Employment & Pensions Blog: The UK Supreme Court restores injunction to preserve contractual entitlement to increased pay

There has been a lot of media coverage recently about employers using fire and re-hire (or dismissal and re-engagement as it is also known) to vary terms and conditions of employment. Particularly following the implementation of the new Statutory Code of Practice on 18 July 2024, as well as the new Labour government’s pledge to ban exploitive fire and re-hire practices. This media surge continues with the UK Supreme Court case of Tesco v USDAW and others, where the Supreme Court re-instated an injunction against Tesco in order to prevent them from using fire and re-hire as a means to remove a contractual entitlement to enhanced pay to some of its workers. 

Background

Tesco recognised USDAW for collective bargaining purposes. In 2007, Tesco went through a re-organisation and decided to close down some of its distribution stores, which would in turn result in redundancies. As an incentive to staff to relocate to different stores, Tesco and USDAW agreed for staff to receive contractual entitlements to “Retained Pay”. Tesco made clear in its communications to staff that the Retained Pay would remain for as long as they remained in their current role at the time, that it could not be negotiated away, and would increase each year in line with any general pay rise. A 2010 collective agreement also made clear that the Retained Pay would be “permanent” in nature and could only be changed through mutual agreement, on promotion, or following an employees’ request to change their work pattern. However, in 2021 Tesco consulted on the removal of this Retained Pay entitlement and offered staff a lump sum payment in return for giving up their entitlement to Retained Pay. Tesco stated that employees who did not agree to the change would be fired and re-hired on the new (less favourable) terms, which excluded the Retained Pay. 

In February 2022 USDAW successfully applied to the High Court for: a) a declaration that the affected employees’ contracts were subject to an implied right preventing Tesco from removing/diminishing the right to Retained Pay; and b) an injunction preventing Tesco from terminating the employees’ contracts of employment. Tesco appealed and this decision was overturned by the Court of Appeal who found that the High Court had erred in finding that USDAW and Tesco had intended that the entitlement should be permanent and therefore continue indefinitely for life, until normal retirement age, or that the circumstances under which it could be terminated ought to be limited. The Court of Appeal found that the term “permanent” was only for the duration of the employment contract and so Tesco was entitled to serve notice to end the contracts which would, in turn, end the benefit to Retained Pay. 

USDAW appealed the Court of Appeal's decision to the Supreme Court. 

Supreme Court Decision

The Supreme Court allowed the appeal and re-instated the injunction to prevent Tesco from terminating the contracts of employment so as to remove the Retained Pay entitlement. It held that when they considered and interpreted the word “permanent” in its ordinary meaning, they reached the conclusion that the employees’ right to Retained Pay continued for as long as they remained in the same role, and was not determined by the length of their contract. It further found that the Retained Pay entitlement would lose its value if there was nothing in place preventing Tesco from terminating the contracts so as to deprive their employees of this entitlement in circumstances where they remained in the same role. Ultimately it concluded that to not interpret “permanent” in its ordinary meaning would go against the intentions of the parties at the time. 

Comment

Whilst this ruling does not set a precedent for preventing the much-criticised practice of fire and rehire, it does demonstrate that employers ought to take great care when negotiating contractual terms and offering significant unqualified benefits as an incentive to vary employees’ contractual terms and conditions. Employers are advised to forward plan and pay particular attention to contract drafting to minimise the risk of binding themselves into large financial commitments, which they cannot later go back on. 

It must, however, be noted that the circumstances of this case were highly unusual and, in our view, it would be rare for employers to offer employees indefinite guarantees similar to the ones offered in this case. However, employers should be cautious to ensure that their communications with staff and their employment contracts match their intentions at the time of drafting, and that any promises made to staff as incentives to vary their terms and conditions are unambiguous and can be honoured for the period intended. 

If you require any further assistance or support, please contact a member of the Employment Team.