UK: Supreme Court prevents employer using 'fire and rehire' in order to remove 'permanent' pay protection

The Supreme Court in Tesco Stores Ltd v USDAW has upheld an injunction to prevent an employer from exercising its right to dismiss employees (and then offer re-engagement on new terms) where it was found that the employer's purpose behind the fire and rehire was to remove a contractual entitlement to 'permanent' pay protection.  The Court held that there was an implied term that the employer could not dismiss for the purpose of depriving the employees of their right to retained pay.  In this case, it was appropriate to grant an injunction to prevent dismissal, despite this amounting to indirect specific performance of an employment contract.  This was because trust and confidence still existed (evidenced by the employer offering to re-engage the employees) and damages would be inadequate (given the complexities of calculating compensation and because non-pecuniary loss was irrecoverable).

Tesco had agreed pay protection as an incentive for employees to relocate to new distribution centres, rather than take a lump sum redundancy payment.  The term negotiated by collective bargaining with USDAW was incorporated into the employees' contracts and provided that the right to retained pay would be permanent unless changed by mutual consent, on promotion to a new role or where the individual requested a change to their working pattern. Many years later Tesco sought to remove the entitlement in return for a lump sum; if employees did not agree, they would be dismissed and offered new employment on the revised terms without the retained pay.  The Supreme Court considered that it was objectively inconceivable that the mutual intention of the parties had been for Tesco to be able to dismiss the employees to bring the entitlement to an end at any stage, including immediately after the employees' relocation.  It ruled that a term should be implied preventing Tesco from exercising its contractual right to dismiss for the purpose of removing or diminishing the right to receive permanent retained pay.  This would not prevent it dismissing the employees for unconnected reasons such as misconduct or redundancy. 

The judgment highlights the need for careful consideration before offering contractual benefits which could be expected to be long-term or permanent, given the potential for this to restrict the employer's ability to terminate the contract in order to remove the entitlement.  It will obviously be preferable, if commercially possible, to negotiate a long-stop date for such entitlements and use clear language to set this out both during negotiations (given such communications may be taken into account in determining the parties' intentions) and in the drafting of the contracts. 

Of course, dismissal and re-engagement has been a controversial topic recently and one which politicians are keen to regulate.  A new statutory Code of Practice came into force on 18 July 2024 requiring employers to inform and consult at an early stage whenever fire and rehire is being considered as an option, and to contact Acas once there is a clear intention to adopt this course of action.  Breach of the Code can lead to a potential 25% increase in certain tribunal awards including for unfair dismissal (see our blog post here for more details).  Changing terms and conditions by firing and rehiring is set to become even more difficult under the Labour Government's draft Employment Rights Bill (which proposes making such dismissals automatically unfair unless the employer can show extreme financial distress), although those reforms are unlikely to come into force before 2026. 

The importance of careful drafting of potentially long-term benefits – and of appreciating the implications of contractual commitments disclosed in due diligence on the acquisition of a company – is illustrated by another recent case, Adekoya v Heathrow Express Operating Company Ltd.  In that case the employees had an express contractual right to a life-long discount on rail travel provided by a third party.  Although the employees knew that the benefit was provided by a third party, they were wholly unaware of the terms of the third party's agreement with the employer.  The EAT held that it was not possible to imply a term that the employer could withdraw the benefit, simply because this was part of the agreement it had with the third party provider. 

The Tesco case is also notable for obiter comments from Lord Leggatt intimating that it might be time to develop the law to require an employer's discretion to terminate an employee's employment to be exercised in good faith.  This idea has received support in other quarters and, if pursued, would be a revolutionary change enabling courts and tribunals to examine an employer's reasons for termination on a wrongful dismissal case.