The Midnight Email
In November 2022, newspapers reported [1] that Elon Musk had sent his new employees at Twitter a midnight email offering them a choice between longer working hours or three months’ severance pay. The subject line of the email was said to be ‘a fork in the road.’
Musk allegedly issued this ultimatum less than a month after he had finally acquired the social media giant. The media was in uproar over this supposed demand. One of the big questions floating around was ‘can he actually do that?’
From a legal point-of-view, the question is can an employer unilaterally change the terms of employment of his existing employees?
For those who just want the answer and not the explanation – no, there’s no chance it would work in India.
Unilateral Changes to Contracts Are Possible
In India, the Indian Contract Act (“ICA”) governs contracts. Employment contracts also fall within the purview of the ICA.
Section 62 of the ICA specifies that ‘if the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract, need not be performed.’ Clearly, both parties must agree to the alteration of a contract. However, what if one of the parties in the contract has already ‘pre-agreed’ to abide by any changes that the other party makes to the contract? Would any such alterations to the contract then be valid?
Judgements of various courts in common law countries (including India) have held [2] that unilateral changes to contracts by one party, when the other party has previously agreed to any such changes, are valid. However, as we shall discuss later, many of these judgements are now bound by restrictions.
The Idealized World of Benode Behary
In the Benode Behary Case [3], an employee claimed his right to a gratuity-at-retirement benefit that had earlier been included in the bye-laws of his employer but which was withdrawn prior to the employee’s termination.
The Calcutta High Court made some interesting observations that are still valid:
- As per the employee’s contract he had to abide by the company’s bye-laws from time-to-time. Only the bye-laws referred to the gratuity and not the employment contract itself. The articles of the company also enabled the directors to amend the bye-laws. Therefore, the company was well within its rights to withdraw the gratuity, and this was applicable to all current employees.
- The aggrieved employee argued against the company withdrawing an interest already vested in him. However, the Court ruled that the gratuity would only vest at retirement hence it could be withdrawn before then.
- A contract must have an express term allowing one of the parties to make unilateral changes to it.
There have been several Supreme Court findings reaffirming the Benode Behary decision of the Calcutta High Court. However, these must be seen in context. On the face of it, it seems as if Elon Musk’s alleged ultimatum would be valid in India as well. Herein follows the ‘but.’
The Caveats
No matter how confident we think we are in stating a position in law there will always be numerous caveats that shake our understanding. Such is the case in this discussion as well:
- Statutory Benefits in Public Interest Cannot Be Contracted Out
In a previous article, we had discussed that contract law fundamentally governs employment contracts. However, when other laws prescribe benefits for employees these benefits are sacrosanct regardless of contractual terms.
Example
An employee has agreed to allow the employer to make unilateral changes to the employment contract. Despite this agreement, the employer still cannot alter the pension and provident fund benefits available to the employee under The Employees Provident Funds and Miscellaneous Provisions Act.
To complicate matters, we will throw in a caveat-within-a-caveat. Section 63 of the Indian Contract Act allows one party in a contract to waive his right(s) under the contract. Under this provision, can an employee waive his right to a statutory benefit for example his pension?
Courts have held [4] that a person can waive private rights through a contract but not rights created in public interest. For example, if a contract has a clause that requires any disputes between the parties be referred for arbitration, either party can waive their right to the arbitration. On the other hand, an employee can’t waive his right to form a union which is a fundamental right.
This caveat makes sense. Statutory rights benefitting employees were created to bridge the power gap between employers and employees. Therefore, even if it appears that an employee has voluntarily given up a right, it could be a case that he was ‘unduly influenced’ by his powerful employer to do so.
- Unconscionable Changes to Contracts
Employees cannot waive rights accorded to them in public interest and therefore employers cannot unilaterally alter those rights. However, as we mentioned in caveat no. 1, private rights can be waived and therefore altered as well. Well, this is also not always true.
