In the case of Norman and others v National Audit Office UKEAT/0276/14, the Employment Appeal Tribunal (“EAT”) confirmed that flexibility clauses in employment contracts which seek to give employers the right to make unilateral changes to the contract’s terms will be interpreted restrictively against employers.

In reaching its decision, the EAT overturned an Employment Tribunal’s decision that the National Audit Office (“NAO”) had the power to unilaterally vary its employees’ contracts in relation to their leave and sick pay terms.

The Facts

Under their contracts of employment, NAO staff had entitlements to ‘Privilege Leave’ (an additional leave benefit beyond standard holiday entitlements) and generous enhanced sick pay benefits. The NAO sought to reduce those benefits and commenced consultation with the employees’ trade union in 2012. That consultation was ultimately unsuccessful in reaching agreement and, in spring 2013, the NAO sought to impose the changes on its employees unilaterally, relying on what it asserted was a clause in the employees’ contracts allowing the NAO to make unilateral changes without the agreement of the employees.

The NAO’s HR Manual contained two key provisions in this respect. The first (the “Variation Clause”) covered changes to terms and conditions of employment and provided that:

• Conditions of service are “subject to amendment”
• Any significant changes will be notified to staff by one of a number of specified methods

The second provision entitled “Settlement of Disputes” stated that:

• Wherever possible, management and the Trade Union will try to reach agreement before implementing any changes that affect staff
• Changes to working practices or terms and conditions will not be implemented whilst negotiations are taking place, or whilst the issue is under referral to ACAS, unless management considers this essential to the operation of the NAO

The employees sought a declaration from the Employment Tribunal that their terms of employment were unchanged and contained the original Privilege Leave and Sick Pay provisions. However, the Employment Tribunal found in the NAO’s favour.

The EAT’s decision

On appeal, the EAT disagreed with the Employment Tribunal for two reasons:

1. The Variation Clause was not sufficiently clear and unambiguous to give the NAO a unilateral right to amend the employees’ contractual terms.

The statement that conditions of service are “subject to amendment” did not, when read objectively, give the NAO discretion to change contractual terms unilaterally. In fact, the provision said nothing about which party to the contract could amend it and how. The stipulation that significant changes would be notified to staff did nothing to change that, and was entirely consistent with the NAO not having discretion to amend contractual terms unilaterally.

2. The Settlement of Disputes provision did not give the NAO the right to amend the contracts unilaterally.

The EAT made this finding for two reasons. First, on the facts, the provision did not have contractual effect, such that it could not give the NAO a unilateral variation right. Second, even if it did have contractual effect, it could at most give the NAO a power to unilaterally implement changes which were “essential to the operation of the NAO”.The EAT was not persuaded that the NAO had met that criterion.

The EAT therefore determined that the employees’ Privilege Leave and Sick Pay provisions remained unchanged.

What does this decision mean for employers?

The case emphasises the need to be cautious when seeking to rely on purportedly wide flexibility clauses to make unilateral changes to employees’ terms and conditions without their consent. Clear and unambiguous wording will be required to give an employer a discretion to make changes and, in most cases, the discretion will need to be expressly stated to cover the area which the employer is looking to change. For that reason, when drafting employment contracts, express reference should be made to terms where flexibility is likely to be required, such as an employee’s place of work. A blanket general right for the employer to make changes unilaterally to any term of the contract is unlikely to work.

The duty on employers to maintain their relationship of trust and confidence with employees means that, whatever the contractual position – before making unilateral contractual changes – consultation with employees should be undertaken. In this case, the NAO had consulted with the employees’ trade union and taken measures to lessen the impact of the changes. However, that was not enough to overcome the absence of an adequate flexibility clause.

Where employee consent is not forthcoming and changes that are not permitted by the contract are required, an employer could decide to follow a dismissal procedure and offer to reengage the employees on the required new terms. That is, however, always a risky process, not least because it triggers the right for employees who qualify to bring unfair dismissal claims. The process needs to be managed carefully to limit the scope for successful unfair dismissal, breach of contract and other claims.