In September, Tesco lost a major case in the Supreme Court brought by members of shop workers union Usdaw that were fired and subsequently rehired on less favourable terms. Despite the decision only affecting approximately 50 members of staff, it is nonetheless significant in terms of how large employers might draft their employees’ contracts in the future.
The case stems from Tesco’s decision in 2007 to offer a significant and permanent financial incentive called retained pay to employees to relocate, constituting roughly 32% to 39% of their wages following the retailer’s closure of some of its distribution centres. In 2021, Tesco proposed to scrap retained pay by offering a one-off lump sum equal to 18 months retained pay instead. If the employees refused, Tesco would serve contractual notice to end the existing contracts of employment and then offer new contracts without retained pay.
The decision turned on whether Tesco’s right to terminate the contracts was prevented by an implied term that it could not deprive employees of their right to retained pay, since this was not something Tesco had negotiated at the outset. The bigger question is whether this ruling sets a precedent that prevents this sort of practice from happening more generally.
As a starting point, if contractual changes are genuinely needed, then employers should try to renegotiate terms with their workforce through consultation and consent, as Tesco had tried to do initially. However, if this is not achievable then, as a last resort, an employer can serve notice to bring the existing contract to an end and offer a new contract on the revised terms after the notice period has expired. The Supreme Court’s decision should not change this long-standing principle, provided that ending and replacing a contract is done properly.
The difference in this case is that Tesco did not carve out the right to vary, or end, retained pay in the future. On the contrary, it was referred to in the employment contracts as being permanent.
Employers must take great care when drafting employee contracts or negotiating or renegotiating contractual terms if they want to avoid being handcuffed into long-term financial commitments that may come back to bite them. Language matters, as do effective industrial relations and clear communication with staff. Unfortunately for Tesco, these key ingredients were missing, meaning the employees were entitled to continue enjoying the benefit of retained pay indefinitely during their employment.
Tania Goodman is a partner at Collyer Bristow
