Fire & Re-Hire – Lessons from USDAW v Tesco Stores

The recent High Court decision in USDAW v Tesco Stores Limited (2022) has highlighted the challenge to employers who seek to change an employee’s terms and conditions.

Employers are often concerned about how they can bring about changes to an employee’s contract. There may already be flexibility clauses within a contract that allow some changes to be made, but even so, good practice is to notify proposals at least a month before action is taken and undertake consultation. Where possible, employers should seek to reaching an agreement with employees (possibly by offering a cash sweetener or other benefit).

If employees are resistant to proposals, however, ultimately employers may feel they have no alternative but to terminate existing contracts and offer new contracts with altered terms – known as “Fire and Rehire.” This can be a risky endeavour as legally it constitutes a breach of contract.

Employees can either agree to the proposals, reject them and leave (perhaps claiming constructive dismissal) or work to the new contract “under protest” whilst seeking a resolution.  However, employees are in a relatively weak position in such cases and the proliferation of “fire and rehire” during the Covid pandemic has highlighted an increasingly aggressive trend on the part of some companies, with young and BAME workers particular targets.

In the High Court case referred to above, supermarket giants Tesco sought to renegotiate terms with a particular group of employees by terminating their employment and re-engaging them on new contracts.  As previously said, that in itself would not have posed a problem; the law does not prevent employers from “firing and rehiring” in the interests of business efficiency. However, these employees benefited from “retained pay” a higher pay rate that had been negotiated through USDAW over a decade ago, when Tesco sought to encourage them to relocate to new distribution centres over 45 miles away from their original place of work. Under that contract, “retained pay” could only be altered by mutual consent, unless the employee was promoted to a new role in which case it would cease. The contract also gave Tesco the right to dismiss employees with notice.

When Tesco recently decided to “fire and rehire” these employees and to offer them new contracts that removed the right to retained pay, USDAW sought and were granted an injunction preventing them from doing so.

The High Court found that although Tesco had the right to terminate the employee’s contracts with notice, they could not go against the implied term that retained pay – which had been offered to compensate employees for relocation – should be permanently guaranteed.

The Court further clarified that Tesco would not be prevented from terminating employment for other reasons, such as redundancy or gross misconduct, even if the effect would be to bring the entitlement to Retained Pay to an end.

It’s been an expensive and perhaps embarrassing saga for Tesco and highlighted continuing concerns that “fire and rehire” tactics may be misused by employers in a growing trend towards US style “employment at will” business management. “Fire and rehire” has now been made illegal in Ireland, Spain and France, but the current UK Government have made clear that they do not intend to legislate to end the practice, leaving it to the Tribunal and court system as the last resort for employees who have been treated unfairly.  

“Fire and rehire” is rarely the best way to deal with business restructuring, but it may be the only option in some circumstances. Good employers are unlikely to face any legal challenge provided they can show contract changes are absolutely necessary for the business and they seek agreement with employees, including explaining the options facing the company and possible alternatives. Reaching a settlement agreement with employees who refuse re-engagement under a new contract will also make sure the employer is protected against potential claims.

Our employment law solicitors can advise you on minimising risks and guide you through the dismissal process. Please contact Zoe on 0203 858 9765 or email zoe@mulberryssolicitors.com.  Mulberry’s has offices in Brighton and London.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.