Supreme Courts blocks fire and rehire to preserve “permanent” right to enhanced pay

‘Fire and rehire’ is a shorthand for the practice of changing employment terms and conditions by way of dismissal and re-engagement, typically in situations where it is impossible to obtain employee or trade union agreement to the changes. It has attracted heightened controversy in recent years and in July 2024, a new statutory Code of Practice came into effect to regulate its use.

What was “Retained Pay”?

In 2007, Tesco restructured its distribution centre network, including opening a number of new warehouses and closing others. As part of this, it tried to retain experienced staff, rather than losing them through redundancy, by offering them a significant enhancement to their salaries known as ‘Retained Pay’ in return for moving to new warehouses located at Lichfield and Daventry.

During negotiations with USDAW, its recognised trade union, Tesco made a number of statements to employees regarding Retained Pay, including stating that it was “guaranteed for life”, would remain in place “for as long as you are employed by Tesco in your current role” and “cannot not be negotiated away” by either Tesco or the union.

A 2010 collective agreement between Tesco and USDAW contained an express term stating that Retained Pay would “remain a permanent feature of an individual’s contractual eligibility”. Both Tesco and USDAW agreed that the term was incorporated into each affected employee’s individual contract of employment.

Lifetime guarantee?

In 2021, Tesco took steps to remove Retained Pay. Having failed to reach agreement with USDAW through collective bargaining, the company offered employees an advance payment equal to 18 months of Retained Pay, if they agreed to give up their right to future payments. If they did not agree to these change, Tesco informed staff that they would be dismissed and re-engaged on the same terms but without any entitlement to Retained Pay.

Success in the High Court…

USDAW and 3 individual employees who had refused to give up their Retained Pay issued proceedings in the High Court in 2021. Their aim was to get an injunction to prevent Tesco from using ‘fire and rehire’ to remove their contractual entitlement to Retained Pay.

This application was successful. In reaching this decision, the High Court was satisfied that Tesco’s pre-contractual statements demonstrated that the intention of both parties was for the entitlement to Retained Pay to permanently remain in place for as long as employees were employed by Tesco in the same role.

The employment contracts contained two mutually inconsistent express terms: one granting employees a “permanent” right to Retained Pay and another giving the employer the right to terminate employment on notice. To resolve that conflict, the High Court held that a term should be implied into each affected employee’s individual contract that the employer’s right to terminate on notice could not be exercised for the purpose of removing the right to Retained Pay.

….but overturned in the Court of Appeal

Tesco appealed this decision, arguing that the High Court had misinterpreted the word ‘permanent’ in the collective agreement and had wrongly implied a term limiting the employer’s right to terminate on notice.

The appeal succeeded, with the Court of Appeal finding that it was not the mutual intention of Tesco and the union when agreeing the collective agreement that Retained Pay should continue until the employees reached retirement age. More narrowly, the intention was that it would not be negotiated away by collective bargaining between the parties.

What did the Supreme Court decide?

Following an appeal by USDAW, the Supreme Court unanimously overturned the Court of Appeal’s decision and granted an injunction prohibiting Tesco from using dismissal and reengagement to remove Retained Pay.

The Supreme Court rejected Tesco’s argument that ‘permanent’ simply meant that the entitlement to Retained Pay could not be removed through collective bargaining - that interpretation would have deprived the employer’s promise of any value for staff. In this context ‘permanent’ should be given its ordinary meaning: that the entitlement was not time-limited and Retained Pay would continue to be paid for as long as employees remained employed by Tesco in the same role.

On the question of implied terms, the Supreme Court decided that it was necessary to imply a term into the contracts of the affected staff to prevent the employer from exercising its right to dismiss them on notice for the purpose of removing the entitlement to Retained Pay. Without this, Tesco could simply have removed the right to Retained Pay at any time by immediately giving notice of dismissal. The Supreme Court decided that this would have been at odds with the intention of both parties when they entered into the collective agreement.

In terms of a remedy, the Supreme Court reinstated the injunction, blocking the use of fire and rehire. It concluded that damages alone would not be an adequate remedy (as any assessment of future losses from the withdrawal of Retained Pay would be too speculative and could not compensate staff for non-financial losses, such as anxiety and upheaval). The Supreme Court accepted that the injunction would amount to specific performance (as it would require the employer to continue paying Retained Pay),but concluded that it fell within the limited circumstances where this would be permitted in an employment context. 

What are the implications for employers?

While this decision underscores the legal and reputational risks involved in using fire and rehire, it is highly fact-specific. Importantly, it does not mean that there is now a general ban on using dismissal and reengagement to change terms and conditions.

The commitments provided by Tesco regarding the protections for Retained Pay were exceptionally far-reaching and unqualified. In our experience, it would be highly unusual for employers to agree to indefinite guarantees of this kind.

That said, there are a number of learning points for employers:

• Employers should now be even more cautious about promising to provide benefits or other terms in perpetuity. As demonstrated by this case, this could seriously restrict their flexibility to adapt to changing circumstances in the future.
• Businesses implementing significant terms and conditions should take care to review employee communications to avoid unhelpful statements which may create future hostages to fortune.
• Employers that may be considering the use of fire and rehire should assess whether they may have inadvertently conferred permanent contractual entitlements in the past, which may now restrict their ability to force through changes (such as to end a contractual entitlement to participate in a final salary pension scheme).

Future changes

This decision will likely soon be superseded by changes to the law governing fire and rehire in the new Labour Government’s forthcoming Employment Rights Bill. As we have written about previously, Labour has pledged to “end” the practice of fire and rehire, and has signalled that it will only remain available in exceptional circumstances for businesses facing extreme financial distress.

However, we’re still waiting for detail about how and when these reforms will be implemented. For example, will the Government introduce new powers for courts or Tribunals to block the use of fire and rehire outright (as the Supreme Court has done based on the exceptional factual circumstances in this case)? Or will it simply amend existing employment law so that any dismissal as part of a fire and rehire exercise will constitute automatic unfair dismissal? Keep track of news and announcements on this, and other policies, on our Labour Policy Impact Hub.

Tesco Stores Ltd v Union of Shop, Distributive and Allied Workers & Ors [2024] UKSC 28 – judgment available here.