment of the relative clarity of the words reserving the unilateral power of variation. For example, in Hart v St Mary’s School (Colchester) Ltd.[11] and Norman v National Audit Office,[12] the relevant clauses in the employment contract provided that its terms were “subject to variation” and “subject to amendment.” In both of these cases, the EAT held that this sort of wording was not sufficiently clear or unambiguous to enable the employer to unilaterally vary as the wording failed to clarify which of the parties could amend, and how. In that way, the purported variations were of no effect and not binding on the employees. This decision underscores how existing legal doctrine serves to subject unilateral variation clauses to a measure of constraint.
Secondly, legal doctrine governing employment contracts goes further. It provides an additional set of controls on the validity of unilateral variation clauses. In particular, the far-reaching implied term of mutual trust and confidence – which is a common law term of the contract of employment implied in law – has been marshalled by the courts to strike down a variation where the employer invoked its unilateral power to do so.[13] According to the applicable test, the employee must show that the employer has exercised the unilateral variation power in a way which has, without reasonable or proper cause, either destroyed or severely undermined the employee’s trust and confidence in the continuation of the employment relationship. In the final analysis, the implied term acts as a check on the managerial prerogative to unilaterally modify the employment contract, but the question is whether something else is required to provide employees with greater protection. This takes us to the case for law reform and what shape any adjustments of the legal position might take.
A Case for Reform?
From the discussion so far, can we have faith in any assurances that the employment law governing unilateral variation clauses is sufficiently robust, conferring adequate protection on the employee? For in the case of the contract of employment, the capacity of the employee to exercise their freedom to and of contract is arguably compromised. As Kahn-Freund famously remarked, although the contract of employment is consensual in nature, the autonomy of the employee is in fact an “indispensable figment of the legal mind”, representing a penetrable gloss, that only sparingly hides the subordination lurking beneath.[14] This can be ascribed to the distinction between the formal freedom (to and of contract) of the employee and the reality of the imbalance in the bargaining power in favour of the employer. Under such conditions, it is meaningless to talk of employee “autonomy”, particularly where the terms of the contract of employment are presented by the employer to the employee at the inception of the working relationship on a “take-it-or-leave-it” basis. And if Kahn-Freund is right that the notion of “agreement” and “autonomy” in the case of the “contract” of employment is nothing but an inspired fiction, then how can it ever be justifiable to accept the current law on the validity of unilateral variation clauses? In essence, the claim is that lending legal validity to unilateral variation clauses is wholly misconceived, overlooking the inequality of bargaining power inherent in the employment relationship. On this basis, it would be more equitable to reform the law governing the employment contract to depart from the orthodox rules of contract law and outlaw all unilateral powers of variation conferred in favour of employers.
However, while appealing, I am firmly against any departure of this sort from general contract law. My rejection of the suggested prohibition is rooted in two doctrinal considerations, which make it both unnecessary and counter-productive. First, it is unnecessary in light of the existing legal doctrines that place a degree of constraint on the ability of employers to rely on and exercise unilateral variation clauses. To recap, the courts will police such clauses to declare that they are not binding on the employee for either a want of clear wording (e.g. Norman v National Audit Office) or the fact that their exercise breached the implied term of mutual trust and confidence (Dresdner Kleinwort Ltd and Commerzbank AG v Attrill). Secondly, it is potentially counter-productive in light of the doctrinal reality that the laws governing the variation or termination of the contract of employment are interdependent and inextricably linked together in a sort of symbiotic relationship, to the extent that the respective territories that they occupy oscillate and react to movements in the other.
By way of explanation, the more restrictions or prohibitions imposed by the law on unilateral employer variations, the more important the law of termination becomes: if it is more difficult to vary, the more attractive the termination/dismissal and reemployment of the employee (incorporating the rejected terms) becomes. Of course, the opposite is also true. In other words. if the law regulating the variation of the terms of the employment contract is simplified and lax, then the law governing the termination of the employment contract becomes less relevant: if it is easier to vary, there is less need for the employer to dismiss and reengage an employee to achieve its commercial ends. And this is concerning in light of the recent high-profile use of the dismissal and reengagement – or “fire and rehire” – strategy by management in response to employees who consistently refuse to consent to employer-proposed changes to their terms and conditions. Political anxiety over the use of “fire and rehire” reached its zenith at the time of the P&O Ferries scandal and has not subsided. Here, P&O sacked 800 workers by video call or text message with immediate effect and then offered to rehire them on the basis of the less favourable terms and conditions if they agreed to work as agency staff via an employment agency. This controversial episode highlighted the inadequacy of the employment laws protecting workers from the practice of fire and rehire and a draft Code of Practice produced by the DBT has been issued to guide employers.[15] It reinforces the point that “fire and rehire” is a strategy that should only be used by management as a matter of last resort.[16]
As such, the irony is that any tightening up of the rules that currently enable employer-led variations will simply incentivise employers to dismiss and immediately reengage their employees on a new employment contract containing the varied term(s) that the employee has rejected. This result is diametrically opposed to existing policy, as articulated in the draft DBT Code of Practice. For that reason, any consideration of the imposition of additional legal controls on the ability of employers to vary the employment contract should proceed with caution, cognisant of the fact that any reform proposals must account for the employer’s ultimate power of dismissal when confronted by employees withholding their consent to changes.
[1] J. Mill, Principles of Political Economy (Kitchener, Batoche Books, 2000) 1111.
[2] Robinson v Page (1826) 3 Russ. 114.
[3] Wandsworth London B.C. v D’Silva [1998] IRLR 193, 197 per Lord Wolff MR.
[4] Bateman v Asda Stores Ltd [2010] IRLR 370.
[5] See Chitty on Contracts (35th edn, Sweet & Maxwell 2023) para. 26-04; May and Butcher Ltd. v R [1934] 2 KB 17, 21 per Viscount Dunedin.
[6] Bateman v Asda Stores Ltd [2010] IRLR 370.
[7] [2014] UKSC 42, [2014] 4 All ER 907, 923.
[8] Where there is no unilateral variation clause in the employment contract, the law recognises that an employee can also resist the employer’s proposed variation by continuing to work, having put forward their individual (or via their trade union) protest to the proposed terms: see Secretary of State for the Home Department v Cox [2023] ICR 914 and P. Lorber, “Check-off, Variation of Contract and Collective Voice” (2023) 53 Industrial Law Journal 944, 948-950. In such a case, the courts will not accept that the employee has agreed to the proposed variation.
[9] Wandsworth London B.C. v D’Silva [1998] IRLR 193, 197 Lord Wolff MR.
[10] [2010] IRLR 370.
[11] (UKEAT/0305/14, 8 January 2015).
[12] [2015] IRLR 634.
[13] Dresdner Kleinwort Ltd and Commerzbank AG v Attrill [2013] EWCA Civ 394, [2013] IRLR 548.
[14] P. Davies and M. Freedland, Kahn-Freund’s Labour and the Law, (London, Stevens & Sons, 1983) 18.
[15] See Draft code of practice: issued by the Secretary of State under section 203 of the Trade Union and Labour Relations (Consolidation) Act 1992 on dismissal and re-engagement (publishing.service.gov.uk)
[16] See Draft code of practice: issued by the Secretary of State under section 203 of the Trade Union and Labour Relations (Consolidation) Act 1992 on dismissal and re-engagement (publishing.service.gov.uk) at pages 6 & 13.
