“Fire and rehire” refers to the practice of making changes to terms and conditions of employment by firing staff and rehiring them under new terms. Employers tend to go this route when a variation cannot be agreed upon. However, this approach is not without risk. The primary exposure will be to unfair dismissal claims against employees with unfair dismissal rights, unless an employer can demonstrate that the reason for termination was “another substantial reason” and that the termination did not was not abusive under any circumstances.
When Tesco sought to restructure its distribution centers as part of its continued expansion in 2007/2008, it involved closures and relocations. In order to retain experienced staff, Tesco has offered some employees incentives to move to the new sites as an alternative to a redundancy plan. This included an element called withheld salary. In some cases, the compensation withheld represented nearly 40% of an employee’s total compensation.
In its communications with staff and in collective bargaining with its recognized union USDAW, Tesco guaranteed that the withheld salary would be a permanent part of the salary of these employees and stated that it was ” lifetime warranty “, would increase each year based on salary increases and that there would be “the protection of life on the new Tesco contract site”. A subsequent collective agreement in 2010 also confirmed pay deductions “permanence”and that it could only be removed by mutual agreement, in the event of a promotion or in connection with a contractual modification of working hours. This clause has been integrated into individual employment contracts.
In January 2021, Tesco sought to remove the withholding pay element to simplify its payroll. It offered eligible employees a lump sum in exchange for giving up their right to wage deduction, failing which the employees would be fired and offered new terms without it. About 40 employees refused the offer.
The USDAW, along with three employees, asked the High Court for a declaration that the relevant contracts included an implied term preventing Tesco from exercising its contractual right of termination in order to remove the right to withholding wages. They also sought an injunction preventing Tesco from terminating contracts to achieve this goal.
High Court decision
The application to the High Court was successful: the court ruled in favor of USDAW and the employees. We wrote about that decision here.
The High Court made it clear that a reasonable person, with all basic knowledge, would have understood that the use of the word ‘permanent’ and Tesco’s communications conferred a right to deduction from wages as long as employees continued in their same role. In order to give effect to this, the High Court held that a term should be implied into the contract, for reasons of commercial efficiency and obviousness, to prevent Tesco from giving notice of termination in order to remove the right to salary deduction.
Because the withheld pay was such an important part of the overall compensation, the High Court also decided that damages would not be adequate relief to compensate for its removal. For this reason, it was fair and just to grant an injunction preventing Tesco from taking steps to ‘fire and rehire’ the employees on new terms, or modify or reduce their withholding of wages.
Court of Appeal decision
The Court of Appeal has now overturned the High Court’s decision and confirmed that Tesco can go ahead with its proposals.
The Court of Appeal observed that declarations made by the contracting parties before the conclusion of a contract may sometimes be relevant for the interpretation of the contract, but that this is only the case if these declarations demonstrate the mutual intentions parties. In this case, the Court of Appeal did not accept that the parties had this kind of mutual intention. There was no evidence that Tesco intended to maintain the contracts for life, until employees retired or until it closed its sites. Moreover, there was no mutual intention to limit the circumstances in which Tesco could terminate contracts, and indeed no evidence that anyone had even considered the prospect of carrying out a ‘fire and rehire’ exercise in the future. . The employees’ contractual right to the withheld wage was therefore only permanent until Tesco gave them notice of dismissal in the usual way; “permanent” was limited to the duration of the contract.
USDAW and Employees faced a similar conclusion with respect to their arguments that dismissal protection should be
implicit in their contracts. In some circumstances a court may “implement” a clause in an employment contract to reflect the intentions of the parties, but this will depend on the facts of the case. The relevant legal tests set the bar high. Based on these facts, the Court of Appeal considered whether the implied term regarding the duration of wage deduction would have been “so obvious” to an objective viewer that it went without saying. The court did not recognize that this was the case.
Importantly, the Court of Appeal held that if Tesco had been asked whether employees had the right to stay on for the rest of their working lives unless their site closed, Tesco would have
“certainly not” said they did (the opposite being the likely response from employees). The Court of Appeal even went so far as to say that the collective agreement signed in 2010 should have included statements such as
“provided the site remains open, payment withheld will continue until you reach age 65” so that employees benefit from such a right.
Finally, the Court of Appeal ruled that while Tesco could not lawfully fire its employees in a ‘fire and rehire’ exercise, it would be inappropriate for it to be prevented from doing so by an injunction. Since an employee’s remedy for breach of contract is invariably financial, in this case damages would suffice. It would also be unprecedented for a court to prevent a private sector employer from laying off an employee indefinitely. This would have the effect that if, many years from now, Tesco were to undertake redundancy proceedings, it would risk having its assets seized or its directors imprisoned for breaching the injunction. The Court of Appeal held that this would be an error.
Implications for employers
Although the facts in this case are extreme, the Court of Appeal’s reversal of the High Court’s decision is good news for employers. The case is nevertheless a useful reminder that employers should:
- Be extremely careful when using clear and unambiguous language that could be construed as guaranteeing contractual rights on an ongoing basis.
- Consider setting a “long stop” date when the right would end.
- Consider limiting promises so that they only last as long as an employee’s contract is in place.
- Be alert to unions seeking to negotiate “permanent benefits” during any collective bargaining process.
The ruling comes as the practice of ‘fire and rehire’ has come under increasing scrutiny from the public and politicians, particularly after the P&O Ferries incident earlier this year (even if it did not, in fact, involve a “fire and rehire” exercise). CASA also recently released new guidelines on this practice, which reinforce that this practice carries significant risks, which we review here. The government has recently committed to introducing a new code of practice on the practice and is currently carrying out a consultation on this. Employers should therefore continue to approach this practice with caution, despite this welcome decision.
USDAW and we Tesco Ltd stores – judgment available here
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.