If an employer cannot agree changes to terms and conditions of employment with employees, it may seek to make the desired changes by dismissing employees and offering to re-engage them on the new terms. In USDAW v Tesco Stores Ltd the High Court prevented Tesco from using a “fire and re-hire” strategy where it was seeking to change protected pay arrangements that it had promised would be permanent.
Between 2007 and 2009 Tesco closed some distribution centres and opened new ones, at which lower rates of pay applied. However, Tesco needed some staff from the closed sites to transfer to the new sites. As it could not require staff to relocate, it incentivised them to do so by agreeing to pay them at their existing higher rates in their new roles. This was referred to as retained pay. Tesco also agreed to increase retained pay in line with any future pay increases awarded at the new sites.
The arrangement was described as “protection for life” while the employees continued in their new roles. The formal agreement with USDAW, the recognised trade union, confirmed that retained pay would be a permanent feature of an individual’s contract and could only be changed by mutual consent or in certain specified circumstances, such as an employee’s promotion.
In 2021 Tesco notified employees that it was intending to remove their entitlement to retained pay. They were offered a lump sum payment to agree to the change. Employees were told that if they did not agree, they might be dismissed and offered re-engagement on the new terms. USDAW applied to the High Court for a declaration that Tesco was not entitled to dismiss the employees in order to remove their entitlement to retained pay.
Implying terms into a contract
Normally an employer is free to dismiss an employee on notice. However, in some cases courts have been willing to imply a term into an employment contract restricting an employer’s ability to give notice, for example in order to prevent an employer dismissing an employee in order to remove their entitlement to permanent health insurance payments.
A court can only imply a term into a contract if:
- It is necessary to give business efficacy to the contract so that it has commercial or practical coherence, or if the implied term is so obvious that it goes without saying;
- It is not inconsistent with an express term of the contract; and
- The term would have been agreed by reasonable people in the position of the parties at the time the contract was entered into.
A term cannot be implied simply because it is fair to do so. The question is what is necessary, not what is reasonable.
Here it was necessary to imply a term that Tesco would not exercise its right to give notice in order to remove or diminish an employee’s right to retained pay. This was needed to give the contract business efficacy by recognising the permanent nature of the retained pay and would have been obvious to a reasonable person when the arrangements for retained pay were agreed. Tesco’s express contractual right to dismiss on notice was limited because of the unusual circumstances in which that agreement was made.
The High Court also issued an injunction preventing Tesco from giving employees notice in order to remove or diminish the right to retained pay.
Employers who are seeking to change employees’ terms and conditions will need to look carefully at any promises that were made when the relevant term was introduced or varied. If employees were told that there would be no future changes to a term, an employer’s freedom to amend or withdraw may be limited.
Employers should also be careful about what they say to employees when they are changing terms and conditions of employment or offering special benefits. Saying “we will not make further changes for x years” will give employers more flexibility than promising that a benefit will be provided permanently.
Authored by Jo Broadbent and Stefan Martin.