What to consider when varying contractual terms
The commercial landscape continues to evolve rapidly and employers may find themselves confronted with changes ranging from technological advancements in AI to organisational restructuring. In these circumstances, employers may need to amend existing employees’ employment contracts to effectively manage their operations in response to the emerging demands and needs. This article explores what employers should bear in mind when effecting variation of contracts.
Where an employee has entered into an employment contract with an employer, an amendment of the terms and conditions of the employment may in certain circumstances require consent from the employee, such that the parties should enter into a contract addendum or a new employment contract. In these cases, the employer should ensure that sufficient legal consideration is provided for the variation.
A binding contractual agreement requires the satisfaction of certain elements, including an offer, acceptance of that offer and legal consideration. Consideration is usually some sort of payment, value or bargain given by one party in exchange for the other party’s promise. The law is not concerned with whether the value of consideration provided is adequate in comparison to the value obtained, so in theory, token consideration (of say $1) would suffice.
What is legal consideration?
In circumstances where the employee is already obliged to perform work under a contract of employment, the question of legal consideration for varying the contractual terms is one of “real benefit” (Test for Consideration), i.e. whether the employer gained a benefit or averted any detriment:
- In Wu Kit Man v. Dragonway Group Holdings Limited [2018] HKCA107, the employer issued an addendum to the contract offering certain cash bonuses to the employee in relation to the employer/holding company’s listing plan and in exchange for her remaining in employment past a certain date. The cash bonus in question was HK$350,000 payable even if the employer/holding company’s listing plan ceased or if the employee left the employer for whatever reason before 31 December 2016. The employee’s employment was terminated before that date, but the employer did not pay the cash bonus in accordance with the addendum and she made a claim in the Labour Tribunal for the cash bonus. The Tribunal upheld the claim, but upon appeal by the employer the Court of First Instance said that the addendum was not supported by consideration, and thus the employee was not entitled to the cash bonus. The Court of Appeal confirmed that the Test for Consideration was the appropriate test and remitted the case to the Tribunal for re-determination on the question of consideration for the addendum.
- In Chong Cheng Lin Courtney v. Cathay Pacific Airways Ltd [2010] HKCA 338, the proposition that the non-exercise by an employee of their right to terminate under the contract of employment is good consideration, but the Court of Appeal emphasised that it is important to look at the circumstances of the case and the context in which the variation took place. The variation in this case was of standard terms across the board to all cabin attendants employed by the employer when there was competition from other airlines offering similar packages. Against the specific circumstances, the Court held that the Test for Consideration was satisfied – the consideration was provided was by the employee refraining from resigning, and this was a real benefit to the employer.
Practical tips for employers
Varying the contractual terms and conditions of an employee’s contract of employment will require an employee’s agreement and legal consideration to support the agreement.
Where an amendment results in an improvement of employment terms and conditions, practically the likelihood of challenge is low and a notification may suffice.
However, if the modification is to add a new term or condition - such as increasing a notice period or adding post-termination restrictions - or a change which is at the employee’s detriment - such as a salary reduction or removal of benefits - the employee’s consent should be sought. Otherwise there is a risk that the employee may argue they are constructively dismissed.
The form of legal consideration in support of a variation depends on the facts and circumstances. Some examples include a one-off cash payment or an extra paid day-off. Ultimately, any legal consideration provided must satisfy the Test for Consideration set out above, in particular when one party is, on the face of things, merely promising to perform its existing obligations. An alternative is executing a variation of contract as a deed, although this is less usual and may raise other practical concerns such as difficulty in enticing an employee to sign the deed.
Where an amendment is not contractual in nature, generally notifying the employee would suffice. An employer must nonetheless ensure that it acts rationally and not capriciously in exercising discretion and deciding to implement such a change.
Fatim Jumabhoy is the Asia Head of Employment, Pensions, and Incentives and Managing Partner, and Veronica So is a Senior Associate, Asia Employment, at Herbert Smith Freehills in Hong Kong.
