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Dismiss all of your staff, then hire them all back the following day with a 5.4% pay cut.

In July 2011, dismissal letters were sent to all of Shropshire County Council's 6,500 employees. The letter stated that all council staff were to be dismissed on the 30th September and immediately rehired the following day, but only if they agreed to a 5.4% pay cut. Those staff who did not accept the pay cut were to be dismissed without compensation. This drastic sounding process follows a similar move by Birmingham City Council earlier this year.

The reason behind this bold move was said to be a £76m shortfall in government funding. The pay cuts were to avoid Shropshire having to make 400 permanent redundancies.

The move followed a 90 day consultation period and a series of negotiation meetings during which no agreement was reached on how to deal with the reduced budget. This 'dismissal and re-engagement' tactic was said to be a last resort.

Terminating employment and offering re-engagement on new terms

When an employer needs to make a change to terms and conditions of employment, there are three ways in which the employer may vary the existing contract of employment:

  1. Seeking the employees’ express agreement to the new terms.
  2. Unilaterally imposing the change and relying on the employees’ conduct to establish implied agreement to the change.
  3. Terminating the employees’ employment and offering re-employment on the new terms.

As Shropshire’s consultation on option 1 above did not work, they had to fast track to option 3. This is generally seen to be better than option 2, which has many legal risks associated with it.

So what are the risks to the employer involved in this type of action?

Wrongful dismissal

Provided that the employer serves due contractual notice on employees (or buys out the notice period with a payment in lieu of notice) it will probably not face any claims for wrongful dismissal.

Unfair dismissal

Even where the employer offers continuing employment on revised terms, termination of the existing contract will constitute a dismissal in law and employees will be able to bring unfair dismissal claims in the ordinary way, even if they choose to accept the offer of new employment.

In order to defend an unfair dismissal claim an employer must:

  • establish a potentially fair reason for dismissal, and  
  • show that it acted reasonably in dismissing the employee for failure to agree to the change in terms of employment.

In the context of changing terms of employment, employers usually rely on the potentially fair reason, “some other substantial reason” (“SOSR”) although redundancy is sometimes pleaded in the alternative where the change gives rise to, or was proposed in, a redundancy situation.

As long as the employer has a sound business reason for dismissing an employee who refuses to accept a change in terms, it should be able to establish SOSR.

An Employment Tribunal will take into consideration various factors in deciding the reasonableness of the employer’s decision to dismiss. However, the Tribunal cannot substitute its personal feelings as to what would have been fair, but must consider solely what a reasonable employer would consider sound.

A dismissal following a failure to agree to a change in terms will almost always be unfair where the employer has failed to follow any procedure and consult with employees over the proposed changes, even where the business is faced with financial problems which means that time is of the essence. The adoption of a "fair" procedure goes to the heart of the question of reasonableness, and thus employers seeking to adopt a fair procedure should seek specialist advice.

 By Martin Williams