LawFlash

UK High Court Halts Deployment of ‘Fire and Rehire’ Intended to Change Terms of Employment

February 07, 2022

The High Court of England and Wales in USDAW & Others v Tesco Stores Limited granted an injunction on 3 February preventing an international retailer, Tesco, from deploying “fire and rehire” to phase out an employee benefit. Although the facts of the case are unusual, the Court’s willingness to intervene comes at a time when the practice of “fire and rehire” is under intense scrutiny. It is a further signal that employers should be wary of the associated risks and particularly careful when defining the terms of exceptional benefits.

What Is ‘Fire and Rehire’?

An employment contract can be amended in a few ways: (1) with the express agreement of the parties, (2) through the unilateral imposition of the new terms and implied acceptance, or (3) by terminating the existing employment contract and offering reemployment on the new terms (to “fire and rehire”).

Changing the contract through the express agreement of the parties is the optimal route—minimising (but not eliminating) the risk of subsequent disputes. Unilateral imposition runs the risk of accusations of breach of contract and (if an employee resigns in protest) claims of constructive unfair dismissal. To fire and rehire is often a last resort, and can run the highest risks, necessarily involving the termination of employment and the potential for unfair dismissal claims (among other claims).

What Happened in the Tesco Case?

Background

In the late 2000s, Tesco carried out a restructuring exercise during a programme of expansion. As part of the restructuring, certain distribution centres closed, new ones were opened, and others were restructured. To help retain certain employees who were to move distribution centres, an entitlement to “retained pay” was negotiated through collective bargaining. To summarise, retained pay was designed to ensure that employees who were asked to move distribution centres were no worse off at their new centre; it ringfenced their prior compensation.

In contemporaneous and subsequent communications to affected employees, the retained pay was variously described, including as “permanent,” “for life,” and “guaranteed.” It was also a significant entitlement, equalling—in the case of one employee referenced by the High Court—approximately 39% of their wages. An express entitlement to the retained pay was incorporated into each affected employee’s terms of employment.

In January 2021, however, Tesco announced its intention to remove the retained pay. In a Q&A issued at the time, Tesco explained that the composition of the Tesco workforce had moved on since the introduction of the retained pay, the retained pay was a residual entitlement of a small number of employees, and it would help simplify its payroll processes. Tesco offered affected employees an advance lump sum equal to 18 months’ retained pay.

In the same Q&A, Tesco also made clear that if affected employees did not accept the change voluntarily, Tesco would propose to terminate their employment contract and offer to reengage them on new terms, identical to their old contract, save for the removal of the retained pay element.

Claim

The claimants in the case—a trade union, USDAW, and certain affected employees—applied to the High Court for:

  • a declaration that the employment contract of each affected employee contained an implied term that Tesco would not terminate employment specifically to remove the right to retained pay;
  • an injunction preventing Tesco from withdrawing retained pay or firing and rehiring to remove the retained pay.

Decision

The High Court found in favour of the claimants and granted the relief sought.

The High Court found that the mutual intention of the parties was that the entitlement to retained pay would be permanent for as long as each affected employee was employed in their particular role. This was fundamentally at odds with the right to terminate employment for the purposes of stripping the retained pay.

Given the circumstances—which the Court said were “unusual” and “extreme”—the Court agreed it was necessary to imply the term sought by the claimants: that Tesco’s right to terminate employment on notice could not be used to remove or diminish the right to retained pay. Without such an implied term, the Court stated that the entitlement to retained pay would not be permanent, and the contract would lack practical coherence.

Further, the High Court found that damages would not be an adequate remedy for the claimants and so awarded the requested injunction. If no such injunction were granted, and the employees’ employment terminated, their remedy would otherwise be limited to the losses recoverable in a claim for unfair dismissal, “with all the difficulties attendant upon such a claim.”

The High Court denied Tesco permission to appeal. It remains to be seen if Tesco will seek permission to appeal from the Court of Appeal.

Takeaways

This case is unusual and may be confined to its facts. Benefit entitlements are rarely described by employers as “permanent,” “guaranteed” or “for life”(although it is not impossible to see this type of argument being creatively deployed by a trade union or representative body in other unusual benefit harmonisation situations, such as if an employer is seeking to freeze the accrual of final salary benefits). While the facts are extreme, the case undoubtedly represents an interesting expansion of the law concerning the circumstances in which an implied term can fetter an employer’s express contractual power to give notice to terminate an employment contract.

Further, the decision chimes, more generally, with growing concern expressed in the media and by politicians about the mechanism of fire and rehire. Only last year, Labour Member of Parliament Barry Gardiner launched a private member’s bill in Parliament seeking to curb (but not eliminate) the practice, which attracted significant media and public attention. The bill did not receive government backing, and did not progress.

The subject matter remains a hot topic. The Tesco case (whether appealed or not) should give employer’s some pause, particularly where the intent of firing and rehiring is to eliminate a benefit that may have been expressed in some degree of permanence (which the exigencies of the situation at the time of offering may have necessitated). It is also a reminder to ensure that benefits or entitlements that may, quite legitimately, be subject to change or withdrawal at a future point in time, are worded carefully to incorporate—where possible—such flexibility.

In the context of collective bargaining and the introduction of a valuable new benefit, employers should prepare and plan for the risk that trade unions insist on the application of permanent status to such a benefit so that the principles of USDAW v Tesco may be said to apply.

Currently, the law only allows an employer to fire and rehire where the employer has a “substantial” reason for doing so and acted reasonably in all the circumstances. If unreasonable, an employment tribunal will find fire and rehire to be an unfair dismissal and can award compensation for any losses. To avoid such an outcome, an employer needs a sound business rationale and in the current climate it is likely that such a rationale will come under increasing heavy scrutiny from an employment tribunal. Some employers are therefore looking to enhance their defence by relying on expert evidence from accountants or business analysts in a similar way in which they might look to justify restructuring decisions in continental Europe. Major employers can also continue to expect that significant and/or large-scale dismissals and reengagements, may attract media and public scrutiny.

CONTACTS

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

London
Matthew Howse
Lee Harding
Louise Skinner
Pulina Whitaker
Thomas Twitchett