Local government has been aware for more than a year that it will need to make massive budget cuts in order to achieve the £1.66 billion of savings that the government announced it expected local government to contribute towards tackling the budget deficit.
However, drastic measures are required to achieve budget cuts of this order (see Legal update, Government sets out local government efficiences to tackle budget deficit). One option that is being pursued by Shropshire County Council to achieve savings of £76 million over the next three years, and which has received considerable publicity, is the dismissal of all its staff and the re-engagement of only those who agree to accept a 5.4 per cent cut in their salary (to be phased in over two years to enable staff to adjust to lower earnings).
Shropshire Council is unlikely to be the only authority pursuing this option as the financial position of public sector bodies worsens. Indeed, last year Birmingham City Council sent warning notices to all its staff that they would receive new contracts imposing cuts in pay and conditions and Southampton City Council has also recently announced that it is adopting a similar approach to cut the staff pay roll.
Given the drastic nature of this approach, it is essential local authority employers contemplating following Shropshire’s lead get the process right. An employment contract cannot just be changed or terminated by the employer at will. If the process is wrongly handled, there is a risk that a local authority employer will find itself in the employment tribunal facing claims for unfair dismissal and (if it does not serve notice) breach of contract. There is also a risk, if none of the employees agree to re-engagement on the new terms, that the local authority employer could find itself without a workforce!
In relation to those employees who do not accept the offer of re-engagement, it is essential that a local authority can successfully defend any unfair dismissal claim brought. Seventeen employees at Southampton City Council refused to sign new employment contracts implementing pay cuts of between 2% and 5.5% and legal proceedings have been issued by the unions over the dismissal and re-engagement process. In order to defend any unfair dismissal claim, a local authority employer must be able to:
- Establish a potentially fair reason for the dismissal within the categories set out in sections 98(1) and (2) of the Employment Rights Act 1996.
One of the potentially fair reasons is “some other substantial reason” (SOSR) of a kind justifying the dismissal of an employee from the position held. In order to dismiss an employee fairly for this reason, a local authority employer will need to demonstrate that it acted reasonably in treating that reason as a sufficient reason for dismissal and that it followed a fair procedure. Provided a local authority employer is able to demonstrate that it had a sound business reason for dismissing an employee who refused to accept a change in their contract terms, it should be able to establish SOSR. - Show that it acted reasonably in dismissing the employee for failure to agree to the change in terms of employment. The factors that a tribunal will consider, when assessing the reasonableness of an employer’s decision to dismiss where it has failed to obtain the employee’s agreement to proposed changes, are:
- The employer’s motives for introducing the change.
- The employee’s reasons for rejecting the changes.
- Whether the employees were given reasonable warnings of the proposed changes.
- Whether the changes and their full effect were sufficiently and clearly explained to the employees.
- Whether the employer undertook an assessment of the impact of the changes on employees and whether alternatives to any changes were considered.
- Whether the employer attempted to obtain the employees’ voluntary agreement to any of the changes.
- Whether a reasonable and genuine consultation process was undertaken with the affected employees. This would include the employer listening to their reasons for rejecting the changes, responding reasonably to objections and making concessions where reasonable to do so.
- Whether a majority of the employees have accepted the changes.
- Whether any recognised trade union recommended or objected to the changes.
If a local authority employer cannot show that it had regard to the above when changing an employee’s terms, an employment tribunal is likely to find that a dismissal, following a failure to agree to a change in terms, is unfair.
In summary, therefore, a local authority employer, considering the dismissal and re-engagement of its staff, must be able to show that it has:
- Consulted with its employees to see if agreement can be reached on the proposed change. This may include meeting with the unions to see if a collective agreement can be reached to implement the necessary changes. In Shropshire Council’s case, a collective agreement was not achieved with the unions, despite a 90-day consultation.
- Exhausted all alternative options.
- A compelling business reason for making the changes.
For the local authority employer considering it can only find the necessary budget cuts by drastically cutting the salaries of its staff but keen not to find itself facing costly tribunal claims from former employees, the following PLC resources may be useful:
- Changing Employment Terms: a quick guide.
- Letter seeking agreement to a change in terms of employment of 20 or more employees.
- Letter serving notice on an employee who has refused to consent to a change in their employment terms and the employer is offering employment on new terms.
- Collective redundancy consultation.