The UK Supreme Court has unanimously ruled that Tesco cannot fire and rehire distribution workers who receive ‘retained pay’ and has reinstated a High Court injunction to prevent it from doing so.
Tesco argued that a term in the workers’ employment contract simply meant that an entitlement to “retained pay” would be “permanent” for the duration of the contract and that it was subject to the retailer’s right to dismiss on notice.
However, in Tesco Stores v Usdaw the Supreme Court rejected this argument as it gave no substance to the express promise that the entitlement to retained pay would be “permanent”.
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Supreme Court judges said the correct interpretation of the retained pay term is that the right to receive it continues as long as employment in the same role continues, subject only to certain qualifications within the retained pay term.
It added that the right is deprived of its value if there is nothing to prevent Tesco from unilaterally terminating employment to defeat it.
In its judgment, the Supreme Court held that “Tesco is precluded by an implied term from exercising the contractual right to dismiss the claimants on notice for the purpose of removing or diminishing their right to receive permanent retained pay”.
Usdaw vs Tesco: background
In 2007, Tesco offered a permanent “retained pay” enhancement to staff willing to relocate from closing distribution centres to new ones in Daventry and Lichfield under a collective agreement with the Usdaw union.
We were very disappointed with the outcome in the Court of Appeal but always felt we had to see this case through. We are therefore delighted to get this outcome, which is a win for the trade union movement as a whole” – Paddy Lillis, Usdaw
In 2021, the retailer wished to end this contractual agreement in exchange for a lump sum payment. Those workers who declined the change would be “fired and rehired” – their contracts terminated and replaced with agreements that had the retained pay removed.
In February 2022, the High Court ruled in the workers’ favour, stating that the benefit was “guaranteed for life” and issued an injunction preventing Tesco from issuing notices of termination.
However, an appeal by Tesco saw the Court of Appeal overturn this in July 2022. It found that the fact the collective agreements contained references about retained pay being “permanent” only meant it was guaranteed for the life of a particular contract of employment, and that the language used did not suggest it would last beyond that.
In December 2022, the Supreme Court granted the shop workers’ union permission to appeal and the case was heard in April 2024.
Usdaw vs Tesco: reaction
Paddy Lillis, Usdaw general secretary, said: “Usdaw has been determined to stand by its members in receipt of this valuable benefit that constituted a key component of their pay. We recognised that they had been afforded this payment because of their willingness to serve the business and it was on that basis that we agreed with Tesco that it should be a permanent right.
“When we said permanent, we meant just that. We were therefore appalled when Tesco threatened these individuals with fire and rehire to remove this benefit. These sorts of tactics have no place in industrial relations, so we felt we had to act to protect those concerned.
“We were very disappointed with the outcome in the Court of Appeal but always felt we had to see this case through. We are therefore delighted to get this outcome, which is a win for the trade union movement as a whole.”
Neil Todd, partner in the trade union law group at Thompsons Solicitors, said: “This is a fantastic judgment for Usdaw and the members concerned. Those in receipt of retained pay were promised unequivocally that they would be afforded a permanent benefit under their employment contract if they agreed to remain with the business and support it when it needed them most.”
A Tesco spokesperson said it accepted the Supreme Court’s judgment adding that the retailer’s objective has always been to ensure fairness across all its distribution centre workers.
“Today’s judgment relates to a contractual dispute brought on behalf of a very small number of colleagues in our UK distribution network who receive a supplement to their pay,” they said. “This supplement was offered many years ago as an incentive to retain certain colleagues and the vast majority of our distribution colleagues today do not receive this top-up.
“In 2021, we took the decision to phase it out. We made a competitive offer to affected colleagues at that time, and many of them chose to accept this. Our aim has always been to engage constructively with Usdaw and the small number of colleagues affected.”
Implications for employers
Patrick Howarth, partner at Foot Anstey, said the Usdaw vs Tesco case has been wrongly painted with the same brush as a number of the fire and re-hire cases hitting the headlines recently, with the facts of this case expanding beyond this.
“Retailers and other employers should not be concerned that their right to change terms of their employees’ contracts has been removed. It hasn’t,” he said. “The most important takeaway for employment professionals and HR teams for this case is that communications between unions and employers issued during consultation were held to be relevant to the interpretation of what particular contractual terms actually meant.
“Today’s judgment acts as an important reminder that careful drafting of all communications is essential. Ultimately, today’s ruling will bring into focus a number of tensions within the fire and re-hire debate but its implications for the wider employment landscape remain to be seen.”
Matthew Howse, partner at law firm Morgan Lewis & Bockius, said: “This landmark decision puts substantial limits on ‘fire and rehire’ practices, especially for benefits described as ‘permanent’. It underscores the weight courts may give to such language in employment contracts. Employers will need to reconsider their strategies for implementing contractual changes. Moving forward, more collaborative approaches with employees and unions may be necessary to navigate significant alterations to employment terms.”
Kim Sartin, partner at Baker McKenzie, said: “This is an unusual case, as Tesco had given an express commitment that prior changes to terms would be permanent. In order to give effect to that contractual promise, it was necessary to imply a term that Tesco could not dismiss the employees solely for the reason of denying them that contractual benefit. This would not affect Tesco’s right to dismiss for other reasons unconnected to that contractual term, e.g. business closure, poor performance or misconduct.
“Dismissal and re-engagement is generally an option of last resort. This case is a reminder that before embarking on a large-scale contractual variation exercise, employers will also need to check any past contractual commitments that may have been made.
“The current code of practice focuses on the importance of trying to achieve agreement. Employers considering dismissal and re-engagement should also keep their eyes out for future developments. The Labour government has committed to ending fire and rehire practices except where there is genuinely no alternative option and their manifesto commits to replacing the code with something stronger, so this is unlikely to be the last word on the topic.”
‘Potentially disastorus’: Further reaction to the Tesco fire and rehire verdict…
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