Supreme Court restores injunction to prevent Tesco using ‘fire and re-hire’ to remove enhanced pay entitlement.

On 12th September 2024, the Supreme Court unanimously allowed the appeal in Tesco Stores Ltd (Respondent) v Union of Shop, Distributive and Allied Workers and others (Appellants), brought by the Union of Shop, Distributive and Allied Workers (‘USDAW’) and others.

In 2007, Tesco planned to reorganise it’s distribution centres. As an alternative to a lump sum redundancy payment and as an incentive for staff to relocate, Tesco and USDAW negotiated a ‘Retained Pay’ contractual benefit. USDAW is recognised by Tesco for collective bargaining purposes. This Retained Pay benefit gave staff who relocated a significant pay enhancement which was included in calculations for pensions, any future pay rises and other benefits such as the share scheme. It was agreed that this benefit would be a permanent feature of an individual’s contract and would remain so 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. The Retained Pay terms were confirmed in a collective agreement made between Tesco and USDAW which was then incorporated into individual employment contracts. Any employees who did not wish to relocate were dismissed on the grounds of redundancy.

In January 2021, Tesco announced its intention to remove the Retained Pay benefit. It gave notice to all affected staff that it intended to seek their agreement to remove their contractual entitlement to Retained Pay in exchange for a lump sum equal to 18 months of Retained Pay. If an employee did not agree to this change, Tesco intended to terminate their existing contracts and re-hire those employees on amended contracts with the entitlement to Retained Pay removed.

A significant number of employees refused to agree to the proposed changes and USDAW  applied to the High Court for a declaration that the affected employees’ contracts were subject to an implied term prohibiting Tesco from exercising its right to terminate for the purpose of removing or diminishing the right to Retained Pay. An injunction was also sought to prevent Tesco from terminating the contracts of affected employees for the purpose of re-engaging them on altered terms and conditions that did not include the right to Retained Pay or from removing the contractual right to Retained Pay.

The High Court granted the relief sought and determined that the word ‘permanent’ in the agreed contractual term meant that the entitlement to Retained Pay should last for as long as the relevant employee is employed by Tesco in the same substantive role. It was also deemed to be ‘just and convenient ’ to grant the injunction sought. This decision was then overturned by the Court of Appeal before reaching the Supreme Court.

The Supreme Court has unanimously allowed the appeal. It was deemed necessary to imply a contractual term, qualifying Tesco’s rights to dismiss employees on notice so that this right could not be exercised by Tesco where the purpose was to remove the employees right to Retained Pay. It was stated that such an implied term was necessary so as not to undermine the agreement that the right to Retained Pay was permanent, subject to the agreed qualifications, and therefore to honour the intentions of the parties at the time the agreement was made. It was noted by the Court in its judgement that Tesco could have negotiated a longstop date for entitlement to the Retained Pay or included an express provision that employees could be dismissed and re-engaged in the same role in order to withdraw entitlement to the Retained Pay. This was not done and so this implied term was deemed to be ‘so obvious, that it goes without saying.’

The Supreme Court also concluded that the High Court was right to grant an injunction to prevent Tesco from ‘firing  and re-hiring’ employees in order to remove their entitlement to Retained Pay. Usually, specific performance of an employment contract cannot be ordered i.e. the Court cannot order an employer to continue to employ an employee. The exception to this rule is that specific performance can be ordered against an employer (but not an employee) where there has been no breakdown in mutual trust and confidence in the employment relationship. The Supreme Court found that this exception applied as Tesco planned to re-engage the relevant employees immediately. The Court also held that damages would not be an appropriate remedy for breach of the implied term due to the practical difficulties with calculating such damages. Therefore, the injunction was reinstated.

What is the impact of this judgement?

In this case, there was much emphasis on the fact that this benefit was described as “permanent”. The Supreme Court went to great lengths to examine this wording, which really does highlight the importance of the language contained in contractual documentation, especially where employers are giving such an express commitment as in this case. What was also evident from the judgement was the clarification that Tesco could have dismissed for another reason: “the implied term does not prevent Tesco from termination the contracts for a purpose unconnected with retained pay…..As a matter of contract law (and putting to one side the statutory unfair dismissal regime), termination of employees’ contracts of employment for any purpose unrelated to depriving employees of retained pay remains open to Tesco as a matter of managerial discretion.”

Generally, fire and re-hire should be a last resort and it is always preferable for a collaborative approach between employers and Unions. The current statutory Code of Practice sets out a process employer’s should follow where they are considering making changes to their employee’s contracts of employment and it envisages that, if the changes cannot be agreed, they may opt for dismissal and re-engagement. It is worth remembering that Labour has indicated that it plans to ban the practice of fire and rehire as a means of changing contractual terms altogether. They have described the current Code as “inadequate”.