Posted: 14/02/2022
‘Fire and re-hire’ can be a controversial method, whereby an employer terminates existing employees’ employment in order to re-hire them on less favourable terms, from the employees’ perspective. However, in USDAW & others v Tesco Stores Limited QB-2021-000988 the High Court granted an injunction restraining Tesco from firing and rehiring employees in order to remove a contractual entitlement to enhanced pay.
During the 1990s, Tesco reorganised some of its distribution centres, which involved some closures and some relocations. The company was conscious that it would be harmful to lose its existing employees through redundancy, and so it negotiated ‘Retained Pay’ as an alternative to a lump sum redundancy payment, and to incentivise staff to relocate.
The contractual reward package was given a monetary value, and the difference between that value and the value of the new terms and conditions was protected. Crucially, in its communications with staff, Tesco stated that Retained Pay ‘remains for as long as you are employed by Tesco in your current role’, and was ‘guaranteed for life’.
USDAW is recognised by Tesco for collective bargaining. A 2010 collective agreement stated that Retained Pay would be a ‘permanent feature’ of an individual’s contractual entitlement, and could only be changed through mutual consent, on promotion, or in the case of an employee-requested change to working patterns.
In January 2021, Tesco announced its intention to remove Retained Pay. Affected employees were offered a lump sum payment of 18 months’ Retained Pay in return for giving up the entitlement. If the employees refused, they would be dismissed and offered new terms excluding Retained Pay. The employees were given three weeks to decide.
In response, USDAW applied to the High Court for a declaration that affected employees’ contracts were subject to an implied term, preventing Tesco from exercising its contractual right to terminate for the purpose of removing or diminishing the employees’ right to Retained Pay. In addition, USDAW sought an injunction preventing Tesco from terminating the employees’ contracts of employment.
In reaching its decision, the High Court considered the use of the word ‘permanent’ in the contractual entitlement to Retained Pay. It decided that a reasonable person, having all of the background knowledge, would construe ‘permanent’ to mean ‘for as long as the relevant employee is employed by Tesco in the same substantive role’. As such, there was an inherent conflict between the permanent right to Retained Pay and Tesco’s unfettered contractual right to terminate their employment on notice.
Next, the High Court considered whether a term should be implied into the employees’ contracts to resolve the conflict. Taking into account the particular facts of the case, the High Court determined that a term preventing Tesco from exercising its contractual right to terminate for the purpose of removing or diminishing the employee’s right to Retained Pay should be implied, on the basis of business efficacy and/or obviousness.
Accordingly, the High Court granted declaratory relief so that the implied term was included in the contracts of affected employees. Injunctive relief was also ordered to restrain Tesco from giving notice to terminate the contracts of employment of any affected employees, contrary to the implied term as declared.
It was accepted during the hearing that the facts of this case were ‘extreme’. What, therefore, is the impact of this decision? Even though each case will of course turn on its facts, there can be no doubt that the High Court’s findings increase the scope for individuals in receipt of permanent contractual benefits to argue against a proposed fire and re-hire.
While this decision does not prevent Tesco or employers in a similar position from dismissing employees for good cause, such as redundancy or gross misconduct, it certainly fetters an employer’s ability to dismiss, and increases the likelihood of scrutiny of any decision to terminate. Employers should therefore consider carefully the impact of offering a ‘permanent’ benefit – the costs of doing so to achieve a short term objective could be considerable.
For further information on how this issue might affect your organisation, please contact Paul Mander or your usual Penningtons Manches Cooper contact.
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