The practice of “fire and re-hire” is controversial. A recent attempt to introduce new legislation in this area to enhance worker protections was thwarted at the second reading of the Employment and Trade Union Rights (Dismissal and Re-engagement) Bill in October 2021. ACAS has recently published new guidance for employers, observing that the practice of fire and re-hire is an “extreme step that has significant risks” and that a proposal to dismiss and re-hire is likely to be viewed by employees or their representatives as a “threat” which “might cause immediate and long-lasting damage to trust and working relations in an organisation”. ACAS guidance includes a menu of other risks which include: (i) losing valued members of staff; (ii) potential legal claims; (iii) reputational damage to an organisation or brand, making it difficult to attract new employees; (iv) industrial action, and (v) long-term damage to industrial relations. See https://www.acas.org.uk/changing-an-employment-contract/employer-responsibilities/if-employment-contract-changes-cannot-be-agreed.
The High Court judgment in USDAW & others v Tesco Stores Limited QB-2021-000988 provides a significant development in the controversial practice of “fire and re-hire” where recourse to the law of implied terms provides protection, at least where “permanent” benefits are concerned. Indeed, the High Court granted both declaratory and final injunctive relief restraining Tesco from seeking to fire and re-hire the claimants.
Traditionally, employers seeking to jettison or downgrade terms and conditions of employment have turned to their HR departments and lawyers to explore their options.
Consistently, the advice has been: 1. Put forward a good business case. 2. Consult. 3. Seek consensual variation. 4. But if all else fails, terminate the contracts, and re-engage staff on new contracts which omit the offending terms. 5. Exposure will be limited to claims of unfair dismissal, but (a) employees will be reluctant to take that particular step when they remain employed, and (b) there is every chance that an Employment Tribunal will accept that the reason for termination was “some other substantial reason” (“SOSR”), and that dismissal was not unfair in all the circumstances, applying s.98(4) of the Employment Rights Act 1996. Indeed, if the majority of the workforce agree to the revised terms, this may yet provide further justification that the resultant dismissals of those who do not voluntarily agree fall within the nebulous band of reasonable responses.
USDAW & others v Tesco Stores Limited turns the traditional thinking, certainly as far as “permanent” benefits are concerned, on its head. Where large workforces are concerned, the unions’ hand, when seeking to resist the removal of such benefits, has been strengthened. No longer will affected employees necessarily be required to accept the enforced removal of benefits, or the termination of their employment and the prospect of taking their chances in the Employment Tribunal to secure the limited remedies available for a claim of unfair dismissal. Instead, they can now, at least on suitable facts, invite the High Court to grant declaratory and injunctive relief to protect their position.
USDAW is recognised by Tesco for collective bargaining. In the late 1990’s the company undertook an expansion programme of its distribution network which involved relocating to new purpose built premises. It recognised the need to ensure that it would not lose all of its existing and experienced workforce through redundancy. Following negotiations, it was agreed that affected employees would be entitled to “Retained Pay” as an alternative to a lump sum redundancy payment and as an incentive to relocate. Retained Pay provided a solution as a form of pay protection. Their existing package was given a value and the difference between that value and the value of the new (and less advantageous) terms and conditions available to newly appointed staff was protected. The relevant arrangements applied to a number of distribution centres in England and one in Scotland.
Affected employees were told that their entitlement to Retained Pay constituted “protection for life at [the] new Tesco contract site”. Affected staff were also assured that their “Retained Pay” would “(remain) for as long as you are employed by Tesco in your current role”. It was said that “Your retained pay cannot be negotiated away by either Tesco, Usdaw or Usdaw Shop Stewards…” The benefit was said to be “guaranteed for life”. In due course, the relevant arrangements were incorporated into a collective agreement which provided that they were “an integral part of contractual terms”, and that it would “remain a permanent feature of an individual’s contractual eligibility subject to the following principles: 1) retained pay can only be changed by mutual consent; 2) on promotion to a new role it will cease; 3) when an individual requests a change to working patterns such as nights to days the premium payment element will be adjusted, and 4) if Tesco make shift changes it will not be subject to change or adjustment”.
