High court implies term into contracts to prevent Tesco reneging on assurances

In the recent case of USDAW and ors v Tesco Ltd the High Court held that a term preventing Tesco from terminating employment contracts in order to remove enhanced pay entitlements would be implied into the contracts.

In this blog we discuss the judgement from the High Court and the implications of the decision for employers, particularly in situations where they may wish to alter employment benefits that have been stated as a permanent contractual entitlement.

Background

Between 2007 and 2009, Tesco was undertaking a reorganisation of its distribution centres, which resulted in some closures, relocations, and opening of new sites.

During this period, Tesco agreed with USDAW (a union recognised by Tesco for collective bargaining), that employees would receive ‘Retained Pay’ under their contract. The aim of this entitlement was to provide Retained Pay as an alternative to a lump sum redundancy payment and thereby incentivise staff to relocate as part of the reorganisation.

Tesco communicated to its staff the following:

• The entitlement to Retained Pay would continue so long as employees remained employed in their current role.
• The Retained Pay was non-negotiable.
• The Retained Pay would increase each year in accordance with a general pay rise.

In 2010, a collective agreement provided that Retained Pay would be a ‘permanent feature’ of an employee’s contractual entitlement, and could only be changed through mutual consent or by a request from an employee to change their working patterns.

In January 2021, Tesco announced its intention to remove Retained Pay, offering instead a lump sum payment of 18 months’ Retained Pay in return for employees giving up the entitlement. If employees refused, they were to be dismissed and offered new terms of employment which excluded any entitlement to Retained Pay, through the method of ‘fire and rehire.’

USDAW in turn applied to the High Court, alleging that the employment contracts of the affected employees were subject to an implied term preventing Tesco from terminating the contracts of employment and offering re-engagement on terms which did not include an entitlement to Retained Pay.

The judgement

The High Court reviewed the collective agreement entered into between the USDAW and Tesco and analysed the reference to Retained Pay being a ‘permanent’ feature.

The Court noted that there was a mutual intention of the parties for the Retained Pay to be a ‘permanent’ feature for as long each employee remained employed in their particular role. The clear intention was, in the Court’s view, to preserve the higher pay which each affected employee had received at their original distribution centre, and to provide an incentive for them to relocate.

The word ‘permanent’ was therefore to be interpreted in accordance with that mutual intention, and in doing so, the Court noted that this conflicted with a right to terminate the contract for the purpose of removing the Retained Pay.

As a result, the Court held that it was necessary to imply a term into the contract of employment of each affected employee to the effect that Tesco’s right to terminate the contract for the purpose of removing the entitlement to Retained Pay could not be exercised.

The Court held that it would have been open to the Defendant to seek to set an end-date for the Retained Pay entitlement, and/or to make clear that it subsisted only for as long as the particular contract endured, but that this was not the case here.

The High Court in turn granted an injunction on 3rd February 2022 preventing Tesco from implementing its intention to terminate the existing contracts of employment and offer re-engagement on less favourable terms which did not include the right to Retained Pay.

Comment

In light of the High Court decision employers should be mindful of contractual clauses relating to employee entitlements.

If, at the time the contract of employment is entered into, contractual entitlements are stated to subsist indefinitely, or permanently, employers will not be able to subsequently fire and rehire employees to avoid those entitlements if they no longer wish to provide them. The practice of fire and rehire has itself received scrutiny and criticism, which we have reviewed in our blog ‘Fire and Rehire: Changing the Terms of Employment’.

We would therefore recommend employers undertake a review of their employment contracts to ensure that contractual entitlements are drafted correctly and are not drafted to be ‘permanent’ if this is not the common intention of the parties. We would be happy to assist you with any reviews of your contracts to ensure you have the flexibility to alter employee entitlements if required.

If you would like to discuss the contents of this blog in further detail, please feel free to contact a member of the Employment team.