David Roath | 4th May 2016

National living wage and the withdrawal of benefits


David Roath | 4th May 2016

National living wage and the withdrawal of benefits

On 1 April 2016, the national living wage was introduced. For workers aged 25 or over, the minimum wage that must be paid is £7.20 per hour.

The introduction of the new national living wage was heralded as a good thing for workers and a positive move by the Government. However, quite quickly, there had been reports that employers have tried to erode the benefit or offset the additional cost by removing or changing certain benefits. We have had reports of retailers removing benefits such as free lunches. Other employers have reportedly changed (or are planning to change) premium rates for working overtime and/or working on Sundays.

In essence, employers are being forced by the Government to give on the one hand and are choosing themselves to take away on the other. This has been widely reported in the media as an unexpected consequence of the new national living wage. However, there has been little focus (so far) on whether employers can actually do this?

Contractual Benefits

Let’s start by going back to basics with the law on contract.  Employees have a number of benefits that are or can become contractual rights. The right to benefit from employment benefits can be derived from a number of sources:

  1. Written contract
    Employees should have a written contract of employment and certain employment benefits will be set out expressly in the employment contract.   For example, rates of pay, hours of work and holiday entitlement will be set out in writing.
  2. Verbal Promises
    An employment contract should be in writing but contracts (both employment and otherwise) can be formed verbally. There will be a contractual obligation on an employer if a promise is made verbally and this is accepted.   The problem with verbal contracts is usually evidential with the parties either not agreeing the terms that were allegedly agreed or one party suffering from contractual amnesia.
  3. Implication and/or Incorporation
  4. Terms can be implied into a contract in a number of ways. One such way is by custom and practice. If an employer has for a long period of time provided certain benefits, such as free lunches, and this is well known by all employees in the business, the right might have been incorporated by custom and practice.  Establishing that a term has been incorporated by custom and practice is not easy and an employee would need to show that the custom or practice:
    • is “reasonable, notorious and certain”;
    • has been followed “because there is a sense of legal obligation to do so”.

However, it is an angle which would need to be looked at. Terms can be also incorporated into an individual contract of employment if they are set out in other documents, such as a staff handbook, and they are apt for incorporation.

The reason the above is relevant is because, where a right is or has become a contractual benefit, an employee has a significant amount of protection. An employer withdrawing the contractual right might be acting in breach of contract.

How to lawfully change a contract

It is worth exploring at this stage how an employer can change a contract, if the employer wishes to withdraw a contractual right. This can happen in a number of ways including as follows:

  1. In accordance with the contract
    Some employment contracts provide employers with the ability to make certain changes. However, a general or fairly vague power written into a contract is unlikely to be enough. The Courts have been reluctant to allow employers to rely on fairly generally worded powers of variation. Most employers do not have specific enough wording to make wide ranging changes to a contract of employment (such as withdrawal of benefits or withdrawal of previously agreed overtime).
  2. By agreement
    Any contractual term can be varied by agreement and this is often the only risk free way to make a change. However, employees are unlikely to agree to a change which will be a detriment to them.
  3. Termination and Re-employment
    Where an employer cannot get the agreement of employees, an employer can force through a change by terminating the existing contracts on notice (i.e. lawfully) and by offering re-employment on new terms (usually almost identical terms to the old employment term save for the change the employer wanted to make). However, this is risky for an employer because the termination of employment will be a dismissal. It then raises the spectre of unfair dismissal claims.   Employers can defend claims for unfair dismissal in circumstances such as this where there is a substantial reason for the change.   The employer will need to establish a sound business reason and this might be possible where, for example, the increase in basic pay has had an unexpected impact on the overtime rates which will affect the reasonable profitability or viability of the business.   However, will the same argument apply to free food?   Each case would need to be looked at on its own merits.
    There are also some fairly significant consultation requirements to carry out an advance, especially if the employee is proposing to dismiss 20 or more employees, even where an offer of re-employment is being made.
  4. Force through the change
    Some employers will simply make the contractual change and hope that the employees fall into line. The employer will be acting in breach of the contract and the employee needs to decide what he or she will do. There are a number of potential responses as follows:
  • Simply accept the change. Employees will sometimes be unhappy but will nevertheless accept the change being made by doing nothing about it.   It the change has an instant impact then an employee might waive the breach if he or she works on without formal challenge.
  • Resign and claim constructive dismissal. At the other end of the scale, an employee faced with a fundamental breach of contract (such as the removal of overtime) can accept the breach and resign. The employee will treat himself as being constructively dismissed and can bring an unfair dismissal claim.
  • Stand and sue.  An employee faced with a breach of contract does not have to resign in order to bring a claim. The employee can remain in employment and bring a claim against the employer relating to the withdrawal of the contractual benefits. This is often referred to as “stand and sue”, i.e. stand your ground in employment but bring claim in relation to the breach to either get damages or force the employer to re-think.   The remedies open to the employee will depend upon the nature of the breach.

What are employees doing?

The media stories have all been about employers having withdrawn benefits or planning to withdraw benefits. I have not seen anything yet about employees reacting to this and standing up to their employers. If we take the example of free food provided to employees at lunch times, this may well have become a contractual right. An employer might have previously promised employees the right to a free sandwich and/or a cup of coffee at lunch times or it might have been incorporated by custom and practice. Either way, once it has become a contractual right then it cannot simply be withdrawn.

The issue of premium rates for Sundays or premium overtime rates can be interesting. Unlike benefits such as free meals (which might not be written down) what someone will be paid for working certain days or hours will almost certainly be written down. An employee will know what he or she is going to be paid for working on a given day and will know what the overtime rates are. The wording setting out the pay rates will be important and there might be a specific power to vary. However, absent a specific power to vary, a variation in pay rates would be a fundamental breach of contract.

Admittedly, it is easy for me to say there might be a claim here but not so easy for an employee earning the national living wage to sue one of the retail giants. However, a number of these retailers will have employees who are members of trade unions and I would expect the trade unions to stand up for their members. Other employees could club together to apply some pressure to the employer.

In summary, there is more to this story than meets the eye. The media reports are suggesting that employers might be acting unreasonably or contrary to the spirit of the legislation by withdrawing certain benefits or changing pay rates. However, it goes further than this and employers might be acting unlawfully if they make certain changes as a reaction to the introduction of the national living wage.   Employers cannot simply make contractual changes because the new wage rate is being forced on them and they don’t like it.

For employees, you need to consider the position carefully and if you can take specialist advice then you should do this. For employers, I do not recommend that you take any steps without first considering the contractual issues and having a well planned strategy for making the change, worked out in conjunction with your specialist employment law advisors.  Consultation should be undertaken and will in some cases be compulsory.  Good employers will talk to their employees and explain clearly why they are making changes, even where the employer has the power to make the changes or where it is unlikely the benefit is contractual.

For more information or to discuss any issues regarding the national living wage and the withdrawal of benefits please contact me.