The Supreme Court has handed down judgment in the matter of USDAW and others v Tesco Stores in which it was asked to rule as to whether Tesco were able to terminate certain employment contracts and re-engage the same workers on revised terms, contrary to “two fundamental common law principles that are generally applicable in the realm of contracts of employment”.

This matter goes back to 2007 when Tesco engaged in a massive reorganisation of its warehouse and distribution centres, some of which were closed and in a bid to avoid mass redundancies, staff were offered an incentive to remain with the company but move to alternative workplaces. The terms of Retained Pay were confirmed in a collective agreement made between Tesco and its recognised union (“USDAW”), which was then incorporated into individual employment contracts as "Retained Pay" and described as a permanent benefit. 

In 2021, Tesco attempted to remove the right to Retained Pay by a so-called ‘fire and re-hire” scheme whereby employees were to be re-hired only without the Retained Pay clauses. Tesco asked employees to agree to have the Retained Pay clause removed from their contracts in exchange for a lump sum payment. “If an employee did not agree to this change, their employment contract would be terminated, and they would be offered re-engagement on the same terms but with the Retained Pay term removed ("fire and rehire")”. 

Employees that objected to this brought a claim with USDAW that succeeded in the High Court in an injunction that prevented Tesco terminating the contracts of employment, on the basis that the contracts “contained an implied term that Tesco could not terminate the contracts for the purpose of removing Retained Pay”. In turn, this was then overturned by the Court of Appeal. 

The Supreme Court was therefore asked to consider  “whether the Court of Appeal [was] wrong to find that Tesco was entitled to terminate certain employment contracts which included an entitlement to "Retained Pay", described as a "permanent" benefit, and offer re-engagement on terms without Retained Pay (the so-called "fire and re-hire" mechanism)?

The Supreme Court unanimously allowed the appeal and restored the injunction granted by Ellenbogen J finding that “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 Retained Pay.”