#3643 - Sources Of Contractual Terms - Labour Law

Sources of contractual terms and conditions

Nature of the sources of contractual terms and conditions. How far the law recognises the normative effect of the different sources and how it deals with conflicts between them.

Express terms and managerial prerogative

The express terms of the contract of employment are only capable of playing a limited role in defining the agreement made by the parties e.g. the precise degree of effort which the employee must devote to the work in order to earn the agreed wages cannot be stated in advance: “the contract of employment hardly ever specifies exactly what the employee undertakes to do during each hour or day of his employment” (Lupton and Bowey).

The contract may lay down formal rules and procedures, such as those governing discipline and dismissal, as well as terms and conditions of employment such as wage or salary rates, working hours, holidays, sick pay and pension rights. Whether these express terms are agreed individually or, as more usual, incorporated by reference to a collective agreement or other external source, they give rise to legally-binding, reciprocal obligations between the two parties. But a “vital part of the contract, the content of the work to be done and the quality, intensity and pace of work effort, can neither be specified, nor enforced in the same way” (Pankhurst).

One reason for this which is suggested by transaction cost economics is that to specify the precise contents of performance in advance would be too costly. All long-term contracts contain this element of incompleteness in the sense that limited information prevents the parties from anticipating all future contingencies and specifying the form which performance is to take under those conditions (O Hart).

What is distinctive about the contract of employment is that the problem of incompleteness is addressed by granting one party, the employer, unilateral rights of direction over the other, the employee. The employee agrees to serve in return for wages, rather than undertaking to provide a particular service or product within which his labour is embodied; hence what the employer buys “is not an agreed amount of labour, but the power to labour over an agreed period of time” (Braverman). The employee undertakes to accept, within limits which are not always clearly defined, the authority of the employer to determine the mode of performance.

The idea that the employer possesses a prerogative power which lies beyond the express terms of the contract, just as the employee owes the employer a “diffuse obligation of obedience” (Gouldner) is recognised by the common law of the contract of employment. The employer has the implied power to lay down certain norms for the performance of work which do not take the form of contract terms; they do not need to be agreed in advance with the employees on an individual or collective basis (through their representatives) and they can be changed unilaterally.

This can be seen from cases involving the practice of “working to rule” as part of industrial action against the employer – the employees may adhere precisely and literally to the work rules, but if these rules are simply an expression of the employer’s prerogative power, they cannot claim to have exhausted their contractual obligations by doing so. on the contrary, since the aim of the work to rule is to impair the effectiveness of the employer’s business or service, the individual employees will be in breach of contract by virtue of not fulfilling their “duty of co-operation” which, if unstated, is nevertheless regarded by the courts as fundamental to the contract (SoS for employment v ASLEF No 2).

There is a lack of clarity about precisely where the express contract terms end and managerial prerogative begins. The employer has no power to vary unilaterally the wage rates, hours of work and other conditions of employment which constitute contract terms (Robertson).

Thus an employee’s working hours may not normally be altered without his or her agreement. The precise form taken by a weekly timetable of lessons taught by a schoolteacher has been held, on the other hand, to be subject to the employer’s right to specify the mode of performance, subject only to the need for the orders given to be lawful and reasonable in the circumstances (Sim).

This doctrine, while undoubtedly an important source of flexibility from the employer’s point of view, can only be taken so far without undermining the contractual nature of the employment relationship. Obligations which are specific in nature will normally be construed as express terms which limit the employee’s more open-ended duties of obedience and co-operation. Moreover, although its open-endedness makes it seem to lie “beyond contract” the employer’s residual prerogative power is nevertheless clothed in the form of various implied terms which may be limited in their scope not just by formal agreement between the parties, but also by terms incorporated from sources external to the relationship, in particular collective bargaining.

Terms implied at common law

The ‘bridging’ term, through which the normative contents of collective agreements are given effect in the contract of employment, is one of the most important examples of a common law implied term.

Terms implied at common law underpin managerial prerogative by expressing the employee’s duties to obedience, fidelity and care, but also protect certain of the employee’s expectations of continuing work and employment. Thus the employer may come under an obligation to compensate the employee for lay off or suspension of work caused by lack of demand, and to pay sick pay if the employee falls ill. The reciprocal duty of co-operation places both sides under an obligation to take steps to ensure that the contract can be made to work effectively. The scope of this obligation is very unclear. Sometimes it amounts to saying that the employee’s first responsibility is to the business, even at the possible cost of their own job security. However, it is also the source of an obligation on the employer’s side to avoid action which would be likely to damage or seriously undermine mutual trust and confidence between the parties. The judicial recognition and extension of this implied term are among the most significant developments in employment law.

The obligations created by implied terms are, by their nature, diffuse and open-ended. They epitomise the merging of contract and status within the contract of employment: “to the employee, the arrangement is much more like the all-encompassing status agreement than the express limited regime of contract” (Atleson).

Meritt has traced their presence in modern contract back to 19^th century master and servant legislation: “the status-based incidents of the old master-servant relationship, appropriate to domestic and agricultural service, were grafted on to the relationship of principal and independent contractor, producing, by the end of the 19^th century, the concepts of employer and employee”. The merger of “master-servant law and contract meant that the law never treated the employment contract as the result of free bargaining and mutual consent, despite dogma that this was instead the case. Instead, the contract was deemed to include implied terms which reserve the employer the full authority and direction of employees” (Atleson).

Today, even though the implied incidents of the employment relationship are generally understood to be contractual in nature, it is only with some difficulty that they can be made to fit into a contractual framework, and they bear evident signs of their origins in statutory regulation and the law of tort.

The normal tests for implying a contract term, the “officious bystander” and “business efficacy” tests (Shirlaw and The Moorcock respectively) seek to discover the unstated intentions of the parties; consent remains the rationale for the presence of the term. Implied terms in the contract in the contract of employment on the other hand, are said to be “legal incidents” of the relationship; they do not necessarily arise from the presumed intention of the parties but by virtue of the nature of the underlying transaction. In a similar context, Lord Denning has said of this technique, “these obligations are not founded on the intention of the parties, actual or presumed, but on more general considerations...the obligation is a legal incident of the relationship which is attached by the law itself and not by reason of any implied term (Lostock Garage).

The incidents which are implied into the contract of employment are, characteristically, those which reflect the continuing nature of the employment relationship and the mutual dependence to which it gives rise.

Mears – Stephenson LJ referred to obligations which “the general law will impose and imply, not satisfying the business efficacy or officious bystander tests applicable to commercial contracts where there is no such relationship, but as legal incidents of those other kinds of contractual relationship”. The CoA was prepared to imply a term which would not have been at once assented to by both parties at the time when they made the contract.

Tadd - A court may imply into a contract of employment the ‘bridging term’ necessary to give effect to a collective agreement which is applicable to that contract on the grounds that this aligns the legal contents of the contract with the circumstances governing its operation in practice.

Liverpool CC v Irwin – HoL has said that an incident of the relationship...