Employers seeking to make changes to employees’ contracts usually do so in one of three ways:
- By agreement;
- By unilaterally imposing the change regardless of any breach of contract risk; or
- By terminating the existing contract and then re-engaging the employees on new terms and conditions; often referred to as ‘firing and re-hiring’.
In the recent case of Tesco Stores Ltd v USDAW and ors, the Court of Appeal has allowed Tesco’s appeal against the High Court’s decision to grant an injunction restraining it from firing and rehiring employees in order to remove a ‘permanent’ contractual entitlement to enhanced pay.
Retained pay
In this case, in 2007, Tesco was reorganising its distribution centres and so negotiated ’retained pay’ with USDAW, on a collective bargaining basis, as an alternative to a lump sum redundancy payment and an incentive to staff to relocate.
Tesco’s aim was to ensure that it could retain talented and experienced warehouse staff. In communications to staff, Tesco stated that the individual entitlement to retained pay would remain for as long as they were employed in their current role; that it could not be negotiated; and it would increase each year in line with any general pay rise.
A subsequent collective agreement in 2010 confirmed that the retained pay 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 requesting change to working patterns.
Bringing retained pay to an end
Moving on to 2021, Tesco sought to bring retained pay to an end. The company gave notice to all staff in receipt of retained pay to seek their agreement for this clause to be removed from their contracts, and where an employee did not agree to this change, Tesco intended to terminate the individual’s contract and offer re-engagement on different contractual terms (i.e. terms without the retained pay).
Preventing fire and re-hire
Following this, USDAW applied to the High Court seeking a declaration and injunctive relief to prevent the ‘fire and rehire’ process. The application to the High Court was successful, finding in favour of USDAW and the employees – meaning that Tesco was prevented from seeking to ‘fire and re-hire’ the employees on new contractual terms.
Tesco applied for appeal of the decision at the Court of Appeal which resulted in the High Court’s decision being overturned. In its reasoning, the Court of Appeal confirmed that the High Court was incorrect in concluding that both parties intended that the entitlement should be permanent or until closure of the workplace. The Court of Appeal also concluded that the High Court had wrongly interpreted that protection from dismissal would be implied into the employees’ contracts.
Following this decision, USDAW has confirmed its intention to appeal the decision at the Supreme Court so we will review any developments.
What does this decision mean for employers?
This case will be a welcomed judgment for employers as the fire and rehire approach can remain an acceptable practice, however, the Courts have made it clear that this was a case with “extreme facts”.
The process of firing and rehiring increased during the course of the Covid-19 pandemic, and the Government asked ACAS to carry out an independent fact finding review. ACAS subsequently published its finding in this report, which highlighted the significant risks involved in the process.
Overall, it is clear that employee engagement is fundamental and employers should still consider the following when deciding on firing and rehiring practices:
- The significant risks of employees with the requisite service pursuing and being successful with unfair dismissal claims.
- There may be wider consequences of using such practices, including souring employee and industrial relations and reputational damage to the company.
- Carefully considering the timing of proposing to dismiss employees and re-engage them on new terms, particularly with consideration to the number of employees involved in the process, the legal considerations (including, reducing any risks of discrimination) and ensuring that a fair process is followed, including consultation with employees.
- Listening to employees and resolving any concerns during consultation and deciding if the change is reasonable in the circumstances.
If you require further advice on this topic, please contact our employment lawyers .