Employers can have very valid reasons to need to change the terms and conditions of their workers’ employment. This may happen when a company has to cut costs and changes might include reducing their pay or holiday allowances, changing shift patterns, or reducing the breaks allowed.
If the employer does not have an existing right to implement the desired changes under the current contract, these changes are usually implemented through consultation and agreement with the affected workforce. However, if they cannot agree, employers may choose to dismiss those workers and offer to re-engage them on the new terms and conditions. It is a drastic option with significant risks for an employer. It presents employees with a choice to either accept the new terms and conditions, or accept the termination of their employment. Even when employees reluctantly accept the new terms, it can lead to unfair dismissal claims and consultation claims. Unsurprisingly, there has been a lot of negative commentary on the use of this practice, which has become known by the emotive phrase “fire and rehire”.
Case facts
The recent Supreme Court decision in Tesco Stores Ltd v. Union of Shop, Distributive and Allied Workers (USDAW) provides an example of when the “fire and rehire” strategy did not work on the specific facts of the case.
In 2007, Tesco offered a significant pay rise to staff willing to relocate from closing centres to new ones, known as “Retained Pay”. This was confirmed in an agreement between Tesco and the recognised trade union, USDAW, and subsequently written into individual employment contracts. Retained Pay was described in the contract as “permanent”.
In January 2021, Tesco aimed to end Retained Pay by requesting employees to agree to its removal from their contracts in exchange for a lump sum payment. If employees did not agree, their employment contracts would be terminated and they would be offered a new contract on the same terms but with the Retained Pay term removed.
Employees refused this deal and brought a claim in the High Court, seeking confirmation that their employment contracts contained an implied term that Tesco could not terminate for the purpose of removing Retained Pay.
High Court decision
In February 2022, the High Court declared that the word “permanent” meant that employees were entitled to Retained Pay for as long as they were employed in the same substantive role. It was determined that there was an implied term that Tesco’s normal right to terminate the contract could not be used for the purpose of removing the right of an employee to Retained Pay. Injunctive relief was granted to stop Tesco from terminating the contracts for that purpose.
Court of Appeal decision
In July 2022, on appeal to the Court of Appeal, this decision was reversed. The court ruled that the employer was not prevented from terminating the contract, as it had not been shown that a lifelong contract was the mutual intention of the parties. In relation to the High Court’s finding of an implied term, the Court of Appeal stated that this was inconsistent with the express terms of the contract which included a general right to terminate that was not limited to certain circumstances. Even if the finding was different, the court said that an injunction would not have been a justified remedy, as it was not apparent what the defendant could or could not do. Furthermore, there was no precedent where a court has used an injunction in these circumstances.
Supreme Court decision
The Court of Appeal’s decision was appealed and subsequently the Supreme Court unanimously decided in favour of the Union, reinstating the High Court’s decision to grant an injunction. The court stated that the parties’ intention was for the Retained Pay to be permanent and, on the ordinary meaning of this word, the right to Retained Pay would apply throughout the employee’s employment in that role. The court found that it was necessary, and “so obvious”, to imply a term into the contract to ensure that an employer could not dismiss an employee for the purpose of denying them the right to Retained Pay. It was apparent that permanent Retained Pay was offered to encourage employees to accept the agreement, prompting them to permanently change their lives by relocating to different centres instead of being made redundant. The court found that the mutual intention of the parties was that Retained Pay should continue. However, the court made note that the implied limit on the right to terminate does not act to prevent the employer from terminating the contract under different circumstances that were not related to Retained Pay.
Generally, the court will not order an injunction in employment contract cases as the effect of this is to compel an employer to continue to employ an individual after there has been a breakdown in the relationship. There is, however, an exception to the rule where the employer retained sufficient confidence in the employee. As Tesco was offering new contracts to the employees on the same terms, save for Retained Pay, this demonstrated that there was no breakdown in the relationship with the employees which would make their ongoing employment untenable.
It was also decided that damages would be inadequate in this case as there was no way to determine the amount and it would have required an assumption as to how long the employees would have continued in their role. An injunction avoided all the difficulties presented by an award of damages.
Comment
This case is considered very unusual and is based on “extreme” facts – very few contractual terms are described as “permanent”. The courts would not usually imply contract terms that limit an employer’s express right to terminate and subsequently grant an injunction. However, given this position, the case highlights key considerations for employers.
It is important that contractual documents are drafted clearly and reflect the parties’ intentions. Caution should also be taken when drafting pre-contractual documents as they were admitted as evidence in these proceedings and taken into consideration when determining the parties’ intention. Lifetime commitments in contracts are not very flexible and it may be better to consider conditional or limited clauses to ensure that the employer is protected in the future. The Employment Rights Bill that has been announced by the government is expected to restrict the use of “fire and rehire” by employers. This is likely to limit the situations in which such a practice can be used. It is anticipated that the Bill will be published soon and we will review it in more detail.