Example
There is a factory located several miles away from town in the middle of nowhere. The employer has always provided transportation to the workers to-and-from town. However, later the employer takes away this service. The workers have employment contracts expressly allowing the company to make unilateral changes to the contract from time-to-time. If there is no state law requiring the company to provide such a transportation, the company would be well within its right to withdraw the free service.
Again, courts have stepped in to interpret contract law. At the advent of contract law, it was presumed that contracting parties approach each other on an equal footing. Thus, even if later one party is aggrieved by the terms of the contract, the thinking was that he should have undertaken the required due diligence at the outset. However, over time courts realised that this idealized assumption does not suit the reality of contracts. Parties often contract with each other despite large differences in power between them.
Courts began to involve themselves in weighing up the merits of a particular contract when they considered terms of the contract as ‘unconscionable.’ In the earlier example (the factory far outside town), courts would likely consider the contractual change by the employer as unconscionable given the economic constraints of typical factory workers in India.
In a seminal case on this issue [5], the Supreme Court had to choose how to apply the ‘unconscionable’ contract doctrine. Under the ICA, it had two options:
- To regard the change as an ‘undue influence’ on the part of the employer as per section 19A of the Act
- To regard the object of the contractual change as ‘opposed to public policy’ under section 23 of the Act
The Court finally decided to apply the second option i.e., object opposed to public policy. It made this choice because applying ‘undue influence’ is a matter of investigation in a particular contract. In using this choice, the workers/employees would have to prove the undue influence as a preliminary step. However, the ICA categorically gives Courts the discretion under section 23 to determine if something is ‘opposed to public policy.’
What is ‘unconscionable’ is also dependent on context. An employer who reduces employees’ bonuses in a particular year willy-nilly would no doubt fall foul of this doctrine. However, during COVID, if a particular employer sought to reduce bonuses temporarily to ensure the survival of the company itself, such a move might have been deemed reasonable.
- Meeting of Minds
Consensus Ad Idem or ‘meeting of minds’ is the central concept behind contract law. For a valid contract, the parties must not only agree on the terms themselves but must also agree on those terms in the same sense. Section 13 of the ICA captures this doctrine.
Example
Take two possible and likely clauses that appear in employment contracts:
a) ‘The Employee will abide by the Employee Policies and Procedures of the Company.’
OR
b) ‘The Employee will abide by the Employee Policies and Procedures of the Company as may be updated from time to time.’
There seems to be very little difference between these two clauses except for the additional phrase in (b) – ‘as may be updated from time to time.’ However, these two clauses connote two very different things.
Suppose the employer changed the Employee Policies and Procedures to the detriment of the employee. If the employment contract contained clause (a), the employee could raise the objection that his understanding from the contract was that he would have to abide the Policies and Procedures as existed on the date he signed the contract.
However, if the employment contract contained clause (b), the employee could not succeed with the same objection. When a contractual term appears unambiguous to the court but one of the parties claims to have misunderstood it, that party has operated under a mistake of fact. The ICA bars remedies for one party’s mistake of fact under section 22.
The issue of consensus ad idem in contracts is also the reason why contractual terms should be unambiguous and should capture all reasonable eventualities.
An ‘express’ provision must be expressed!
- Alteration of Contracts
As a thought experiment assume there is a goods purchase contract which contains a unilateral change clause in favour of the seller. Can the seller later alter the type of goods to be sold or quantity or price, keeping all other terms the same? Can this ‘altered’ contract even be considered the same contract? The answer is clearly no. There are certain elements of a contract which are essential to the agreement between the parties. If any one of these elements changes, there is said to be a material change. A material alteration of a contract results in a new contract entirely.
In the words of the Bombay High Court [6], “so also I would say that where there are material or substantial changes which go to the root of the agreement then this has to be regarded in law as a new agreement.”
