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‘‘Fire and Re-hire’’: Injunction prevents Employer from being able to dismiss and re-engage on less favourable terms

The High Court in Union of Shop, Distributive and Allied Workers (‘‘USDAW’’) and others v Tesco Stores Limited [2022] EWHC 201 (QB) has granted an injunction preventing Tesco from dismissing employees who refused to withdraw their entitlement to ‘Retained Pay’. Whilst the facts of this case are unusual (and therefore not necessarily broadly applicable except in limited circumstances), this decision illustrates that the Courts are willing to block attempts to unilaterally impose changes to contracts of employment in certain circumstances.

What is Fire and Re-hire?

The terms of a contract of employment can be varied by:

  • Mutual agreement between employer and employee;
  • A unilateral variation by the employer; or
  • Terminating the existing contract of employment and offering to re-engage the employee on the new terms (i.e. ‘‘fire and rehire’’).

An employer who unilaterally varies an employee’s contract and/or the terminates an existing contract with an offer of re-engagement risks being liable for claims of constructive unfair dismissal (where the employee resigns in response to the unilateral change) or unfair dismissal (in circumstances where the employee has been dismissed under the existing contract). Whilst fire and rehire is often seen as a last resort, it has been suggested that the practice may be more prevalent now than ever before.

Background to USDAW v Tesco Stores Limited

Between 2007 and 2009 Tesco implemented an expansion programme which involved the closure of certain distribution centres; the expansion or restructuring of others; and the opening of new sites. As an incentive to relocate to other sites and remain with the company, Tesco offered its employees ‘Retained Pay’ as an alternative to redundancy. The Retained Pay involved an enhanced remuneration package which included the difference between the monetary value of the existing contract and the new contract.

A collective agreement was entered into between USDAW and Tesco with an express term stating that the Retained Pay was a ‘‘permanent feature of an individual’s contractual eligibility’’. Employees were also told that retained pay would be ‘‘guaranteed for life’’ and ‘‘remain for as long as they were employed by Tesco in their current role’’. For each of the individual Claimants, Retained Pay represented between 32% and 39% of their total remuneration package.

On 18th December 2021 Tesco announced its decision to phase out the Retained Pay stating that the arrangements had ‘‘achieved what they were designed to achieve’’. In an attempt to withdraw the entitlement to Retained Pay, Tesco offered those affected employees an advance payment equal to 18 months of Retained Pay. For those employees that did not accept the advanced payment, Tesco proposed to terminate their contract of employment and offer to re-engage them on a new contract identical to their old one but with the entitlement to Retained Pay removed. 43 individual union members refused to agree to the proposal and commenced High Court proceedings seeking an injunction preventing Tesco from terminating their contracts.

The High Court’s decision

It was common ground that the collective agreement was incorporated as an express term of each employee’s contract of employment, however dispute arose over the word ‘permanent’. USDAW argued that permanent ought to be construed to mean for as long as each affected employee remained employed by Tesco in the relevant role – it contended that permanent simply could not be given any other meaning. Tesco argued that permanent meant the entitlement lasted for as long as the employee continued to work under the terms of that particular contract and it was illogical to imply any term which precluded the offer of re-employment under a new contract.

By finding in favour of USDAW, the High Court determined that the word ‘permanent’ would be understood by the reasonable person to mean for as long as the relevant employee is employed by Tesco in the same substantive role. In so doing, the Court granted the relief sought. In reaching its conclusion the Court had regard to the intention of the parties and the context in which the clause was drafted, in particular that employees were told Retained Pay was ‘‘guaranteed for life’’.

By interpreting the contract in this way, a conflict arose between the express term entitling the employee to Retained Pay and Tesco’s right to lawfully terminate the contract of employment. To overcome this conflict, the Court implied a term into each affected employee’s contract preventing Tesco from terminating the contract for the purpose of removing or diminishing the right of that employee to Retained Pay. By implying a term in this way meant that Tesco would still be able to terminate the contracts of employment for good cause, for example redundancy or gross misconduct.

What does the mean for the future?

Whilst the circumstances of this case have been described as “extreme”, it illustrates the Court’s willingness to intervene in the practice of fire and rehire in certain circumstances. The Court’s decision comes at a time when the controversial practice has attracted significant media attention and public scrutiny.

In October 2021 the Employment and Trade Union Rights (Dismissal and Re-Engagement) Bill was introduced to parliament which would have had the effect of preventing employers from engaging in the practice of fire and rehire unless employees were properly consulted first. However, the Bill failed to gather enough support from MPs and was subsequently blocked. Instead, the government tasked ACAS (Advisory, Conciliation and Arbitration Service) to provide guidance on the practice. The detailed advice “Making changes to employment contracts – employer responsibilities” was published in November 2021 and emphasises the importance of effective consultation and maintaining good workplace relations when proposing contract changes.

Whilst legislative change does not appear to be on the horizon, should it become necessary to vary contractual terms it remains best practice for employers to put forward a reasonable and justified business case, consult with employees and seek their mutual consent before doing so.

For further information on this topic please contact Marcus Alvin at [email protected].