Why did the Supreme Court prevent Tesco from firing and rehiring staff who refused to accept new terms?

If you can’t persuade a worker to accept new terms and conditions, you have the option of dismissing them and offering to re-engage them on new terms. Most employers will only go down this route if the changes they need to make are essential and it's been impossible to obtain employee or trade union agreement. It's sometimes referred to as the ‘nuclear option’ because of the lasting damage it causes to industrial relations. 

Firing and re-hiring staff has become increasingly controversial in recent years, particularly following P&O's decision to sack its crew to force through much lower rates of pay. The government at the time condemned this practice and in July 2024, a new statutory code of practice came into effect which explicitly states that employers should not use threats of dismissal as a negotiating tactic. 

The Supreme Court in Tesco Stores Ltd v USDAW & others had to decide whether it should grant an injunction to prevent Tesco from dismissing and offering to re-engage warehouse staff who wouldn't agree to the new terms of employment on offer.

Facts

In 2007, Tesco decided to close some of its distribution centres, to expand or restructure others, and to open new sites. To avoid redundancies and incentivise staff to relocate, it agreed to provide staff with an enhancement to their pay called ‘Retained Pay’ which would form part of their regular salary. It was a significant amount and constituted approximately a third of their wages. 

During these negotiations, Tesco said that Retained Pay was ‘guaranteed for life’ and would remain in place ‘for as long as you are employed by Tesco in your current role’ and ‘cannot be negotiated away’ by either Tesco or the union.

The right to receive Retained Pay was eventually expressly incorporated into the employee's terms and conditions of employment. It was stated to be a ‘permanent’ feature of their contract and could only be changed:

• by mutual agreement
• if the individual was promoted; and
• if the individual requested a change to their working patterns

In 2021, Tesco wanted to end Retained Pay on the basis that the pay deal had achieved its objectives but had added unnecessary complexity to its new payroll system and was causing problems in terms of equal pay issues with the majority of staff who didn't receive the enhancement. It offered staff a lump sum in exchange for agreeing to remove this and made it clear that it would dismiss and offer to re-engage those who didn't agree to accept the new terms (which were identical to their existing terms and conditions apart from the removal of Retained Pay).

Most employees agreed to the change. However, the union and three individuals who had refused to give up their Retained Pay issued proceedings in the High Court against Tesco. They asked to court to rule on the nature and extent of their contractual entitlement to Retained Pay, and issue an injunction to prevent Tesco from dismissing and offering to re-engage them. The High Court found that the parties’ intended to keep Retained Pay for as long as each worker was employed in their role and concluded a term should be implied into the contract preventing Tesco from giving notice to terminate it.  

The decision was appealed and subsequently overturned by the Court of Appeal and the union appealed to the Supreme Court.

Decision of the Supreme Court

The Supreme Court allowed the appeal and restored the injunction preventing Tesco from firing and re-hiring those employees who had not agreed to changing their terms and conditions. 

It found that their employment contracts contained two mutually inconsistent express terms: one granting a permanent right to Retained Pay (subject to some exceptions) and the other giving Tesco the right to terminate the employee's employment on notice. To resolve that conflict, the Supreme Court implied a term into each affected employee's contract which prevented Tesco from terminating their employment for the purpose of depriving the employees of their right to receive Retained Pay.

Implications for other employers

This case demonstrates that you need to be very careful about threatening to dismiss and re-hire employees if the benefits you want to remove are permanent or could have acquired that status.

More widely, if you are offering terms to incentivise staff to go along with a proposal you need to be careful about what's on offer. We recommend that you: 

• don't make promises that will bind you for many years; and 
• make sure that the messaging is consistent, clear and unambiguous

The future of fire and rehiring staff

The new government has said that it will ban the practice of making an employee redundant and re-engaging them on less generous terms and conditions and strengthen the statutory code of practice which it describes as ‘inadequate’.

It's not entirely clear what a ban might look like. In a nod to reassure business, the government recognises that there may be a need to force through changes to remain viable and where there are no alternatives. But even in those situations, the government has said that employers ‘must follow a proper process based on dialogue and common understanding between employers and workers. 

We may not have long to find out how they intend to legislate to prevent abuse as the much-publicised Employment Bill is due to be published next month. We'll keep you posted. 

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