Internal management briefing papers revealed that the offer and implementation of Retained Pay had been viewed by the company at the relevant time as “crucial to us being able to retain enough colleagues to avoid serious disruption to our [distribution centre] network and the wider business”.
In early 2021, Tesco announced its intention to remove Retained Pay, on the basis that, as far as the company was concerned, the relevant arrangements had “achieved what they were designed to achieve”, and that it was “now the right time to phase those arrangements out”. The company pointed to the fact that recently employed staff did not have entitlement to Retained Pay (something it knew would be the case when these arrangements were introduced), and it wished to simplify its payroll system.
Affected employees were offered an advance payment equal to 18 months of retained pay to agree to its removal. It was made clear that if agreement could not be reached, the company proposed to terminate individual contracts and offer re-engagement on new terms (ie the existing arrangements minus Retained Pay). Affected staff were given 3 weeks to decide.
Individual union members employed at the various distribution centres affected refused to agree to Tesco’s proposal and were included as claimants in the proceedings. Each had taken out a mortgage on the basis of an income which included Retained Pay, one took out some additional loans. For each of the individual claimants, Retained Pay represented between 32% and 39% of their total remuneration package.
Proceedings were issued in the High Court in England and the Court Session in Scotland. An interim interdict was granted in Scotland. The English proceedings went to trial, Tesco having given undertakings pending trial. The Scottish proceedings are yet to be substantively concluded.
USDAW argued that the express term as to Retained Pay as incorporated meant that for as long as each affected employee remained employed by Tesco in the relevant role, their entitlement to Retained Pay could not be removed, including by termination and re-engagement under a new contract which did not provide for that entitlement. The word “permanent” could not be given any other meaning, in particular in the context of the circumstances in which it had been agreed. Alternatively, it was necessary to imply a term by reason of business efficacy, the officious bystander test, or by operation of the implied term of mutual trust and confidence. Whilst a term cannot be implied to contradict an express term, there was ample authority, beginning with Aspden v Webbs Poultry and Meat Group (Holdings) Ltd  IRLR 521, to support the contention that Tesco’s otherwise unfettered express power to give notice to terminate the contract could be subject to an implied restriction so as to give effect to the parties’ mutual intention at the time the entitlement to Retained Pay was introduced. Insofar as Tesco suggested that the implication of such term would fall foul of the so-called “Johnson exclusion zone” (Johnson v Unisys  2 WLR 1076, HL), that line of authority merely precluded a claim to recover damages for post-termination losses arising from the manner of an employee’s dismissal. In the present case, employment had not been terminated and no claim had been advanced seeking damages for pecuniary losses arising post-termination. Further, the Johnson line of authority had not considered or overruled the Aspden line of authority, which remained good law, and it was held in Edwards v Chesterfield Royal Hospital NHS Foundation Trust  UKSC 58, that an injunction to prevent a threatened dismissal in breach of contract did not cut across the statutory scheme for unfair dismissal.
Tesco’s position was that an employer was entitled, as a matter of contract, lawfully to terminate the contract by giving proper notice and could do so for good, bad, or indifferent reasons. The employee had no remedy unless the dismissal was in breach of contract and then, only for that breach (Malloch v Aberdeen Corporation  1 WLR 1578).
It argued that the claim fell within the “Johnson exclusion zone” and that the individual claimants’ remedy lay in the Employment Tribunal, whether or not any offer of re-engagement were to be accepted (Hogg v Dover College  ICR 39, EAT).
The High Court observed that, devoid of context, the use of the word “permanent” might be considered to confer an entitlement which was permanent for as long as the particular contract endured, but that to adopt such a construction would be to ignore the intention of the contracting parties. A reasonable person, having all of the background knowledge which would have been available to those parties at the time the entitlement to Retained Pay was introduced would not have understood the word “permanent” in such a way, having regard to the context in which the clause was drafted. Retained Pay had been introduced as a means by which the company had secured significant commercial benefits. Consequently, this gave rise to an “… inherent conflict between a right to terminate the contract for the purposes of removing the right to Retained Pay, in circumstances in which a fresh contract will be offered, in relation to the same substantive role, which will confer no such entitlement”.
