Comment

The facts of this case were unusual given the choice of wording used to describe the "permanent" nature of the retained pay and the circumstances in which it was offered.

Nevertheless, it illustrates that employers should think very carefully about both how they position any contractual entitlement and communicate a contractual change, in particular, not to make promises about the permanence of a benefit or term if there is a chance that flexibility may be needed later. Not only does this case demonstrate that the express wording of the contractual promise is critical, but also the surrounding communications, which here were used as aids to interpreting the parties’ objective intention when implementing retained pay.

It is also a reminder to check for any past contractual commitments that may have been made before embarking on a large-scale contractual variation exercise.

This decision does not prevent an employer from undertaking a dismissal and re-engagement exercise in the ordinary course. However, as the Statutory Code on dismissal and re-engagement makes clear, this practice should generally be used as an option of last resort and the parties should try to reach agreement (as Tesco had sought to do here) before moving to dismiss and re-engage.

This case is unlikely to be the last word on the topic of dismissal and re-engagement as the Labour government has committed to ending the practice except where there is genuinely no alternative option and their manifesto commits to replacing the Code with something stronger.

In more detail

Facts

In 2007, Tesco embarked on an expansion programme that resulted in the closure of certain distribution centres and the re-opening of others. In order to incentivise employees to relocate to the new sites, they were offered “retained pay” (i.e., an additional contractual element of pay) as an alternative to a lump sum redundancy payment. The retained pay was collectively agreed with the recognized union and incorporated into the employees’ contracts of employment. Retained pay was expressly described as "permanent" in the collective agreement under which it was agreed (which provision was then incorporated into the individual contracts of employment of the Claimants) and, in surrounding communications, as (variously) "guaranteed for life" and something which would “[remain] for as long as you are employed…in your current role”.

In 2021, Tesco wished to bring the retained pay to an end. Tesco offered a one-off payment to buy out the right to retained pay but, if the employee didn’t accept the change, the intention was they would be dismissed and re-engaged on new terms, without the retained pay.

The employees were successful in obtaining an injunction from the High Court preventing Tesco from dismissing and re-engaging them so as to deprive them of the retained pay. The High Court considered it was necessary to imply a term that Tesco's right to terminate the employment contract cannot be exercised for the purpose of removing or diminishing the right of that employee to the retained pay.

Tesco was successful in its appeal to the Court of Appeal. The Court of Appeal dismissed the employees' argument that protection from dismissal should be implied into their contracts. It concluded that it was far from clear or obvious what term should have been implied. It also determined that, even if the High Court had been right to find for the employees on liability, this would not have justified the grant of an injunction, noting that specific performance would not normally be granted in an employment context. As an employee's remedy for breach of contract is invariably financial, the Court of Appeal considered that damages would have been an adequate remedy.  

Supreme Court decision

The Supreme Court upheld the High Court's decision. It considered that in order to give effect to the express right to “permanent” retained pay, it was necessary to imply a term in the employment contracts that Tesco could not dismiss the employees solely for the reason of denying them the retained pay.  

The implied term was really a product of how the right to retained pay had been expressed in the contracts and the pre-contractual communications that had been issued to employees. The Supreme Court noted that it would have been possible to negotiate a long-stop date for the entitlement to retained pay or to make it clear that it could be withdrawn if an employee was dismissed on notice and re-employed in the same role. 

However, the right to retained pay had not been qualified in that manner. The contract set out three specific situations in which the right would be removed or modified (mutual consent, promotion or change of shift patterns). It would have undermined the purpose of the retained pay arrangement if Tesco had been able to give notice to terminate the contract and remove the retained pay once the employee had relocated. If that had been the case, the employee's position after having relocated would have been more vulnerable, defeating the purpose of the retained pay arrangement, which was to incentivise employees to move.

The implied term would not restrict Tesco’s right to dismiss for other reasons unconnected to the retained pay e.g., genuine redundancy, poor performance and misconduct. The Supreme Court therefore rejected arguments that it unreasonably fettered managerial discretion.

The Supreme Court also upheld the High Court’s decision to grant an injunction against Tesco despite it having the effect of requiring specific performance of a contract of employment. Although the general principle is not to order specific performance in employment contracts, an exception may apply if there has been no breakdown of trust and confidence between the parties. Given Tesco was willing to re-engage the employees, this exception was satisfied.

The court also agreed with the High Court that damages would not be an adequate remedy given the difficulties of assessment. Calculating the quantum of damages would require speculation as to how long the employees would have otherwise remained employed by Tesco, and if they were lawfully dismissed, what their prospects would be of finding alternative employment so as to mitigate loss. This would be difficult, prone to error, resource intensive and potentially costly. The employees would also not be able to recover their non-pecuniary losses, for example, the loss of job satisfaction, and anxiety and upheaval caused by dismissal.