Employment Law Cases

USDAW v Tesco Stores Ltd

An employer was entitled to dismiss and offer to re-engage employees on new terms (fire and rehire) to remove pay protection it had originally referred to as ‘permanent’. An earlier injunction preventing it from doing so was overturned.

‘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. It’s also nothing new despite growing media attention borne out of the pandemic, and bodies such as the CIPD and ACAS publishing guides in 2021. There are, however, indications that this practice is becoming more widespread because of businesses struggling through lockdown. An attempt to introduce new legislation in this area to enhance worker protections was thwarted at the second reading of the Employment and Trade Union Rights (Dismissal and Re-engagement) Bill. The government has also promised to introduce a new statutory code of practice on dismissal and re-engagement. It will set out how employers should hold fair, transparent and meaningful consultations on proposed changes to terms of employment, or face a 25% uplift in compensation. As a statutory code, courts and tribunals will be required to take it into account when deciding relevant cases.

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.

Court of Appeal decision

The appeal was allowed.

There was nothing in the contracts, or the statements made before they were entered into, which indicated that it was the mutual intention of the parties that employees with Retained Pay would be employed for life, until the closure of the site concerned or until their normal retirement age. The use of the word ‘permanent’ did not indicate that the parties intended to limit the circumstances in which the contracts could be brought to an end. The express terms of the contracts should therefore be interpreted in accordance their natural and ordinary meaning, namely that Tesco would have the right to give notice in the ordinary way, and that the entitlement to Retained Pay would only last as long as the particular contract. In addition, the implied term argued for by USDAW was insufficiently clear. Terms can be implied only where it is obvious, in the sense of being so obvious that it goes without saying. The precise term to be implied must be capable of clear expression. On these facts, it was not clear what term would be implied. While the employees might have said, if asked, that they had a right to remain in post for the rest of their lives, Tesco would certainly not have agreed.

The Court of Appeal also held that the Retained Pay arrangements were not comparable to permanent health insurance (PHI) benefits - noting that if an employee has the benefit of an employer’s permanent disability insurance, that benefit would be worthless if the employer could dismiss him on the grounds of that disability.

Finally, the Court of Appeal decided that, even if Tesco could not lawfully dismiss its employees as part of a ‘fire and rehire’ exercise, it would be inappropriate for it to be restrained from doing so by an injunction. The court was unaware of any case in which a court has granted a final injunction to prevent a private sector employer from dismissing an employee for an indefinite period. What’s more, an injunction cannot be granted unless it is clear beyond argument what the defendant can or cannot do. That could not be said of the injunction granted by the High Court.

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 end if the employment is ended. The High Court decision appeared to give employees scope to argue that an employer’s comments in the context of changes to terms and conditions restricted its ability to make further changes at a later date. The Court of Appeal decision marks a return to accepted understanding of the law on ‘fire and rehire’ and will reassure employers. USDAW has however been given permission to appeal to the Supreme Court.

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, although ultimately successful in having the injunction overturned, has undoubtedly incurred significant costs in getting to this point.