What happened?

In 2007 Tesco was closing some distribution centres and opening or expanding others. To encourage experienced staff to move to new sites it agreed with its recognised union, USDAW, that it would offer employees pay protection as an alternative to a lump sum redundancy payment. The agreement described the retained pay as “a permanent feature of an individual’s contractual eligibility” that could only be changed by mutual consent or removed if an individual was promoted. Earlier non-contractual documents described the retained pay as “permanent” and “guaranteed for life” and said that it would remain in place for as long as an employee was employed in their current role.

By 2021, Tesco had decided that it wanted to withdraw the retained pay. It offered a lump sum payment to buy out existing entitlements but said that if employees did not agree to the change, their existing contracts would be terminated on notice and they would be offered re-engagement on the new terms. USDAW applied for an injunction preventing Tesco from dismissing the employees. The High Court granted the injunction but this was overturned by the Court of Appeal.

The Supreme Court decision

Tesco argued that it had an express right in its contracts of employment to dismiss employees on notice. There was nothing in the retained pay agreement that qualified that right. Describing retained pay as “permanent” simply meant that the entitlement lasted for the period of the employment under the relevant contract and was subject to Tesco’s contractual right to terminate. 

The Supreme Court disagreed. Calling retained pay “permanent” conveyed that the entitlement was not time-limited and would continue to be paid while the employee was employed in the same role. That promise was deprived of its value if Tesco’s argument was correct, because there was nothing to stop Tesco from removing the right unilaterally by dismissing the employee on notice and re-engaging them on new terms.

It was necessary to imply a term into the contract that Tesco would not dismiss employees on notice for the purpose of depriving them of their right to retained pay. It was clear that the parties had agreed the retained pay arrangements to persuade employees to relocate to new sites. It offended common sense to think that when the agreement was reached Tesco retained a power to bring the pay to an end at any point that it suited its business purposes to do so, even the day following the agreement. If Tesco had wished to do so, it could have offered pay protection for a finite period. That was not the agreement it had reached. 

On the unusual facts of the case, the Supreme Court was prepared to reinstate the injunction preventing Tesco from dismissing the retained pay employees for the purpose of removing or diminishing the right to retained pay. Tesco was still free to dismiss employees for other reasons, such as gross misconduct or in a genuine redundancy situation.

Next steps

It’s uncommon for an employer to promise that a benefit will be provided permanently or for life. However, employers who are contemplating changing terms and conditions of employment will need to consider whether they made any promises about how long such terms would last before deciding how to proceed. It is always safer to guarantee a benefit for a defined period, if necessary to achieve a change, rather than indefinitely.

In the longer term, it may become more difficult for all employers to change terms and conditions by dismissing and re-engaging employees, regardless of the contractual position. The government has promised to “end the scourges” of fire and rehire and fire and replace by providing effective remedies and replacing the existing Code of Practice on dismissal and re-engagement. We are waiting for further details in the Employment Rights Bill expected in October.

Authored by Jo Broadbent, Alice Whitehead and Stefan Martin.