Posted on: May 15, 2013
As a general rule, contractual terms cannot be varied without the consent of both of the contracting parties. However, an employer has a right to manage his or her business. The line between the employer’s right to manage, which does not require the consent of an employee, and a variation of contract, which does require the consent of an employee, can be hard to draw. An absence of protest amounts to acceptance of an alteration, and acceptance of a change may vary a contract even if the acceptance was unwillingly given.
The Employment Relations Act 2000, section 63A(2), provides that when varying an employment agreement the employer must at least:
(a) provide to the employee a copy of the intended agreement under discussion;
(b) advise the employee that he or she is entitled to seek independent advice about the intended agreement;
(c) give the employee a reasonable opportunity to seek that advice; and
(d) consider any issues that the employee raises and respond to them.
If the employee agrees to the change, the variation to the agreement should be carried out in accordance with the agreement and in any case written down, signed by the parties and appended to the agreement.
If the employee does not agree to the change and the employer changes its practice, the employer will be in breach of contract and open to a personal grievance brought by the employee alleging a unjustified disadvantage in their employment.
Terms implied by custom are also enforceable and, therefore, can only be varied by mutual agreement.
The surrounding case law
Variation of terms
In Niao v Tasman Pulp & Paper Co Ltd (2000) 5 NZELC (digest) 98,605;  2 ERNZ 805, two employees who worked as crane drivers alleged that the employer’s unilateral change to their work rosters amounted to unjustified disadvantage. The employer changed their rosters from “6 and 2” (six days on and two days off) to “5 and 2” because the volume of work for cranes had decreased. The change disadvantaged the employees because a higher proportion of their work fell outside the hours for which penal rates would be paid and they had to work longer hours to receive the same earnings. The company argued that it had good commercial reasons for wanting to change the rosters.
The Employment Court noted that the “6 and 2” roster was a term of the employees’ employment contracts. For that reason questions about consultation and notice were not relevant. The company was not, entitled to change the terms of the employees’ contracts without their consent. A change that was for the sole benefit of the employer, and which disadvantaged the employee, also had to be supported by some additional payment. The Court held that the employees had established a personal grievance based on breach of contract.
The Court referred to the decision in RMS Shopfitters Ltd v Baldwin (1998) 5 NZELC (digest) 98,509;  2 ERNZ 387 in which the Employment Court accepted the general proposition that an employer was entitled to reorganise its business, but noted that in doing so it could not ignore the terms of the existing employment contract. The Court in Baldwin noted that the employer could expect the employee to adapt her rights and obligations in accordance with changes to the business. However, it was up to the Court to determine whether the changes were fair and reasonable and were implemented in a fair and reasonable way, or whether they were unilateral changes that amounted to repudiation by the company giving the employee the option of affirming them or regarding herself as constructively dismissed.
Finally, the Court in Niao noted that if the parties had attempted to agree on changes but could not, then the company might have been able to reorganise its business in a way that made the employees’ positions surplus. In that case their dismissal might have been justifiable on the grounds of redundancy.
It is therefore apparent that an employer wishing to alter the terms of an employment contract must:
- obtain the employees’ agreement, and
- pay some consideration if the change is to the sole advantage of the employer.
Unilaterally altering the terms of an employment contract amounts to breach of contract. Employees can elect either to affirm the contract or to accept the employer’s repudiation and to regard themselves as constructively dismissed (in which case they can claim that they have been unjustifiably dismissed). Alternatively, as in the Niao case, the employees can allege that they have been unjustifiably disadvantaged.
If the breach is found to constitute a personal grievance, the employer can attempt to justify it. An employer will be able to justify a breach of contract only if it is:
- technical, or
However, an employer that wishes to make changes for good commercial reasons can reorganise its business to incorporate the changes if the employees do not agree to contractual changes. Such restructuring can result in the affected employees’ positions becoming surplus to the employer’s operations. The employees can then be dismissed on the grounds of redundancy. Their dismissal will be justified if the employer has followed a proper procedure.
Unilateral alterations of the terms of a contract of employment are not binding on an employee who refuses to accept them. For example, a nurse who worked in a rest home refused to accept an alteration to her agreed hours of work. She made herself available for work, and the employer was ordered to pay wages in respect of the time she would have been working: see New Zealand Nurses’ IUOW v Auckland Adventist Hospital (1987) 1 NZELC 95,466;  NZILR 652.
