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The Supreme Court blocked Tesco from firing and rehiring staff to remove “Retained Pay,” emphasising the importance of clear, permanent incentives in contracts.
30 September 2024
Case Study
A decision from The Supreme Court has resulted in a block on Tesco from firing and rehiring its staff on the same terms but with certain rights removed. As this reorganisation strategy is likely only to get riskier under the new Labour government, we take a look at why the Supreme Court intervened in this case.
In 2007, Tesco reorganised its distribution centres, and staff at sites which were closing were at risk of redundancy.
Tesco didn’t want to risk losing experienced employees in the midst of this reorganisation, which involved the opening of new distribution centres. As an incentive for staff to relocate, it negotiated with USDAW, the union, an enhancement known as “Retained Pay.” Retained Pay was offered as an alternative to a lump sum redundancy payment.
In a joint statement with USDAW issued in 2007, Tesco described Retained Pay as “guaranteed for life” and made clear to staff that it could not be negotiated away and would remain for as long as an employee remained employed in their current role. Later, in 2010, Tesco stated that it would be a “permanent feature” and could only be changed by mutual consent or on promotion to a new role. A right to Retained Pay was incorporated into the employment contracts.
However, in 2021, Tesco announced its intention to remove Retained Pay. Employees were offered a lump sum equivalent to 18 months’ Retained Pay in return for their agreement to the removal of their right to Retained Pay. If they didn’t accept that offer, they would be fired and rehired on the same terms of employment but without a right to Retained Pay. In other words, they were offered a chunk of money to voluntarily give up Retained Pay, or else they’d be forced to give it up with nothing in return.
The employees, through USDAW, brought a claim in the High Court. Among other things, they wanted the High Court to stop Tesco from removing their entitlement to Retained Pay by firing and rehiring them by way of an injunction.
Case Study
The High Court decided to grant the injunction. The Court held that a reasonable person with all the background knowledge to understand “permanent” to mean “for as long as the employee is employed by Tesco in the same substantive role.” It accepted that there was a conflict between the permanent right to Retained Pay and the contractual right for Tesco to terminate the employees’ employment on notice, so the Court implied a term into the employment contract that Tesco would not terminate employment on notice for the purpose of removing the right to Retained Pay.
Tesco appealed, which the Court of Appeal allowed and removed the injunction. Among other reasons, the Court of Appeal held that it could not accept that it was both parties’ intention when negotiating Retained Pay to limit Tesco’s ability to give notice to terminate employment in the ordinary way.
USDAW appealed finally to the Supreme Court, which allowed the appeal and reinstated the injunction granted by the High Court. The Supreme Court decided that the notion that Retained Pay was subject to Tesco’s right to terminate the contracts on notice could give rise to an absurd consequence: that affected employees’ contracts could have been terminated immediately after they had relocated. It held that both sides would have regarded this as unrealistic and contrary to industrial common sense.
Importantly, the Supreme Court commented that Tesco could have negotiated a longstop date for the entitlement to Retained Pay or made clear that the Retained Pay could be withdrawn if an employee was dismissed with notice and then re-employed in the same role. However, Tesco did neither.
This was an unusual case on “fire and rehire,” but it shows both the importance of careful negotiation when promising “permanent” incentives to employees and the willingness of the courts to intervene when those incentives are threatened with removal.
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