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Dismissal and re-engagement: High Court restrains employer's right to "fire and re-hire"

09 February 2022

In the recent case of USDAW and ors v Tesco Stores Ltd, the High Court has held that a term constraining the right to terminate was implied into the employment contract on the basis of business efficacy and/or obviousness.

The Court granted an injunction against the employer to restrain it from providing notice to terminate the employment contract contrary to the implied term, namely to remove or diminish the individual contractual entitlement to Retained Pay other than in accordance with express provisions in the contract.

It is worth noting that the Court referred to the circumstances of this case as "extreme" and "unusual" when reaching its conclusion. Nevertheless, employers should be aware that as a result of this case, protection for employees is heightened as their employment contract could be subject to an implied term that restrains the employer's right to terminate the employment relationship and an injunction may be granted against employers who seek to "fire and re-hire" employees on new terms that alter or do not contain benefits that were intended to be "permanent" under the old employment contract.

Facts

Tesco commenced a programme of reorganising its distribution centres, which included closures and relocations. Tesco wanted to retain its staff to ensure the distribution network continued to operate effectively thus, Tesco did not want to lose all of its employees by way of redundancy resulting from the reorganisation.

As a result, between 2007 and 2009, Tesco entered into collective bargaining negotiations with the recognised union, Union of Shop, Distributive and Allied Workers ("USDAW"), and an individual contractual entitlement to Retained Pay for existing employees was agreed, as an alternative to a lump sum redundancy payment and to act as an incentive for employees to relocate. It was a contractual reward package that was given a monetary value and the difference between that value and the value of the new terms and conditions was protected. This "Retained Pay" would increase each year in line with any annual pay rise.

Tesco referred to Retained Pay as "protection for life at [the] new Tesco contract site", and confirmed that the benefit would remain for as long as the affected individuals were employed in their current role.   Tesco and USDAW had also published a statement in respect of the Lichfield site that stated "the retained pay is guaranteed for life" and the employer issued similar communications to the other sites.

In 2010, Tesco confirmed in the collective agreement that Retained Pay is a "permanent feature" of the individual's contractual entitlement and that it could only be changed on promotion, by mutual consent or if an employee requested change to working patterns.

In January 2021, Tesco formally announced its intention to remove the entitlement to Retained Pay and asked all affected employees to agree to its removal in return for an advance payment equal to 18 months of Retained Pay. In total 43 affected employees refused to agree. Tesco proposed to terminate individual contracts and offer re-engagement on different terms (without the Retained Pay entitlement) where affected employees would not voluntarily agree to the removal of the entitlement.

As a result of Tesco's proposals, USDAW and three of Tesco's employees (who were also union representatives) together brought a CPR Part-8 claim against the employer to seek a declaration that there was an implied term in the employment contract to prevent Tesco from providing contractual notice to employees for the purpose of removing or diminishing the right to Retained Pay. Injunctive relief was also sought, to prevent the employer from giving notice to terminate the contracts for the purposes of removing the right to Retained Pay.

Issue

Was Tesco entitled to terminate each affected individual's contract of employment and offer re-engagement on terms that did not include an entitlement to Retained Pay?

Judgment

The Court considered two relevant express terms in the contracts of employment.  The first was that Retained Pay will remain a "permanent" feature of the contract (save for when there is mutual consent, promotion or an employee's request to a change in working patterns) and the second was that specified notice would be given if Tesco terminated the contract other than in the event of gross misconduct.

The Court looked at the objective intention of the contracting parties having regard to ‘what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean" (Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38 cited). The natural and ordinary meaning of the words used, any other relevant provisions of the contract; the overall purpose of the clause and the contract and the circumstances as known by the parties at the time at which the contract was concluded were all relevant considerations.

The Court discussed that although "permanent" may mean for as long as the particular contract existed, that reading would ignore the intention of the parties. The Court concluded that 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 same substantive role, save in the circumstances expressly articulated in his or her contract. 

As such, there was a conflict between the right of the employer to terminate the contract for the purposes of removing the right to Retained Pay and the right of the employee to have the entitlement to Retained Pay for as long as they were employed in the same substantive role.

The Court found that an implied term, namely that Tesco would not exercise its right to terminate the contract for the purposes of removing the right to Retained Pay, was necessary on the basis of business efficacy and/or obviousness test. Without such a term, the entitlement would not be permanent (in the intended sense) and the contract would lack practical coherence. The Court also referred to the officious bystander test and concluded if the officious bystander was asked whether the term was so obvious that it went without saying, the answer would have been ‘Of course!'.

The declaratory relief was granted. In other words, the Court made the requested statement that the express (and/or any implied) term within the contract under which the affected individual is currently employed by which Tesco was entitled to give notice to terminate the contract, is subject to an implied term whereby that right cannot be exercised for the purpose of removing or diminishing the right of that employee to receive Retained Pay.

The Court also granted the injunction sought against Tesco that restrained it from directly or indirectly terminating the contract of affected employees for the purpose of removing or diminishing the entitlement to Retained Pay and from removing or changing the entitlement to Retained Pay other than in accordance with the express terms of the contract (i.e. when there is mutual consent, promotion or when the employee has requested a change in working patterns).

Tesco was refused permission to appeal.

Comments

Employers should be mindful of this case when proposing to "fire and re-hire" employees by which unequivocally "permanent" benefits under the current contract of employment would be removed or changed.   It has been reinforced that the Court will look at the objective mutual intention of the parties at the time the contract was made to assess the meaning of terms. If it is likely a term was intended to last for as long as the employee remained in employment and/or that specific post, it is possible a term may be implied into the contract that the employer cannot terminate the contract for the purposes of removing or changing that "permanent" term.

If employers breach that implied term, they risk claims, not only of unfair dismissal in the Employment Tribunal, but of a CPR Part 8 claim in the High Court for declaratory and/or injunctive relief, the effect of which, if successful, would be that employers would be prevented from terminating the contract and re-hiring employees on new terms that do not include the permanent term.  Employers do of course remain free to terminate employees' contracts for good cause, for example in cases of genuine redundancy or gross misconduct. 

This case has increased the protection of worker's rights under their employment contract in some circumstances and it has strengthened the position of unions to resist changes to employment benefits. However, each case will turn on its facts. In this case, the High Court referenced its "extreme" and "unusual" facts that conveyed a clear and express intention for the entitlement to be permanent, as such this kind of finding, for now, remains the exception rather than the norm. 

Employers should be wary about presenting a term as lasting for as long as the employee is employed and/or in their current role when their intention is for the term to only last so long as the contract in its current form is in existence.  Employers should make it clear at the time of contracting that any benefit will only last as long as the contract is in force, if that is their intention.

It is best practice for employers to put forward a reasonable and justified business case, consult employees and seek their mutual consent to vary contractual terms. 

It is also worth noting that the government has recently blocked a "fire and re-hire" bill aimed at curbing the practice of dismissing and re-engaging employees on more detrimental terms.  In the absence of legislation the government tasked Acas with the job of creating detailed guidance on the practice.  In November 2021 Acas launched "Making changes to employment contracts – employer responsibilities".

Written by Megan Dickenson

If you need any assistance with regard to changing terms and conditions please do not hesitate to get in touch.  

Further Reading