Applying the principles enunciated by Carr LJ Yoo Design Services v Iliv realty Pte Limited  EWCA Civ 560 to the unusual (or “extreme”) facts, and having regard to the tests of business efficacy and/or obviousness, the Court held that it was necessary to imply into the relevant contracts a term to the effect that the company’s right to terminate the contract on notice could not be exercised for the purpose of removing or diminishing the right of the affected employee to Retained Pay. By analogy with the well-known cases in the context of permanent health insurance benefits (“PHI”), an employer’s otherwise unfettered express power to give notice to terminate the contract could be subject to an implied restriction in certain circumstances, so as to give effect to the parties’ mutual intention at the time at which (in this case) the entitlement to Retained Pay was introduced. See Aspden; Hill v General Accident Fire & Life Assurance Co plc  IRLR 641; Briscoe v Lubrizol  IRLR 607; Awan v ICTS Ltd  IRLR 212 and the analysis of Elias J (as he then was) in Jenvey v Australian Broadcasting Corporation  IRLR 520.
The Court held that outside the sphere of PHI benefits, the clear ratio of Jenvey was that a contract should not be construed so as to permit an employer to exercise a power in circumstances in which to do so would frustrate the function and purpose of the contract in denying the very benefit which it envisaged would be paid. The Court observed: “as a matter of principle, it matters not whether that benefit is PHI; a contractual redundancy payment; or the entitlement to Retained Pay for as long as the employee remains employed in the same role”.
Whilst the company rightly objected to the implication of any term which would have the effect of precluding an employer which was otherwise contractually entitled to give notice to terminate from offering to re-engage on different terms, the difficulty in the present case lay not in the intention to offer re-engagement but in the intention to terminate the original contract for the purpose of extinguishing or diminishing the right to Retained Pay. The Court made it clear that the implication of the term which it found to be implied meant that Tesco could not exercise the power to terminate for good cause.
The Court rejected the proposition that the implication of the term fell foul of the Johnson line of authority, given that the circumstances of the instant case were not concerned with the manner of dismissal, or the application to a dismissal of the implied term that the parties would not act in a manner which was calculated, or likely, to destroy or seriously damage the relationship of mutual trust and confidence between them. The principle in Kerry Foods v Lynch  IRLR 680 was not undermined. The availability of a claim for unfair dismissal (in the event of a dismissal) afforded no answer or bar to the instant claims, or relief sought.
Applying FSA v Rourke  CP Rep 14, Ch. D (per Neuberger J as he then was) it was appropriate to grant declaratory relief to the effect that the implied terms contended for were indeed contained in the contracts of affected employees. It was also appropriate, just and convenient to grant final injunctive relief to restrain Tesco from giving notice to terminate the contracts of employment of any affected employees, contrary to the implied terms as declared.
The Tesco takeaway
It is undeniable that this case represents a development in the law concerning implied terms in relation to “permanent” contractual benefits. When this case is cited in future, employers might argue that USDAW v Tesco turns on its facts (and “extreme” facts at that) and that it does not represent an opening of the floodgates. Against that, employees who are the beneficiaries of “permanent contractual benefits” will cite USDAW v Tesco in the confidence that it represents a significant strengthening of their hand when their employer, for arbitrary or other reasons, seeks to withdraw a “permanent” benefit, purporting to rely on the ultimate “right” simply to terminate the relevant contracts by giving due contractual notice.
In the sphere of collective bargaining and negotiation, trade unions need only suggest to their employer counterparts, when agreeing to the introduction of new terms that the principles of USDAW v Tesco apply, so as to give affected employees and their trade union representatives the comfort and reassurance required to ensure that the benefit in question “does what it says on the tin”. The case also stands out as a claim which “sits outside the Johnson exclusion zone”.
USDAW was represented in the High Court by Paul Gilroy QC of 9 St John Street, leading Stuart Brittenden of Old Square Chambers, instructed by Neil Todd of Thompsons Solicitors LLP.