Background and Facts

Dismissal and re-engagement, often referred to as "fire and rehire" is a practice employers sometimes adopt when making changes to terms and conditions of employment. Employees who refuse to agree to proposed new terms are dismissed and re-engaged on the new terms.

Tesco recognised USDAW for collective bargaining purposes. In 2007, Tesco planned an expansion and restructuring of its distribution centre network involving the opening of new sites and the closure of others. The company was keen to ensure that it would not lose experienced warehouse staff through redundancy. It sought to persuade employees to move to other distribution centres by way of an incentive amounting to significant enhancement of their pay, known as Retained Pay (RP). In communications to staff, Tesco made clear that the individual entitlement to RP would remain for as long as they were employed in their current role, that it could not be negotiated away, and that it would increase each year in line with any general pay rise. A 2010 collective agreement with USDAW stated that RP would be a ‘permanent feature’ of an individual’s contractual entitlement, and could only be changed through mutual consent, on promotion, or in the case of an employee-requested change to working patterns.

The collective agreement and right to receive RP subject to the above qualifications were then incorporated into the relevant employment contracts as an express term. A separate term in the employment contracts gave Tesco the normal contractual right to dismiss the employee without cause, on provision of specified notice.

In 2021, Tesco wished to bring RP to an end. The company gave notice to all staff in receipt of RP that it intended to seek their agreement to remove the RP clause from their contracts in return for an advance payment equal to 18 months of RP. Where an individual did not agree to this change, Tesco intended to terminate the individual’s contract and offer re-engagement on different terms.

The claimants brought a successful claim in the High Court against Tesco seeking an injunction to prevent the dismissal and re-engagement. Tesco appealed against this judgment and the Court of Appeal allowed Tesco’s appeal and overturned the injunction. The claimants then appealed to the Supreme Court.

Supreme Court judgment

The Supreme Court have today unanimously allowed the appeal and have restored the original injunction.

The RP term and its relationship to the notice provision

Tesco had argued that the RP term simply meant that the entitlement to RP would be “permanent” for the duration of the contract i.e. it was subject to Tesco’s unqualified right to dismiss on notice. This argument was rejected by the Supreme Court as giving no substance to the express promise that the entitlement to RP would be “permanent”. They stated that the correct interpretation of the RP term is that the right to receive RP will continue for as long as employment in the same role continues, subject only to the qualifications within the RP term. However, their view was that that right is deprived of its value if there is nothing to prevent Tesco unilaterally terminating the employment to defeat it.

The Court held that the employment contracts contained an implied term with the effect that the employer’s right to terminate the employment contract, by giving requisite notice, could not be exercised for the purpose of depriving the employees of their right to RP.

This scenario and the existence of this implied term is similar to cases where employment contracts, which include permanent health insurance benefits, have been held to contain an implied term to the effect that the employer is restrained from dismissing the employee to deprive them of such benefits.

The Court emphasised that the implied term does not prevent Tesco from terminating the contracts for a purpose unconnected with retained pay, for example, lack of capability, misconduct or redundancy and business closure, provided that the purpose was not to remove retained pay.

What is the appropriate remedy – injunction or damages?

The Court then considered whether an injunction restraining Tesco from dismissing the employees was the correct remedy. It was acknowledged that in practice, such an injunction would amount to specific performance of Tesco’s obligation to continue to employ the employees on RP.

Unlike damages, specific performance is a remedy where a party is ordered to perform their obligations under the contract. In general, specific performance will not be granted in relation to an employment contract or where damages are an adequate remedy. However, an exception to this first limb is that specific performance may be ordered against an employer where there has been no breakdown of the implied term of mutual trust and confidence. The Court decided that there was no such breakdown here as Tesco was prepared to immediately re-engage the relevant employees.

The Court also decided that damages would not be an adequate remedy in this case. Any damages assessment would involve significant speculation, uncertainty, additional costs and possibly expert evidence, and would exclude any non-pecuniary loss (e.g. loss of job satisfaction) suffered by the employees being dismissed.

The Court therefore reinstated the injunction granted by the High Court.

What does this mean for employers?

This is a significant case as it is highly unusual for a UK court to grant an injunction to prevent a private sector employer from exercising a contractual power to give notice to terminate.

However, as the Courts have acknowledged this case was based on “extreme” facts. While these facts would not be replicated in every instance of dismissal and re-engagement, employers should always consider how to best communicate contractual changes and in particular how to build in flexibility when offering any entitlement which could be construed as "permanent". Employers should use clear and unambiguous language when drafting contractual entitlement and be wary of using language which could be interpreted as guaranteeing contractual entitlements on a permanent basis. An option in this scenario would be to set a longstop date for the entitlement or to make clear that it would subsist only for as long as the particular contract endured.

As outlined above it is also unusual for specific performance to be granted in relation to an employment contract, particularly in the private sector. It is possible the unions will view this as an opportunity to attempt to extend the circumstances in which they seek to use injunctions to prevent an employer dismissing an employee.

Future legislation