The Court of Appeal's judgment in Tesco v USDAW and others, handed down a few weeks ago, has confirmed that 'fire and rehire' is still an option available to employers, which will come as a relief to many organisations.

It is fair to say that many organisations (and advisers alike) took a sharp intake of breath in February this year, when the High Court of England and Wales issued an injunction against Tesco preventing them from dismissing and reengaging a group of employees with a view to removing a particular contractual benefit.

For the decision went against the commonly understood practice, (that we often advise as a tool open to employers on a day-to-day basis) that if an organisation wants to make a contractual change and is unable to obtain agreement from its employees, then dismissal and reengagement (commonly referred to as ‘fire and rehire’) is one of the tools available to it.

Fortunately, for many organisations, the Court of Appeal has restored the previous position.

A brief background

In 2007, Tesco performed a reorganisation which involved the closure of some warehouses and the relocation of several employees. Tesco were keen to retain as many employees as possible and therefore offered ‘retained pay’ as an alternative to a lump sum redundancy payment. Tesco agreed with the employees that the retained pay would remain in place for as long as they were employed, it could not be negotiated away and that it would increase year by year in line with their pay rises.

Interestingly, in a joint statement between Tesco and the union (like Tesco’s shopping bags) the retained pay was stated to be ‘guaranteed for life’ and the collective agreement described it as a permanent feature of the employment contract which could only be changed through mutual consent or on promotion.

Unsurprisingly, fast forward several years and the landscape looked very different. In 2021 Tesco needed to remove the employees’ entitlement to retained pay and offered a lump sum incentive to employees to agree to its removal. Tesco informed the employees that if they did not agree to its removal, they would be dismissed with contractual notice and offered re-engagement on new contractual terms which did not include any element of retained pay. The union applied to the High Court and obtained an injunction preventing Tesco from doing this, which Tesco then appealed.

The Court of Appeal’s analysis (the legal part)

When considering whether the injunction should be set aside, the Court of Appeal undertook a detailed analysis of the express and implied terms of the relevant employees’ contracts of employment, to establish if there was any contractual term which could prevent Tesco from dismissing and reengaging the employees.

By way of a reminder an express term is a term agreed on by parties to a contract, which can be made in writing or by oral agreement. By contrast, an implied term is a term that has not been expressly agreed between the parties but has been implied into the contract for several different reasons.

The court considered in its analysis that there was no express contractual term preventing the dismissal and reengagement of the employees. If anything, if Tesco were able to end the employees’ contracts of employment on notice in other situations such as redundancy there was no reason as to why they shouldn’t be allowed to do the same here. Furthermore, whilst language such as ‘guaranteed for life’ had been used, it could not be accepted that any employment contract or term could, in reality, be ‘guaranteed for life’.

The Court of Appeal then considered whether it could be said that there was an implied term again preventing the dismissal and reengagement of the employees. The court noted that whilst a few weeks after retained pay had been introduced, a reasonable person was likely to conclude that the contracts could not be ended on notice to remove the entitlement, the same could not be said several years later. As such, no implied term was also found.

What else should be taken away?

Although it is rare for language such as ‘guaranteed’ to be used in the drafting of employment contracts, this case is a reminder to employers to be careful with the language used in contractual documentation, to be clear and unambiguous and to ensure that contractual wording allows for contractual entitlements to be ended. If organisations are unsure, they should seek legal advice.

Whilst the Court of Appeal’s judgment confirmed that “fire and rehire” remains an option open to employers, it was noted within the judgment that in respect of the provision of permanent health insurance (often referred to as “PHI”), there had to be an implied term within any contract of employment that an employee’s contract would not be ended whilst an employee was claiming PHI as to do so would go against the very intention of both parties in providing PHI. As such, this instance rightly creates an exception.

It is not clear if USDAW intend to appeal the Court of Appeal’s decision further, so for now watch this space.

If you require support on changing contractual terms, please contact Lauren on [email protected] or any other member of our national employment