Earlier this year, the High Court found that Tesco was prevented from dismissing and re-engaging employees in order to remove protected pay arrangements it had agreed some years previously (USDAW v Tesco Stores Ltd). The Court of Appeal has now taken a more orthodox approach, finding that there was no basis for implying a term into the employees’ contracts that meant they could not be dismissed on notice.
What happened
Tesco was closing some distribution centres and opening new ones. To incentivise existing employees to move to the new sites, which had less generous terms and conditions, it offered them generous pay protection. This was described as “protection for life” while employees remained in their current roles. A subsequent collective agreement between Tesco and USDAW confirmed that the retained pay was permanent and could only be changed by mutual consent or in certain specified circumstances, such as promotion.
Some years later, Tesco notified employees that it was intending to “buy out” the entitlement to retained pay. Employees who did not accept might be dismissed and offered re-engagement on new terms. USDAW successfully argued that the circumstances of the retained pay agreement meant that there was an implied term in the employees’ contracts preventing Tesco from dismissing them to remove their entitlement to retained pay.
The decision
The Court of Appeal upheld Tesco’s appeal.
The express terms of the employees’ contracts entitled them to “permanent” pay protection. Properly understood, this entitled them to pay protection for as long as the particular contract endured. There was nothing in the contracts, or the statements made before they were entered into, which indicated that it was the mutual intention of the parties that employees with retained pay would be employed for life or until their normal retirement age. Using the word “permanent” did not indicate that the parties intended to limit the circumstances in which the contracts could be brought to an end.
A court can imply a term into a contract only where it is obvious in the sense of being so obvious that it goes without saying. The precise term to be implied must be capable of clear expression. On the facts of the case, it was not clear what term would be implied. Although the employees might have said, if asked, that they had a right to remain in post for the rest of their lives, Tesco would certainly not have agreed. The obviousness test was not satisfied, particularly given that the implied term argued for would have been inconsistent with the express term allowing Tesco to terminate employment contracts on notice.
While the courts have been prepared to imply a term into employment contracts preventing an employer from terminating an employee’s contract where that would prevent them from benefiting under a permanent health insurance scheme, that line of authority did not “get the claimants home” given the different background to this case.
Next steps
The Court of Appeal emphasised that it is only possible to imply a term into a contract where the parties, acting as notional reasonable people, would have agreed to the term had they considered the issue at the time the contract was made. It is not sufficient that a term appears fair or reasonable; the test is whether it is necessary.
The original High Court decision appeared to give employees greater scope to argue that an employer’s comments in the context of changes to terms and conditions of employment restricted its ability to make further changes at a later date. That risk now appears to have receded, with a return to a more conservative approach in the Court of Appeal.
Authored by Jo Broadbent and Ed Bowyer.
