Fire and rehire: Tesco Stores Ltd v USDAW
In September 2024, the Supreme Court handed down its judgment in Tesco Stores Ltd v USDAW and unanimously held that Tesco could not dismiss and re-engage employees for the purpose of removing their contractual right to a pay uplift, known as retained pay.
Factual background
In 2007, Tesco planned an expansion and restructuring of its distribution network, involving the closure of existing workplaces and the opening of new sites some distance away. As an alternative to making redundancies, Tesco sought to retain experienced employees by offering an incentive to encourage staff to relocate. Following negotiations with the recognised trade union, the Union of Shop, Distributive and Allied Workers (USDAW), it was agreed that a substantial pay uplift (known as ‘retained pay’), would be offered to employees who agreed to relocate. A collective agreement was entered into, and the terms were incorporated into employees’ individual contracts of employment.
Retained pay formed a considerable 32-39% of the employees’ total pay and it was described by Tesco as being “guaranteed for life”. The employees who accepted the offer to relocate were told that they would receive retained pay for as long as they were employed by Tesco in their current role at the new location. Some of those who accepted the offer moved house and took out mortgages on the basis that their income would be supplemented by retained pay.
In 2021, Tesco sought to end employees’ entitlement to retained pay and offered a lump sum payment, equivalent to 18 months retained pay, to employees who agreed. Employees were told that if they refused to accept a change to their terms and conditions, they would be dismissed and offered employment on identical terms apart from the entitlement to retained pay. A total of 367 members were affected by the proposed changes, leading to the union and several individual employees applying for an injunction to prevent Tesco from dismissing and re-engaging them on less favourable terms.
High Court’s decision
The High Court agreed with the union and granted an injunction to prevent Tesco terminating employees’ contracts of employment for the purpose of removing their entitlement to retained pay. The Court looked at the circumstances of the restructuring and the significant financial commitments undertaken by some employees on the understanding that retained pay was not temporary, but rather a permanent feature of their contract. Tesco appealed.
Court of Appeal
Tesco argued that the language used was to stress that retained pay could not simply be negotiated away by collective bargaining in the future. The Court did not accept that the references to the entitlement being “permanent” and “guaranteed for life” meant that the parties intended to limit the circumstances in which Tesco could bring the employees’ contracts to an end. The Court overturned the decision of the High Court, however USDAW appealed to the Supreme Court.
Supreme Court
The Supreme Court was not persuaded by Tesco’s argument that it was the intention of the parties that retained pay would only last as long as the existing contract. If its argument had succeeded, Tesco could simply have given notice to dismiss an employee the day after they relocated to the new site and offered to re-engage them on the same terms but excluding their entitlement to retained pay. This would deprive the promise that retained pay would be “permanent” of any value.
Instead, the Court looked at the wording used by Tesco and included in the collective agreement negotiated with USDAW. It agreed with the High Court that weight had to be given to the promise that retained pay was intended by the parties to be a permanent entitlement whilst the employees remained in their roles.
Tesco had failed to negotiate any limitation on the entitlement to retained pay and it was not prevented from dismissing employees for a reason unconnected with retained pay, for example poor performance or misconduct. Consequently, the Supreme Court unanimously agreed that Tesco could not dismiss and re-engage employees for the purpose of removing their entitlement to retained pay and the injunction granted by the High Court was restored.
While the outcome is a great success for USDAW and its members employed by Tesco, the decision is very fact specific and does not prevent an employer from dismissing an employee and offering to re-engage them on less favourable terms other than in exceptional circumstances, such as those seen in this case. However, the new Labour Government has proposed to restrict the use of fire and rehire – please see below for more details.
Proposals to restrict the use of fire and rehire
The Employment Rights Bill was published on 10 October 2024 and proposes to amend the Employment Rights Act 1996 to provide that an employee will be deemed to have been automatically unfairly dismissed if the main reason for dismissal is their refusal to agree to a change to their terms and conditions; or where the employer dismisses the employee and offers to re-engage them on less favourable terms (or recruit other individuals under new terms with substantially the same duties).
However, there is an exception where the employer can demonstrate it is in financial difficulties that affect or are likely in the immediate future to affect the employer’s ability to carry on the business. An employer will also need to demonstrate that it could not reasonably have avoided the need to make the change. If an employer can meet both conditions, it will be necessary to go on to consider whether any dismissal was fair in the circumstances which will include consideration of whether any consultation took place, as well as whether the employee was offered anything in exchange for their agreement to the proposed change.
At the moment, if an employer wants to make changes to an employee’s terms and conditions it should first consult with the employee (and any trade union) and try and reach agreement. Where it isn’t possible to reach agreement, an employer may decide to dismiss and offer to re-engage the employee on new terms and conditions (often known as fire and rehire). There has been increasing scrutiny on the use of this tactic, particularly over the last year or so following the P&O Ferries scandal.
A new statutory code came into effect on 18 July 2024 which provides practical guidance for both employers and employees. Although the code is not legally binding, it is admissible as evidence in the Employment Tribunal. If an employee succeeds in a claim to which the code applies, the Tribunal can increase any compensation it awards for a failure to inform and consult by up to 25% if an employer has unreasonably failed to comply with the code. Equally, any unreasonable failure to follow the code by an employee can result in a reduction of up to 25% in any compensation awarded.
It is anticipated that the Government will look to strengthen the code in due course, however it is understood that any changes to the unfair dismissal regime, including fire and rehire, are unlikely to come into effect until at least autumn 2026, following a period of consultation.
(The information provided does not constitute legal advice; this article sets out the position as it is understood to be as at 25 November 2024.)