Reflections on The Budget
You’d have to have been living off grid in a technology free zone to miss the furor around Chancellor Rachel Reeves’ budget, announced yesterday. Understandably employers are feeling particularly aggrieved, given that £25bn of the £40bn tax rises will come from an increase to employer’s national insurance contributions. From 6 April 2025, it will increase to 15% and the threshold at which employers are required to pay it will be lowered to just £5000.
On top of this from 1 April 2025 the national living wage will increase by 6.7% to £12.21 for workers 21 and over; to £10 per hour for 18-20 year olds; and £7.55 per hour for apprentices. The accommodation offset will increase to £10.66 a day.
Inevitably these costs will be passed on to workers one way or another. For some employers withdrawing discretionary benefits or withholding annual pay rises may seem an attractive way of clawing back some of these costs.
On the face of it benefits which are discretionary, and do not form part of the employee’s terms and conditions of employment, can be withdrawn without the need to give notice or obtain an employee’s consent. Likewise, depending on the wording of the contract, whilst there may be a right to an annual pay review, it does not necessarily follow that there will be a contractual right to a pay rise. However, there are some potential traps for the unwary.
Firstly, notwithstanding that it is described as discretionary, entitlement to a benefit, bonus or pay rise can be implied into a contract of employment through custom and practice. To become an implied right, a benefit would need to be offered regularly and consistently over a number of years. It must also be reasonable, generally established and well known, and clear cut, such that there becomes an expectation that it will be provided by the employer. An example might include an employer granting additional holiday at Christmas time, where the employer has done so repeatedly and without exception over a number of years. If you consider that there is a risk that entitlement to a benefit might have become an implied contractual right, it’s best to take advice before making any changes. Unilaterally withdrawing or changing contractual entitlements will amount to a breach of contract and could result in costly claims for damages and unfair constructive dismissal claims.
Secondly, even if something is truly discretionary, an employer must not exercise its discretion irrationally, arbitrarily or perversely. If it does so this will amount to a breach of the implied duty of mutual trust and confidence. An example of a situation where an employer is likely to be found in breach of this duty is where a bonus scheme states that award of a bonus is dependent on individual performance. However, despite the employee meeting all targets the employer withholds payment of any bonus on other non-specified grounds.
Finally, even if contractually an employer can withdraw benefits and perks it’s worth considering the impact on morale and employee engagement at a time when the cost of living remains high. Whilst making such changes can appear to make financial sense it can have a wider business impact if employee morale is adversely affected as a result. Although not necessarily obliged to do so, therefore it is prudent prior to implementing changes to be transparent with staff about the reasons for the proposals and obtain staff feedback. There may, for example, be lower cost benefits that have greater value to employees that could be offered as an alternative rather than removing all benefits entirely.
