Background

In the context of a 2007 restructuring, Tesco agreed with USDAW, its recognised trade union, to provide an enhanced payment (“retained pay”) to certain Tesco staff as an incentive for them to relocate. Those staff accepted this as an alternative to taking redundancy and receiving a redundancy payment.

The collective agreement with USDAW described retained pay as “a permanent feature of an individual’s contractual eligibility” which could be changed only by mutual consent and which would cease on their promotion to a new role. This express term became incorporated into the relevant staff contracts. Earlier communications had also reassured staff that retained pay could not be “negotiated away” by Tesco or USDAW and that it was “guaranteed for life”.

In 2021, Tesco announced its intention to remove the entitlement to retained pay, offering a lump sum payment to staff who agreed. For those who didn’t agree, it proposed terminating their employment contracts on notice and re-engaging them on new terms without the entitlement (using “fire and rehire”).

The staff won their claims in the High Court which granted an injunction to prevent Tesco from proceeding. The Court of Appeal overturned this ruling and discharged the injunction.

The final verdict: No “fire and rehire” for Tesco staff

The Supreme Court has now restored the injunction, blocking Tesco’s “fire and rehire” plans (in Tesco Stores Ltd v USDAW and others). In its view, describing retained pay as “permanent” conveyed that the entitlement was not time-limited and would continue for as long as employment in the same role continued.

Applying the business efficacy (or obviousness) test, the Court found it necessary to imply a term that would preclude Tesco from dismissing staff on notice to deprive them of “permanent” retained pay. This was an incentive for an otherwise unpalatable relocation, and it was inconceivable that the parties intended for Tesco to be able to dismiss staff specifically to remove it. However, Tesco could terminate their contracts for another reason, such as lack of capability, misconduct or redundancy even if, practically, this would end their entitlements.

Since there was no breakdown of mutual confidence (because Tesco was prepared to re-engage staff on the same terms, just without retained pay), and damages would be an inadequate remedy, the Court granted an exceptional injunction. This effectively required Tesco to continue employing them with their retained pay terms.

Takeaways for employers

This is a fact-specific judgment, which warns employers against dismissing employees to remove entitlements promised to them indefinitely or unconditionally. Notice of termination can still be given for other reasons (which may bring those entitlements to an end) and very rarely will an injunction be granted to prevent this. Whether a dismissal is fair for statutory purposes must be assessed separately.

The judgment does not preclude using the “fire and rehire” route to make some unilateral changes, but caution is needed. A Code of Practice introduced in July 2024 entails a more prescriptive consultation process, but the forthcoming Employment Rights Bill will apparently replace this “inadequate statutory code” and “provide effective remedies” (suggesting that the current uplift of up to 25% of compensation for an unreasonable failure to follow the Code could be increased, or extended to protective award claims under the Trade Union and Labour Relations (Consolidation) Act 1992). Employers should ideally avoid these risks by obtaining employees’ consent to any changes.

The case is also a warning to ensure that contractual benefits are carefully drafted and that any conditions attaching to them, including as to duration, are made clear. Employers will wish to retain future flexibility to vary terms rather than baking entitlements into the contract. Pre-contractual communications should be kept consistent because, in the event of a dispute, any loose promises may be taken into account when determining an employer’s intention.

The contractual implications of this decision are examined by India Jordan in her blog.