Q&A | Does an employee need to accept a benefit for it to be binding | Employment Law Update March

We introduced a shift allowance for our shift worker employees a few months ago. However, in recent times business has slowed down and we are thinking of removing the shift allowances to reduce costs. We did not sign an amended employment agreement with the staff regarding the shift allowance, we just sent them a letter notifying them of the shift allowances. None of them has ever responded to us in regard to the shift allowances or said anything to signify some sort of acceptance. Does that mean that we are now able to remove the shift allowances since we never entered into an agreement and they never said anything in acceptance of the shift allowances?

No, it is unlikely to be lawful for you to do this. The employees did not need to respond to say that they accepted the additional shift allowance payment in order for it to be a binding contractual agreement. It is likely that their continuing to work as per usual after you communicated the introduction of that shift allowance is regarded as an acceptance of that additional income.

Generally, as part of what is required for a contract to be binding, there must be an offer and acceptance, and there must also be consideration (something of value to both parties exchanged as part of the deal). The case law below sets out how these necessary elements for creating a binding contract can play out without an employee communicating an acceptance of something an employer offers.

An older decision of the Employment Court was to the effect that an offer and acceptance can take place where the employer makes a declaration of something being provided, and the employee, by continuing to work as per usual, has effectively accepted such an offer: Owen v McAlpine Industries Ltd [1999] 2 ERNZ 819 (EmpC). The Court also held that continuing to work can amount to consideration. The Court found that the employment contract had been mutually varied to include compensation entitlements when the general manager simply wrote that office workers would receive that entitlement. It was held that this advice from the general manager was an offer and that, by continuing to work as usual, the employees accepted that offer. The Court considered that this was consistent with the common situation where employers periodically offer increased remuneration; no formal acceptance is required each time remuneration increases.

The Owen decision applied a decision of the Court of Appeal which had undertaken similar reasoning to the issue of “consideration”: United Food and Chemical Workers Union of NZ v Talley [1993] 2 ERNZ 360 (CA).

The following comment from the Court of Appeal at [376] was cited:

We are disposed to think that the continued performance of the contract following a variation such as a voluntary pay increase, or the practical benefit to the employer of the employee’s willingness to continue to serve in the light of the incentive, should be seen as consideration sufficient for the change to become incorporated into the contractual terms.

The Owen and United Food and Chemical Workers Union decisions were later applied by a recent Employment Court decision where the Court observed that previous decisions of the Court suggested that the rules of offer, acceptance and consideration apply in the employment context in a varied manner: Fernandez v Rappongi Excursions Ltd trading as Denny’s Restaurants [2019] NZEmpC 99.

The Court in this more recent Fernandez decision was dealing with the situation of an employer who had notified the employee that he would be entitled to a 10% shareholding of the operating company. The Court considered that the facts in Fernandez were closely aligned with those in Owen. The announcement of the 10% shareholding by the employer amounted to an offer and it was accepted by the employee continuing his duties.

As the cases above demonstrate, in most instances an employee does not have to communicate an acceptance of any benefit or pay increase that you notify them of. Therefore when announcing any changes in wages, salaries or benefits to employees, it is important that you are committed to providing this to them before you do it and that the change is sustainable. As simply the fact of them continuing to work for you after such an announcement is likely to constitute a binding contract having been created.

Information reproduced with permission of Wolters Kluwer

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