When can an employer be prevented from adopting “fire and re-hire” to change terms?

The High Court has granted an injunction to stop Tesco from using termination and re-engagement (sometimes referred to as “fire and re-hire”) to change the terms of some of its workforce to their detriment.

The facts

USDAW are recognised by Tesco for collective bargaining purposes for staff below the grade of Team Manager at some distribution sites. 

During the closure of some distribution centres between 2007 and 2009, Tesco negotiated with USDAW an entitlement to Retained Pay as an alternative to the redundancy payment which would have been paid to affected staff, to encourage them to relocate rather than take redundancy.  At the time, Tesco committed in communications with staff to increase the Retained Pay annually in line with any annual pay rise, stated that it was permanent, guaranteed for life, and could not be negotiated away.  These terms were then approved in a ballot of USDAW members.  It was on the strength of these promises that many staff agreed to relocate.

This was confirmed by Tesco in 2010, when Tesco and USDAW entered into a collective agreement which stated that Retained Pay would remain a “permanent” feature of the relevant employee’s contracts.  This term was incorporated into the staff’s contracts of employment.

However, on 18 January 2021, Tesco announced its intention to remove Retained Pay.  Staff who qualified were asked to agree to its removal in return for a one-off payment of 18 months’ Retained Pay.  Tesco stated in communications with staff that if they were unable to agree the contractual change, they were proposing to terminate their contracts and offer re-engagement on new terms (“fire and re-hire”).

A number of employees refused to agree, and together with USDAW brought proceedings in the High Court seeking an injunction preventing Tesco from going ahead with the proposed termination and re-engagement. The claimants were all employees who accepted Retained Pay and relocated rather than accept a redundancy payment of between £6,000 and £8,000. They gave evidence that the sole reason for their agreement to relocate was the Retained Pay offer.

The claimants argued that the express term regarding Retained Pay incorporated in each contract of employment ought to be construed to mean that for as long as each affected employee remained employed by Tesco in the relevant role, his/her entitlement to Retained Pay could not be removed, including by termination and re-engagement under a new contract. Alternatively, there was an implied restriction stopping Tesco from dismissing any affected employee other than for good cause independent from the removal of Retained Pay.

Tesco argued that each claimant’s contract of employment included an express term which entitled him/her to Retained Pay for as long as his/her employment continued under the terms of the contract, but that Tesco was entitled to terminate those contracts in accordance with their express terms.

The decision

The High Court decided that at the time the clause regarding Retained Pay was incorporated in the claimants’ contracts of employment, it was the mutual intention of the parties that the entitlement to Retained Pay would be permanent for as long as each affected employee was employed in the particular role. Therefore ‘permanent’ should be construed to mean for as long as the relevant employee was employed by Tesco in the same substantive role.

While this case has unusual facts, here, the High Court was satisfied that it was necessary to imply a term into the contract of employment meaning that Tesco’s right to terminate the contract on notice could not be exercised to remove or diminish the right to Retained Pay. Without such a term the employee’s entitlement to Retained Pay would not be permanent.

The High Court noted that, at the time the Retained Pay was agreed, Tesco could have sought to set a longstop date for the entitlement to Retained Pay and/or to make clear that it subsisted only for as long as the particular contract was in place.  However, they did not.

The High Court considered that justice to the claimants lay in ensuring that the terms of all affected employees’ contracts of employment were definitely declared.  The High Court was also satisfied that it was just and convenient (the relevant legal test) to grant final injunctive relief.

Under the terms of the injunction, Tesco is now restrained from (i) giving notice to terminate the contract of employment contrary to the implied term whereby the right to terminate cannot be exercised for the purpose of removing or diminishing the right of that employee to receive Retained Pay; and/or (ii) otherwise withdrawing or diminishing or causing the withdrawal or diminution of Retained Pay for any affected employee.

The High Court refused Tesco permission to appeal.

How will this case affect employers/employees going forward?

The facts of this case are unusual, and it is extremely rare for terms to be implied into a contract of employment which restrict an employer’s right to terminate that contract in accordance with its terms.  Employers should be careful where promises to ring-fence pay, benefits or other terms and conditions on a permanent basis have already been made. 

Going forward, employers should to consider such promises very carefully, and make those promises conditional or time limited wherever possible in order to maintain flexibility to make changes in the future where their business needs have changed.

Employees who are under threat of “fire and re-hire” should consider the changes proposed by an employer, and whether they go against promises made by the employer in the past.