USDAW v Tesco: the end of fire and rehire?

Benjamin Gray looks at the lessons to be learned from the Supreme Court's recent consideration of a "fire and rehire" case.

“Fire and rehire” has become a controversial political issue, with the introduction of a statutory code of practice in July this year, and the new Government pledging to end the practice “soon”.

If an employer wants to renegotiate the terms of their relationship with their employees, “fire and rehire” (also known as “dismissal and re-engagement”) is the nuclear option in the industrial relations toolkit. The employer can unilaterally end the existing legal relationship and insist that the employee’s continued employment is based on accepting their terms.

Whilst fire and rehire is subject to the laws on unfair dismissal, employers can defend these claims so long as they show that there was a potentially fair reason (such as redundancy or business reorganisation), and they followed a fair process – usually involving some level of consultation and negotiation. However, any claim to reinstate the original contract or assert ongoing losses for breach of contract would normally fail, as the express terms of the contract typically permit the employer to end the relationship for any reason by providing notice.

The Supreme Court’s decision in USDAW v Tesco [2024] UKSC 28 at first blush seems to contradict this assessment. An employer enters a negotiation with its employees over pay, they are unable to reach an agreement, and the employer fires and rehires. Yet in this case, the High Court held that to do so was a breach of contract, and issued an injunction restraining Tesco from dismissing the affected employees. This decision was upheld by the Supreme Court.

Was this a radical departure from employment orthodoxy? At face value, possibly, but in practice much of it was the restatement of orthodox contractual principles.

The Background

In 2007 Tesco closed some of its distribution centres as part of a wider restructuring. It wanted to avoid losing all the experienced employees at those sites, and offered them a “retained pay” package to incentivise them to stay employed by Tesco and relocate to other sites.  These sites were substantial distances from their original workplace. The Claimants all moved houses, and took out mortgages based on their Retained Pay.

This was reduced to express in a collective agreement, which the parties agreed was incorporated into the individuals’ contracts of employment, the most material of which stated:

Retained pay will remain a permanent feature of an individual’s contractual eligibility subject to the following principles:           

• Retained pay can only be changed by mutual consent;
• On promotion to a new role it will cease;
• When an individual requests a change to working patterns such as nights to days the premium payment element will be adjusted;
• If Tesco make shift changes it will not be subject to change or adjustment. 

Within the negotiation process Tesco made numerous statements about the nature of Retained Pay. These included that it was ‘protection/guaranteed for life’, ‘remains for as long as you are employed by Tesco in your current role’, ‘cannot be negotiated away by TESCO, USDAW or USDAW shop stewards in future negotiations’.

In 2021 Tesco sought to negotiate away the Retained Pay entitlement. Ultimately the employees were offered either an enhanced payment as compensation, or dismissal and re-engagement on the same terms less Retained Pay.

The affected employees issued proceedings in the High Court, which held that there was an implied term that prevented Tesco from exercising the right to terminate for the purpose of removing or diminishing the employee’s right to Retained Pay. Ellenbogen J granted an injunction restraining Tesco from dismissing the employees on this basis.

An appeal by Tesco was upheld in the Court of Appeal, and USDAW appealed to the Supreme Court.

The Supreme Court’s Decision

The Supreme Court unanimously upheld USDAW’s appeal.

Lord Burrows and Lady Simler (with whom Lord Lloyd Jones agreed) held that as a matter of construction, the express Retained Pay term identified above meant that the employees were entitled to receive this benefit ‘for as long as their employment in the same role continues’. This was consistent with the ordinary meaning of the word “permanent”, and to hold that the entitlement could be terminated merely by dismissing on notice (as Tesco suggested) would deprive it of any meaning. Moreover, the qualification that “Retained pay can only be changed by mutual consent”  meant that “permanent” had to carry a meaning other than ‘cannot be removed by collective bargaining’.

Accordingly, there was a tension between the Retained Pay clause and Tesco’s contractual right to dismiss on notice. It was therefore necessary as a matter of business efficacy to imply a term that the right to dismiss on notice ‘cannot be exercised for the purpose of depriving the claimants of their right to permanent retained pay.’ This was necessary to avoid undermining the promise that Retained Pay would be “permanent”. Alternatively, such a term was implied by obviousness – it was ‘inconceivable’ that the parties had agreed that Tesco retained a unilateral right to end the Retained Pay entitlement by providing notice, or that the employees had agreed to place themselves at greater risk of dismissal as a result. To do otherwise would render the promise of permanence meaningless.