In New Zealand Resident Doctors Association v Otago Area Health Board (1991) 4 NZELC 95,334, the employer attempted to impose individual employment contracts on a number of employees before their collective contract had expired. Chief Judge Goddard stated that “if it is the employer’s wish to change any term of [the contract of employment], negotiations are needed but there is no right to alter the contract unilaterally.
Similarly, in Grant v Superstrike Bowling Centres Limited (1991) 4 NZELC 95,374 an employer who tried to reduce the overtime rates of an employee without her agreement could not do so. The employee was entitled to the same terms and conditions in her individual contract that she enjoyed before the Employment Contracts Act 1991 came into force. These were based on an award that provided for overtime for weekend work, and such provisions could not be unilaterally changed.
Custom and practice – implied terms
Terms implied by custom are also enforceable and, therefore, can only be varied by mutual arrangement. Thus, in New Zealand Merchant Service Guild IUOW Incorporated v New Zealand Rail Limited (1991) 4 NZELC (digest) 98,125 where a ship’s officers were traditionally provided with separate mess facilities, an attempt by the employer to combine the officers’ dining rooms with another failed. There was no doubt in the Court’s mind that the separate mess facilities were a reasonable and obvious term of the employment contract. That term was not capable of unilateral variation by the employer.
However, the Court of Appeal was more circumspect in its approach to the question of implied terms in Attorney-General v NZ Post Primary Teachers Association (1992) 4 NZELC (digest) 98,141. It stated:
“… the nature of employment contracts will affect the content of implied terms (such as duties of fairness, confidence and trust) but that does not call for any different test for implication in such contracts. Similarly the jurisdiction may justify a less rigid approach to evidence in satisfaction of the various tests but that should not detract from the tests. There is no established basis for the implication into employment contracts of terms that the parties have not agreed should be binding conditions of engagement for the reason simply that it would be reasonable to do so.”
It overturned a judgment of the Employment Court and found that the Teacher Non-contact Time Allowance was not to be a term implied either by custom or in some other manner as a result of having been understood and applied by the parties in practice. Mandatory maintenance of the allowance at its existing level could be said to be neither necessary to make the collective agreement effective nor so obvious that it went without saying. The Court considered the usual tests involved in implying terms into contracts and found that none of them indicated an implied term in this instance.
In Everist v McEvedy  3 NZLR 348, the High Court observed that a well-established custom or practice may become an enforceable term of a contract where:
- it has acquired such notoriety that the parties should be taken to have known of it and intended that it should be part of their contract
- it is certain and reasonable
- it is capable of being proved by clear and convincing evidence, and
- it is not inconsistent with any express term of the contract.
In Blom v Ports of Auckland Ltd  NZERA Auckland 68, the Employment Relations Authority held that an employer who, with the agreement of employees, had introduced a new formula for calculating productivity payments on a trial basis could not revert to the original formula after 6.5 years had passed. The Authority said that the “existence of a ‘trial’ incorporates an intention to test the suitability of something or someone for a particular purpose” and noted that the scheme had never been reviewed. The Authority said the extent of the mutual acquiescence in the arrangement meant that the scheme could no longer be regarded as a trial and the new agreement was binding and enforceable between the parties. If the employer attempts to unilaterally change an implied term, it will be in breach of contract and open to the employee bringing a personal grievance for disadvantage in employment.
The “right to manage”
Employers have the right to run their businesses in a way that is commercially viable. An employer is entitled to reorganise its business for good commercial reasons. Reorganisation might result in changes to an employee’s employment position or in the employee’s position becoming surplus to requirements.
An employer cannot, however, unilaterally alter employees’ contracts of employment on the basis that it is exercising its managerial prerogative. The Employment Court in Green v Schering-Plough Animal Health Ltd (1999) 5 NZELC (digest) 98,590;  2 ERNZ 733 said the following with regard to a finding of the Employment Tribunal that unilateral changes to an employee’s contract fell within managerial prerogative:
“It is a little surprising to see this supposed prerogative relied on in the ninth year of the Employment Contracts Act 1991 which emphasises with some force that the relationship between employer and employee is in these days a matter of contract and depends upon the contract between the parties in any given case.”
The employer in that case unilaterally altered the sales call cycle of a sales representative. The employee found the changes unacceptable and eventually resigned. The Employment Court decided that the employee had been constructively dismissed because the changes to his contract were significant and there was no express provision in the contract for mobility, transfer or flexibility. The employee’s departure was directly attributable to the employer’s actions.
