“Firing and rehiring” refers to the practice of making changes to employment terms by dismissing staff and re-engaging them on new terms. Employers tend to go down this route where a variation can’t be agreed. However, this approach is not without risk. The key exposure will be to claims of unfair dismissal in respect of employees with unfair dismissal rights, unless an employer can demonstrate the reason for the termination was “some other substantial reason” and that the dismissal was not unfair in all the circumstances.

Background

When Tesco sought to restructure its distribution centres as part of its ongoing expansion in 2007/2008, this involved some closures and relocations. In order to retain experienced staff, Tesco offered some employees incentives to relocate to the new sites as an alternative to a redundancy package. This included an element called Retained Pay. In some cases, Retained Pay accounted for nearly 40% of an employee’s overall pay.

In its communications with staff, and as part of the collective bargaining negotiation with its recognised trade union USDAW, Tesco guaranteed that Retained Pay would be a permanent element of these employees’ pay and stated that it was “guaranteed for life”, would increase yearly in line with pay rises and that there would be “protection for life at the new Tesco contract site”. A subsequent collective agreement in 2010 also confirmed Retained Pay’s “permanence” and that it could only be removed by mutual consent, in the event of promotion or in relation to a contractual change in working patterns. This term was incorporated into individual employment contracts.

In January 2021 Tesco sought to remove the Retained Pay element to simplify its payroll. It offered eligible employees a lump sum in return for giving up their Retained Pay entitlement, failing which employees would be dismissed and offered new terms without it. Around 40 employees refused the offer.

USDAW, along with three employees, applied to the High Court for a declaration that the relevant contracts included an implied term preventing Tesco from exercising its contractual right to terminate in order to remove the entitlement to Retained Pay. They also applied for an injunction preventing Tesco from terminating the contracts to achieve this objective.

High Court decision

The application to the High Court was successful: the court found in favour of USDAW and the employees. We wrote about this decision here.

The High Court was clear that a reasonable person, with all the background knowledge, would have understood the use of the word “permanent” and Tesco’s communications to confer an entitlement to Retained Pay for as long as employees continued in their same role. In order to give effect to this, the High Court concluded that a term should be implied into the contract, for reasons of business efficacy and obviousness, to prevent Tesco from giving notice of termination in order to remove the right to Retained Pay.

Because the Retained Pay was such a substantial element of overall compensation, the High Court also decided that damages would not be an adequate remedy to compensate for its removal. For this reason, it was just and equitable to grant an injunction preventing Tesco from taking steps to “fire and rehire” the employees on new terms, or amend or reduce their Retained Pay.

Court of Appeal decision

The Court of Appeal has now overturned the High Court’s decision and confirmed that Tesco may proceed with its proposals.

The Court of Appeal observed that statements made by contracting parties before a contract is entered into can sometimes be relevant when interpreting the contract, but that that is only the case if those statements demonstrate the mutual intentions of the parties. In this case, the Court of Appeal did not accept that the parties had this kind of mutual intention. There was no evidence that Tesco intended for the contracts to continue for life, until the employees retired or until it shut its sites. Also, there was no mutual intention to limit the circumstances in which Tesco could end the contracts, and indeed no evidence that anyone had even contemplated the prospect of conducting a “fire and rehire” exercise in the future. The employees’ contractual right to Retained Pay was therefore only permanent until Tesco gave them notice of termination in the ordinary way; “permanent” was limited to the duration of the contract.

USDAW and the employees faced a similar conclusion in respect of their arguments that protection from dismissal should be implied into their contracts. In certain circumstances, a court may “imply” a term into a contract of employment in order to reflect the parties’ intentions, but this will depend on the facts of the particular case. The relevant legal tests set a high bar. On these facts the Court of Appeal considered whether the implied term regarding the duration of Retained Pay would have been “so obvious” to an objective bystander that it went without saying. The court did not accept that it was.

Critically, the Court of Appeal believed that, had Tesco been asked whether employees had a right to remain in post for the rest of their working lives unless their site closed, Tesco would “certainly not” have said that that they did (the opposite being the likely response of employees). The Court of Appeal even went so far as to say that the collective agreement signed in 2010 would have had to include wording such as “provided the site remains open Retained Pay will continue until you reach the age of 65” in order for employees to enjoy such a right.

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. Because an employee’s remedy for a breach of contract is invariably financial, in this case damages would suffice. It would also be unprecedented for a court to prevent a private sector employer from dismissing an employee indefinitely. The effect of this would be that if, many years from now, Tesco were to undertake a redundancy process, it would be at risk of an application to seize its assets or to commit its directors to prison for breach of the injunction. The Court of Appeal believed that this would be wrong.

Implications for employers

Although the facts in this case were extreme, the Court of Appeal’s overturing of the High Court’s decision is welcome news for employers. The case is nonetheless a useful reminder that employers should:

• Be extremely cautious of using clear and unambiguous language which could be construed as guaranteeing contractual entitlements on a permanent basis.
• Consider setting a “long stop” date at which point the entitlement would come to an end.
• Consider limiting any promises to last only for so long as an employee’s contract is in place.
• Be alert to trade unions seeking to negotiate “permanent benefits” during any collective bargaining process.

This judgment comes as the practice of “fire and rehire” comes under increasing scrutiny from the public and politicians, especially after the P&O Ferries incident earlier this year (even though that did not, in fact, involve a “fire and rehire” exercise). Acas has also recently published new guidance on this practice, which reinforces that this practice carries significant risks, and which we consider here. The government recently committed to introducing a new Code of Practice on the practice and is currently consulting on that. Employers should therefore continue to approach this practice with caution, despite this welcome decision.

USDAW and ors v Tesco Stores Ltd – judgment available here