The Court of Appeal has overturned an injunction that prevented supermarket chain Tesco from 'firing and rehiring' employees in order to remove their contractual entitlement to enhanced pay.
In 2007, Tesco offered some employees incentives to move to new sites as an alternative to a redundancy package, which included retained pay that in some cases accounted for nearly 40% of an employee’s overall salary. A collective agreement in 2010 confirmed that the term was incorporated into individual employment contracts.
However, in January 2021 Tesco moved to remove retained pay in order to simplify its payroll, offering eligible employees a lump sum in return for giving it up, in a process that would mean their being dismissed and then rehired on new terms. The Union of Shop, Distributive and Allied Workers (USDAW) and 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.
The High Court found in favour of USDAW and the employees, and granted an injunction preventing Tesco from taking steps to fire and rehire the employees on new terms, or amend or reduce their retained pay.
According to the Court of Appeals, however, the High Court was wrong to conclude that Tesco could not adopt its proposed course of action and 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.
The judges said: “Whether one focuses on the phrase guaranteed for life or the word permanent I cannot accept that it has been shown that it was the mutual intention of the parties to the collective agreement, or the parties to the individual contracts of employment into which the 2010 retained pay clauses were incorporated, that the contracts would continue for life, or until normal retirement age, or until the closure of the site concerned.
“Furthermore, it does not seem to me to make any sense to say that if, having given notice of termination, the [business] makes no offer of a new job it has no liability for breach of contract; if it then offers the employee a new job in a different role there is no continuing entitlement to retained pay; but that if it makes an offer to re-engage the employee in the same role as before it can only be on the original terms.”
A Tesco spokesperson said: “A very small number of colleagues in our UK distribution network receive a supplement to their pay, which was offered a number of years ago as an incentive to retain colleagues. The vast majority of our distribution colleagues today do not receive this top-up, and so we took the decision to phase it out.
"We are considering our next steps following today’s ruling, and will continue to work constructively with the small number of colleagues affected to agree a way forward.”
David Hopper, partner at law firm Lewis Silkin, added: "'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."
