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Matthew Whelan

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Ask the expert: Removing allowances from contracts


 This week a public service client is seeking to remove a car allowance. How should this be managed? Esther Smith and Matthew Whelan advise.




The question

I work for a public sector organisation and we are looking for ways to make efficiencies. It has been highlighted that some of our employees have a contractual ‘essential user allowance’; this is a monthly payment in return for them having a car available at all times.
It has come to our attention that not all essential users are meeting the eligibility requirements and some are not doing the required mileage in order to receive the payment. However, this has not been audited or reviewed for a number of years and as such the payment has been made without question.
How do we stand if we wanted to remove the allowance? What are our options and what are the risks?

Legal advice

Esther Smith, partner, Thomas Eggar

These allowances are contractual and therefore in order to remove or vary them you ideally need to have employee agreement. While there may have historically been conditions applicable to the entitlement to the allowances, it sounds as if there may have been effective variation of these conditions due to custom and practice. For example, if you have been paying someone an allowance for a year or so even though they do not meet the conditions, it is arguable that they have a contractual entitlement to the allowance without the conditional element.

If you want to change the terms and conditions of employment you need to consult with employees about the proposed changes, and the impact it will have on them personally. If you get their agreement, then all well and good (but make sure that this is documented in the event of future disputes!). Your ability to get agreement would be increased if you could offer something by way of an incentive, such as a compensation payment or increased holiday entitlement.

However, if they don’t agree you are left with a few options. You could just leave the allowances in place and give up on the attempts to change the terms – probably not palatable due to the financial impact on the business and this would also create a perception on the employees’ part that have ‘won’.  You could serve the employee notice to terminate their contract of employment on its current terms and offer them re-engagement under the new terms, without the allowances – this is risky as you are effecting a dismissal which could give rise to a claim, although your counter argument would be that the employee has failed to mitigate the effect of any unfair dismissal by not taking up the new contract offered. Finally, you could simply impose the change upon them and wait to see if they resign and bring a constructive dismissal claim (which would be quite extreme on their part) or remain in employment and bring an unlawful deduction of wages claim for the allowance.

If you wanted to try and incentivise their agreement, you could on the next pay review only award pay rises to people who agree to the changes. Generally speaking employees do not have a contractual right to a pay rise (unless there is some enforceable collective pay agreement or contractual increment entitlement) only a pay review, and therefore the pay award, if made, can be a valid incentive to agree.

Esther Smith is a partner in Thomas Eggar’s Employment Law Unit. For further information, please visit


Matthew Whelan, solicitor, Speechly Bircham

The first thing to consider is whether you can achieve your desired cost reduction by relying on the eligibility requirements to stop making payments to those who do not meet the requirements. You face the possible argument that the organisation’s custom of paying the allowance regardless of eligibility has given rise to an unconditional right to the ‘essential user allowance’ and you therefore need to consider the strength of this argument. This is more of a risk if the eligibility requirements are not set out clearly and the longer you have paid on this basis.

The other possibility is to get rid of the essential user allowance completely. It sounds like this would constitute a variation to the relevant employees’ contracts of employment. If you want to do this then I suggest that you take full legal advice at an early stage as the process to vary contracts of employment can be complicated and there are a number of considerations to take account of.

If you cannot get an employee’s agreement to the changes (and even then you would need to give them something in return for the change and properly record it), you would need to consider terminating the current contracts of employment (by giving requisite notice if you want to avoid breach of contract claims) and offering to re-engage on new contracts without the essential user allowance. This may be necessary to effectively implement the change. If you did this then you risk claims for example for unfair dismissal, even if you reengage (although the employee’s loss would then be limited). You may need to collectively consult, as you would in a collective redundancy situation, depending on what you decide to do. This obligation may arise at an early stage, hence the need to take advice before you do anything.

You could, of course, take away the essential user allowance for new employees only to avoid these issues, although I appreciate this may not achieve the desired costs saving for some time. You would also leave staff of a two-tier system.

There is a further issue arising out of your question which is whether you would like to recover the essential user allowance which has been paid in error in the past. This of course would be most unpopular amongst staff and may well reduce morale, and consequently productivity, amongst your workforce. You may also not have a legal right to recover the money – this depends on the circumstances.  I recommend you take legal advice on this if this is something you wish to consider.

Matthew Whelan can be contacted at [email protected]. For further information, please visit

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