As businesses continue to look for flexible ways to address headcount issues in an unpredictable economic environment, their quest for creative solutions through contract variations could have significant legal implications. It’s important for employers to be aware that implementing contract variations (such as demotions and salary freezes) is only acceptable when the employee provides absolute consent.
We’re finding that many employers are using contract variations, such as reduced hours or salaries, in place of redundancies as they try to bring further flexibility to their workplace. However, if employers step too far, it’s possible an employee could claim a fundamental breach of their contract and lodge an adverse action claim, suing their employer for damages.
While a certain amount of variation is permitted in most contracts, any variation above 20 per cent of an employee’s normal duties is risky. However, exactly how much variation is permitted within an employee’s contract is a very grey area.
Most contracts include a clause allowing employers to vary employees’ duties from time to time in a subtle way. For example, photocopying documents may not explicitly be in an employee’s job description, but it’s not usually recognised as an unfair variation. Essentially, just because something isn’t a core part of a job description doesn’t mean it amounts to a fundamental breach of the terms and conditions of a contract.
There are other examples which can be recognised as an unfair variation. If the employee doesn’t consent to this change, they can deem it a repudiation of their contract and ultimately undertake litigation.
Employee point of view
The biggest mistake employers make in contract variations is not appreciating the significance of change from an employee’s point of view.
While business owners may feel they’re only affecting small changes to help their business survive, it’s risky to assume the employee, whose duties you’re altering, is going to consent. In addition, a failure to understand an employee’s perspective often involves overseas parent companies insisting on contract variations, where there is less proximity to issues on the ground.
Essentially, employers need to understand that sound people management isn’t divorced from the law; rather the two go hand-in-hand. If you’re making big changes — with the best possible intentions — you’ve got to see more than just names on a balance sheet.
Furthermore, provisions in the Fair Work Act (FWA) have opened the door for employees to challenge any variations made to the terms and conditions of employment they claim are to their detriment.
Under the FWA employees must demonstrate a breach of a fundamental workplace right in order to make a claim. However, we’ve noticed these provisions have been subject to some ‘creative interpretations’ which has opened the door for a significant increase in employee claims.
Moreover, the ability to make an adverse action claim is open to anyone, regardless of remuneration levels. As such, employers must be vigilant in communicating openly and honestly with their employees.
In my experience, employers who are able to communicate changes effectively to employees are going to be far better able to implement change and achieve the cost savings and commercial outcomes required.
Advice for businesses
- Ensure all employment contracts and policies are detailed, accurate and provide the necessary flexibility for employers.
- Document all conversations, changes and agreements. If a deal is done ‘on a handshake’ and variations aren’t recorded properly in writing, they could end up open to debate.
- Don’t just use standard templates for employment contracts. Look at what’s cutting edge and what other employers are doing successfully to help structure their employee base.
- Transparency, proper communication and giving people time to think things through is important. In addition, employers should keep an open mind to feedback and be prepared to negotiate changes.