In February 2022, the High Court granted a highly unusual injunction preventing Tesco from using so-called ‘fire and re-hire’ to implement changes to terms and conditions for some of its workforce in order to remove a ‘permanent’ contractual entitlement to enhanced pay (see Be Aware 3 February 2022). The Court of Appeal overturned the injunction in July 2022 (see Be Aware 15 July 2022).
The Supreme Court unanimously allowed the appeal and restored the injunction granted by the High Court. The employment contracts contained a term implied by fact with the effect that the employer’s right to terminate could not be exercised for the purpose of depriving the employees of their right to the enhanced pay.
Facts
Tesco recognised USDAW for collective bargaining purposes. As part of a reorganisation between 2007 and 2009, USDAW and Tesco agreed individual contractual entitlements to ‘Retained Pay’, as an alternative to a lump sum redundancy payment and as an incentive to staff to relocate. In communications to staff, Tesco made clear that the individual entitlement to Retained Pay would remain for as long as they were employed in their current role, that it could not be negotiated away, and that it would increase each year in line with any general pay rise. A 2010 collective agreement stated that Retained Pay would be a ‘permanent feature’ of an individual’s contractual entitlement, and could only be changed through mutual consent, on promotion, or in the case of an employee-requested change to working patterns.
In January 2021, Tesco announced its intention to remove Retained Pay, offering a lump sum payment in return for giving up the entitlement, failing which employees would be dismissed and offered new terms excluding Retained Pay (‘fire and re-hire’). USDAW applied to the High Court for a declaration that the employees’ contracts were subject to an implied term preventing Tesco from exercising its contractual right to terminate for the purpose of removing or diminishing the right to Retained Pay. USDAW also sought an injunction preventing Tesco from terminating the contracts.
Judgment of the Supreme Court
Tesco submitted that each affected employee’s entitlement to Retained Pay remained a feature of their employment contract for as long as the contract lasts but, like any other entitlement under a contract of employment, it was subject to Tesco’s express and unqualified right to terminate the contract on notice at any time. Use of the word ‘permanent’ ensured that Retained Pay could not be removed through collective bargaining but did not guarantee Retained Pay entitlements for any period.
The Supreme Court considered that the underlying problem with this argument is that it gives no substance to the express promise made by Tesco that Retained Pay “will remain a permanent feature of an individual’s contractual eligibility“. The natural and ordinary meaning of the word ‘permanent’ does not convey any indication that it is limited to meaning that Retained Pay is not subject to removal by collective bargaining; further the express statement that Retained Pay could be removed by mutual consent indicates that the word ‘permanent’ must mean something more than merely that Retained Pay cannot be removed by collective bargaining. The word ‘permanent’ conveys that the right to Retained Pay is not time-limited in any way and would continue to be paid to employees for as long as their employment in the same role continues. If Tesco’s submission were correct, that promise is defeated or deprived of value as there is nothing to prevent Tesco from removing it unilaterally by dismissal on notice and offering re-engagement on contractual terms that do not include Retained Pay. Therefore, the real question is whether there is a term implied that qualifies Tesco’s otherwise unrestricted right to terminate the employment contracts on notice in order to deprive employees of the right to permanent Retained Pay.
The Supreme Court agreed with the claimants that it is necessary, applying the business efficacy test, to imply a term in the contracts to qualify Tesco’s right to dismiss on notice so hat it cannot be exercised for the purpose of depriving the claimants of their right to permanent Retained Pay. That implied term is necessary in order not to undermine the promise that Retained Pay would be a ‘permanent’ feature of contractual entitlements for the relevant employees.
The circumstances in which the right to Retained Pay was agreed make clear that the offer of permanent Retained Pay was intended as an inducement to employees to accept the terms of the collectively negotiated agreement and make permanent changes to their lives by relocating to the new distribution centres rather than accepting redundancy. The mutual objective intention of the parties was to preserve the higher Retained Pay offered because Tesco needed experienced employees to relocate and wished to retain them in employment at the new sites and, without the inducement offered, relocation would not have been palatable to the employees. It is inconceivable that the mutual intention of the parties was that Tesco would retain a unilateral right to terminate the contracts of employees in order to bring Retained Pay to an end whenever it suited Tesco’s business purposes to do so. It would have been open to Tesco to negotiate a longstop date for the entitlement to Retained Pay or to make it clear that Retained Pay could be withdrawn if an employee was dismissed with notice and then re-employed. It is therefore necessary to imply a term which would preclude exercise of Tesco’s otherwise unqualified termination rights to dismiss the affected employees in order to deny them the benefit they were promised would be paid permanently. This implied term does not prevent Tesco from terminating the contracts for a purpose unconnected with Retained Pay, albeit that the practical effect will be to bring the entitlement to Retained Pay to an end.
The Supreme Court’s view was supported by a line of cases concerning employment contracts offering valuable permanent health insurance (PHI) benefits. In these cases, courts have concluded that an employer’s otherwise unrestricted power to terminate the employment contract on notice is qualified by an implied term that the employer shall not terminate the contract as a means of depriving the employee if such entitlements. The principle derived from the PHI cases has also been applied outside that sphere, albeit rarely. These cases exemplify the principle that a term implied by fact may be required to qualify an employer’s otherwise unqualified contractual right to dismiss in circumstances where to do so would defeat or undermine the purpose of the contract by denying the very benefit that was promised.
Turning to the appropriate remedy, it was common ground that the practical effect of the injunction was that Tesco would be compelled to continue to employ the affected employees on Retained Pay terms. This can be regarded as indirect specific performance. The general rule is that specific performance will not be ordered of an employment contract. However, the courts have recognised exceptions where there has been no breakdown of mutual confidence. The Supreme Court held that this was the case here, as demonstrated by the fact that Tesco was offering the employees a new contract on the same terms except as to Retained Pay. The Supreme Court concluded that damages would be an inadequate remedy in this case. The assessment of damages would be too difficult and could not reflect the loss of job satisfaction, anxiety and upheaval suffered by the employees. Therefore, the Court restored the injunction granted by the High Court.
Commentary
The facts and the relevant terms of the contracts at the heart of this dispute were unusual and, as noted by the Supreme Court, the circumstances in which an employer’s otherwise unqualified right to terminate on notice will be qualified by an implied term will be rare. However, it does highlight the difficulties faced by employers who wish to make changes to employees’ contracts of employment but need to retain all or most of those employees. If the incentives offered to employees to make changes are subject to too much qualification, the employees may not accept those changes. However, if the incentives are not qualified, for example by being time-limited, the employer can face difficulties in removing them further down the line. This is a problem which may be exacerbated by the new Labour government’s proposed changes to the law on ‘fire and re-hire’.
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