Employment Law Cases

USDAW v Tesco Stores Ltd

An employer was not entitled to dismiss and offer to re-engage certain of its employees on new terms (fire and rehire) to remove pay protection it had referred to as ‘permanent’. An earlier injunction preventing it from doing so was reinstated.

‘Fire and rehire’ is used by employers looking to introduce changes to contractual terms where employees disagree with the changes being proposed. More accurately described, it is the practice of dismissing employees (with contractual notice), and then offering them new employment on revised terms. Although controversial, it is not illegal when handled properly.

A revised code of practice on dismissal and re-engagement was introduced with effect from 18 July 2024 which sets out how employers should hold fair, transparent and meaningful consultations on proposed changes to terms of employment or face a 25% uplift in compensation. The Labour government has however stated its intention to replace this code with a strengthened version.

Background

In the late 2000s Tesco restructured its distribution centres. As part of this, there was collective bargaining negotiations between USDAW and Tesco. To ensure that its distribution centre network would continue to operate effectively throughout this period, where staff could not be compelled to relocate to a new distribution centre, Tesco sought to make sure that they would not lose all their existing employees due to redundancy. An entitlement to ‘Retained Pay’ was negotiated as a retention incentive for those who would relocate, this being an alternative to a redundancy payment. The employees’ existing package was given a monetary value and the difference between that value and the value of the new (and less advantageous) terms and conditions available to newly appointed staff at the new distribution centre was protected. Each of the claimants had relocated rather than accepting a redundancy payment.

In communications with affected staff, Tesco stated that their entitlement to Retained Pay would remain for as long as they were employed in their current role, that it could not be negotiated away, and that it would increase each year in line with any general pay rise. A 2010 collective agreement stated that Retained Pay would be a ‘permanent feature’ of an individual’s contractual entitlement and could only be changed by mutual consent, on promotion or in the case of an employee-requested change to working conditions. Retained Pay also affected the value of other benefits such as shares and pensions.

In early 2021, Tesco said it wanted to phase out Retained Pay. All affected employees were asked to agree to its removal in return for a one-off payment equating to 18 months’ worth of the benefit as an incentive to agree. Staff were told that if they didn’t agree to the change, Tesco would proceed to the termination of employment contracts with the substitution of new contracts containing identical terms and conditions but excluding the right to Retained Pay (so-called fire and rehire). Affected staff were given three weeks to decide.

Individual union members employed at the various distribution centres affected refused to agree to these changes and were included as claimants in the proceedings. Each had taken out a mortgage based on an income which included Retained Pay. For each of them, Retained Pay represented between 32% and 39% of their total pay.

USDAW applied to the High Court for a declaration that the affected employees’ contracts were subject to an implied term preventing Tesco from firing and rehiring them for the purpose of removing or reducing their right to Retained Pay. The union also sought an injunction preventing Tesco from terminating the contracts of those affected employees. Tesco argued that the relevant contracts included an express term which entitled them to Retained Pay for as long as their employment continued under the terms of the contract but that it was entitled to terminate those contracts in accordance with their express terms.

High Court decision

The relief sought by the claimants was granted.

The High Court said that a reasonable person, having all the background knowledge that would have been available to the parties at the time the negotiations took place would consider that the intention of both was that the entitlement to Retained Pay would be permanent for as long as each affected employee was employed in the particular role. It noted: ‘there is no other way in which to make sense of the use of expressions such as “guaranteed/protection for life”, and, in particular, “for as long as you are employed by Tesco in your current role”’. There was therefore a conflict between the employees’ permanent rights to Retained Pay and the employer’s contractual right to terminate on notice.

Noting the ‘unusual’ and ‘extreme’ facts, the High Court held that to resolve such a conflict it was appropriate to imply a contractual term that prevented Tesco from exercising its right to terminate on notice, solely for the purpose of removing or lessening the employees’ entitlement to Retained Pay, on the basis of business efficiency and/or obviousness. Without such a term, said the High Court, the employees’ entitlement to Retained Pay would not be permanent and the contract would lack coherence. Were an officious bystander to have been asked whether the term was so obvious it went without saying, the High Court was satisfied that the answer would have been ‘Of course!’

The High Court emphasised that such a finding did not prevent Tesco from terminating the affected employees’ contracts for good cause, e.g. gross misconduct or redundancy, although in such a case the genuineness of the reason pleaded by an employer would undoubtedly be carefully scrutinised.

It was also just and convenient to grant injunctive relief. Tesco’s intention to terminate and re-engage would remove a sizeable proportion of the employees’ pay, causing substantial injury to their legal rights. Damages would be an inadequate remedy given that their remedy would be limited to any losses recoverable in an unfair dismissal claim. The injunction granted prevents Tesco from giving notice to terminate the contracts of the affected employees contrary to the implied term, and from otherwise removing or lessening of Retained Pay.

Tesco successfully appealed. The Court of Appeal held that no such implied term existed; Tesco had the right to give notice in the ordinary way, and the entitlement to Retained Pay would only last as long as the particular contract endured. USDAW appealed.

Supreme Court decision

The appeal was unanimously allowed.

The correct interpretation of the Retained Pay term is that the right to receive Retained Pay continued for as long as employment in the same role continues. That right would be deprived of its value if there is nothing to prevent Tesco unilaterally terminating the employment to defeat it.

Tesco’s right to terminate the employment contract by giving the requisite notice is therefore qualified by a term implied that Tesco’s right to dismiss cannot be exercised for the purpose of depriving employees of the right to Retained Pay.

The Retained Pay term was an incentive for staff to undertake an otherwise unpalatable relocation and it would flout industrial common sense if Tesco could retain a unilateral right immediately to dismiss these employees for the purpose of removing the right to Retained Pay.

The existence of this implied term is supported by analogous cases, including cases in which employment contracts, providing for permanent health insurance benefits, were held to contain an implied term to the effect that the employer was restrained from dismissing the employee to deprive them of such benefits. See for example, Awan v ICTS UK Ltd.

As to the question of remedy, the court noted that, in practice, an injunction preventing termination would amount to indirect specific performance of Tesco’s obligation to continue to employ the employees on Retained Pay. While it is a general rule that specific performance of an employment contract will not be granted, there is an exception allowing for specific performance to be ordered against an employer where there has been no breakdown of mutual trust and confidence. There was no such breakdown here: Tesco was prepared to re-engage the relevant employees immediately. The court was therefore satisfied that the exception to the general rule was engaged. The court accordingly concluded that the injunction granted by the High Court should be reinstated.

Comment

These were unusual facts. It is rare for a court to imply terms which restrict an employer’s right to terminate that contract on its terms – and rarer still for an injunction to be granted in such instances. Generally the only types of cases would be where an employer has not followed a contractual process, or where the employee is in receipt of permanent health cover which would cease if the employment were ended. However, key here was the fact that Tesco made a very clear promise that the Retained Pay would be paid to the employees whilst they continued to be employed. There is no right of appeal as the Supreme Court is the highest appeal court following BREXIT.

Employers who over promise with lifetime guarantees on benefits may yet come to grief when they want to back out of such a bargain. Certainly, any such promises should be made conditional or time-limited to maintain flexibility in the future. Use clear and unambiguous language when drafting contractual entitlement and be wary of using language which could be interpreted as guaranteeing contractual entitlements on a permanent basis. It was open to Tesco to set a longstop date for the entitlement to Retained Pay and/or to make clear that it endured only for as long as the particular contract lasted. It didn’t and Tesco has now paid the price for this.