In Sadler v Quotable Value New Zealand Limited EC AC4/04, 12 February 2004, the Employment Court held that, on construction of the relevant employment contract, the employer was not permitted to alter the employee’s annual performance targets in the course of the year. Its attempt to do so disadvantaged the employee and entitled him to compensation. The Court said that the employer was not entitled to alter the employment contract unilaterally in the exercise of its managerial prerogative to change its strategic direction. However, the Court found that the employer was entitled to expect the employee to conform to its reasonable managerial requirements, and to expressly commit himself to doing so. Because the employee did not do this, the employer was entitled to determine that the working relationship was untenable for the future. Accordingly, its dismissal of the employee was justified.
The employer in Pacific Dunlop Holdings (NZ) Ltd t/a Corys/Frasers v Wilson (1997) 5 NZELC (digest) 98,442 substantially altered an employee’s employment position. Her role, which was largely administrative, was changed to one of store person and packer. The Employment Court found that the changes were radical but inevitable following restructuring of the company. However, as the core content of the employee’s job was so different from what it had been before, she was entitled to reject the company’s offer of continued employment. She was redundant and should have been treated as such. The company’s refusal to recognise the redundancy situation and its insistence that the employee accept the new position left her with no option but to resign. The Court concluded that she had been constructively dismissed.
The employer in Feltex Woven Carpets Ltd v New Zealand (with exceptions) Woollen Mills, etc, IUOW (1987) 1 NZELC 95,591;  NZILR 591 was facing a downturn in business. It made some employees redundant and attempted to redistribute the redundant employees’ duties among the remaining employees. Some employees refused to carry out the additional duties when not required to do so under their contracts, and were dismissed. The Labour Court found that the employer was entitled to make the decision to reallocate duties, since it was part of the employer’s “right to manage”. If the employees refused or were unable to comply with such an alteration and were dismissed, the matter could be decided on its merits as a personal grievance.
Further, the Court said that an employer also has the right to alter the nature of an employee’s work, subject again to the worker’s rights under the personal grievance procedures and subject to the terms of any contract of employment. It found that, if there were redundancies, the relevant award did permit the employer to redistribute duties among remaining staff.
An award provision determined the issue of variation of duties in Caxton Paper Mills Ltd v Northern Woodpulp, etc, IUOW (1988) 2 NZELC 95,752. The provision permitted the employer to order an employee to undertake other duties if that employee’s normal work was not available, and the employer sought a compliance order requiring the union to advise members to accept such duties. The Court granted the order. Moreover it found that there was a long-standing practice of accepting extra duties in the circumstances concerned, and that the practice had become a part of each employee’s contract. The provision could not be unilaterally revoked.
The right to manage has also been upheld when there is no substantial alteration to a person’s employment. In Canterbury Clerical Workers’ IUOW v Radio Avon Limited  ACJ 563, a clerical worker was required to carry out new duties concerned with accountancy support. The Court found that this change did not substantially alter the nature of her engagement in clerical terms. Her refusal to conform to that requirement justified her dismissal.
In a later decision, New Zealand Amalgamated Engineering, etc, IUOW v Feltex Industries Ltd (1988) 2 NZELC 96,165;  1 NZILR 582, the Court upheld the employer’s right to transfer an employee who carried out cleaning duties to the position of extruder operator. The employee had resisted the transfer and was dismissed. However, he had been employed as an extruder operator originally, and the Court found nothing to prevent the employer from transferring him back to that position. The change was within the terms of the contract of employment, and did not amount to work so fundamentally different from that which the employee had contracted to do that the employee’s position could be said to have been destroyed.
Introduction of new policies
The introduction of new policies to govern the conduct of employees should be undertaken carefully. The new policy must not impose duties that extend, vary or contradict the employment agreement. In New Zealand Amalgamated Engineering Printing and Manufacturing Union Inc v Air New Zealand Ltd (2004) 7 NZELC 97,367, Air New Zealand introduced a new policy to implement testing for drugs and alcohol. Certain unions applied for an injunction to restrain the airline from introducing the policy. One of the arguments they advanced was that the introduction of the policy was a unilateral attempt to vary relevant employment agreements and as such was unlawful. The Employment Court noted that none of the relevant employment agreements dealt with the issue of drug testing. It said the policy did not impose new contractual obligations on employees without their consent and that the airline was entitled to rely on its right to manage the business.
This article, and any information contained on our website is necessarily brief and general in nature, and should not be substituted for professional advice. You should always seek professional advice before taking any action in relation to the matters addressed.