This is an important point that affects employment contracts as well. If the employer makes a change that goes to the heart of the employment agreement, then an entirely new contract is proposed. The word ‘proposed’ is important, because as per section 2(b) of the ICA, there must first be a proposal and only then can there be an acceptance of the proposal. Therefore, when an employer wants to make a material change to an employment contract it does not matter if the contract has a unilateral change clause; the employer is in effect proposing an entirely new contract and pre-acceptance via a previous agreement is not valid.
Example
An employee code of conduct of a particular company specifies that all employees must not name their employer when using social media. The code then proceeds to list social media platforms to which the policy applies. Later the company amends this part of the handbook and adds a new social media platform.
In this example, does the insertion of the new platform result in a new contract or is it just a simple alteration? It would vary on a case-by-case basis. If the new platform inserted was Mastodon, then perhaps no employee would have an issue. However, if the new platform was LinkedIn, then many employees would complain since one’s profile on LinkedIn serves as an e-resumé as well as the primary connection point with other professionals.
The Post-Benode-Behary World
Earlier we had discussed the 1949 judgement of the Calcutta High Court in the Benode Behary case that affirmed that unilateral changes to contracts were possible. Considering the 4 caveats that have developed since then, it is safe to say that the Court would not have made the same judgement today.
The Employee Handbook Deception
From the preceding discussion the implications are clear. Practically speaking, employers cannot unilaterally make big changes to employment contracts no matter what powers these contracts give them.
It is the rare employer who tries to amend an employment contract itself. Most employers, who fall foul of the limitations mentioned earlier, do so when attempting to amend a peculiar document known as the ‘Employee Handbook.’
The Employee Handbook is a common name for a document that contains the policies and procedures of the company, important information and code of conduct. This document is peculiar because it seems to occupy a liminal position – it is not regarded as a legal document, but employers still expect employees to follow it. In many cases it is the HR department of a company that drafts this handbook which is written in simple language.
There is however an inherent misconception, the Employee Handbook is very much a legal document. Most employment contracts reference the policies and procedures and code of conduct and thereby link the Handbook as an intrinsic part of the employment contract.
We suggest the following best practices when a company is creating/modifying its Employee Handbook:
- Ensure that a lawyer reviews the legality of the various provisions – Most large companies would already do this. However, some smaller companies such as startups may not have realised that the Handbook is a legal document which needs to be vetted.
- Don’t miss the forest for the trees – A lawyer vetting the Handbook will likely check the statutes and case laws to see that every provision of the Handbook is kosher. However, certain provisions of the Handbook may be valid as per law and may yet be disputable in a court. For example, changing the weekly mandated holiday to a different day may not be an adverse change in certain situations but could be one in others. The persons in charge of the Handbook should employ their own judgement based on their experience in the company on whether a particular change will be material or not.
Don’t Elon Try It
Apologies for the poor pun. However, the point stands. If an Indian employer had sent the infamous ‘fork in the road’ email to his employees, he would have immediately fallen foul of not just the caveats listed above but also laws on maximum working hours.
Not many people realise this but many state shops & establishments laws have a limit on working hours. For example, in Maharashtra the limit is 9 hours a day. Most corporate offices regularly fall foul of this rule, it would do no good to highlight it.
Co-authored/Edited by Ashok K. Gupta
References
- “Elon Musk Gives Twitter Employees an Ultimatum: Commit to “Extremely Hardcore” Workload or Leave.” Observer, 16 Nov. 2022, observer.com/2022/11/elon-musk-gives-twitter-employees-an-ultimatum-commit-to-extremely-hardcore-workload-or-leave/. Accessed 7 Dec. 2022.
- (2002) 5 SCC 433 [Build India Construction System v. Union of India]
- 1949 SCCOnLine Cal 56 [Benode Behary Roy v. The General Assurance Society Ltd]
- (2017) 1 SCC 487 [All India Power Engineer Federation v. Sasan Power Ltd]
- 1986 SCR (2) 278 [Central Inland Water Transport Co. v. Brojo Nath Ganguly]
- 1990 SCCOnLine Bom 305 [Andheri Bridge View Co-op Housing Society v. Krishnakant Anandrao Deo]
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