The Court found support for this in cases such as Aspden v Webbs Poultry and Meat Group [1996] IRLR 52 and Jenvey v Australian Broadcasting Corporation [2002] IRLR 520. In these cases the Courts have held that an otherwise-unfettered right of termination can be subject to an implied term that an employer cannot terminate where doing so would be contrary to the functioning of the particular scheme – in those cases Permanent Health Insurance and enhanced redundancy pay respectively. Whilst these cases were not identical to the present case, they were said to

exemplify the principle that a term implied by fact may be required to qualify an employer’s otherwise unqualified contractual right to dismiss in circumstances where to do so would defeat or undermine the purpose of the contract by denying the very benefit that was promised.

Turning to remedy, the Court held that in substance an injunction restraining dismissal would amount to an order for specific performance, and should be governed by the same principles. Ordinarily, contracts of employment are not specifically enforceable. However, there are exceptions. In this case, the exceptions were that (a) there was still a relationship of trust and confidence – Tesco wanted to rehire these employees; and (b) damages were an inadequate remedy – the losses would be too speculative, and it would be resource-intensive and costly to quantify them. They would also not reflect the non-pecuniary losses of fire and rehire such as a loss of job satisfaction, anxiety and upheaval. An injunction was therefore appropriate.

Lord Leggatt reached the same conclusions, albeit following reasoning. The analysis and potential ramifications of this speech will be covered in a further piece by James Bickford-Smith. In briefest summary.

• The language of “permanent” was meant by the parties as a protection against Tesco removing Retained pay at a later date. To hold otherwise would render the language “worthless”.
• It was necessary to imply a term restraining the right to dismiss in order to give effect to that express term.
• Although the termination clause was expressed in unqualified terms, there is a substantial body of authority (e.g. Braganza v BP Shipping Ltd [2015] UKSC 17) that implies restrictions on discretionary powers. There was no reason to consider that this principle did not extend to the right to terminate. This did not fall foul of the Johnson v Unisys [2001] UKHL 13 exclusion zone as what was in issue was not the manner of dismissal but whether to dismiss at all.

Lord Reed also agreed with Lord Burrows and Lady Simler. However, he did not consider that the conclusion was reached simply through construing the two terms. Rather, it was necessary to imply the restriction on termination because it was clear from the surrounding circumstances that Tesco intended Retained Pay to be an inducement to the affected employees to relocate rather than accept redundancy. Permitting Tesco to dismiss the employees at will to avoid paying Retained Pay would undermine that intention. He disagreed with Lord Legatt’s reasoning about the application of Braganza.

Comment

It is well-established that an employer’s right to dismiss an employee is constrained where doing so frustrates the operation of a contractual benefit such as Permanent Health Insurance. The basis is that this is necessary to give effect to the express terms of the contract: a contractual right to Permanent Health Insurance is meaningless if an employer can dismiss the employee for long term sickness. Likewise, there is an obvious absurdity in an employer deciding to dismiss an employee because they are redundant, then choosing to dismiss on other grounds to try and avoid paying a contractual redundancy package.

What is unusual is that unlike those cases, this case does not involve a side benefit but an element of the employee’s pay package.

But, as the Supreme Court acknowledged, ‘the industrial context of this case is far from usual’ (para 47). Retained Pay was not ‘an employee’s ordinary entitlement to an ongoing contractual benefit as consideration for work’, but a specific inducement to employees to encourage them to relocate rather than accept redundancy. It was also accompanied by strong statements from Tesco that the pay package was a “permanent” benefit that could not be revoked save by “mutual consent”. It is therefore not difficult to see why the Supreme Court had difficulties with the proposition that these strong words could be defeated by Tesco unilaterally dismissing the employees on notice.

Those looking to extract a wider principle that “fire and rehire” is not possible where it affects an employee’s pay are likely to be disappointed. The Supreme Court was clear that this was not a case involving the ordinary wage-work bargain, and what distinguishes the Retained Pay clause is the additional wording about its permanent nature. Had that wording not been included, the outcome would likely have been different. Indeed, at paragraph 44 of its judgment the Court identified that Tesco could have avoided this outcome either by providing a longstop date for the expiry of Retained Pay, or adding a clause expressly permitting fire and rehire.

Despite the political context of fire and rehire, this case was ultimately decided on orthodox principles of contract law with which practitioners will be familiar:

1. Express terms will be read in a manner that gives effect to both of them;
2. Where necessary, terms will be implied to ensure that harmony; and
3. Courts are not there to relieve the parties of what they later decide to be a bad bargain.

Benjamin Gray is a barrister at Littleton Chambers.