Fire and rehire: HR managers breathed a collective gasp a few days ago when the Supreme Court decided that Tesco could not force through changes to its employees’ employment contracts by terminating their employment and then offering the employees employment on changed terms.

A device used by employers to effect changes to employment contracts in the face of employee opposition appeared doomed. However, a closer look at the case, reveals that things are not quite so simple. 

Don’t overlook the facts

The facts on which the court based its decision are often skated over in the headlines. But they are important and unusual. 

Back in 2007, Tesco reached a deal with some of its employees. The employees would agree to relocate to new sites, in return for a retained pay package. So far so good. 

However, not only was the agreement incorporated into employees’ contracts but the package was described as “a permanent feature” of the employees’ contracts. It could only be changed by mutual consent or in other very limited circumstances. 

Tesco described the retained pay as ‘protection guaranteed for life’ and made a host of other statements consistent with the benefit being permanent. 

Several years later

No longer enamoured with the deal, Tesco tried unsuccessfully to persuade the employees’ union, USDAW, to vary it. The union refused and Tesco ultimately offered the employees a choice. 

Take a compensation payment to buy out the retained pay, or the company would terminate the employees’ contracts and offer them employment on terms that no longer included the retained pay. 

USDAW pushed back through the courts and ultimately the Supreme Court approved the grant of an injunction to stop Tesco from forcing through the changes through threats to dismiss and rehire. 

A ploy by the courts

Was the court banning employers from threatening dismissal and rehire as a way to change varying contracts, whatever the circumstances? 

No. A number of factors influenced its decision. Key among them was Tesco’s emphasis, from the get-go, that the retained pay was a “permanent” benefit. The court decided that allowing Tesco to use fire and rehire to remove the benefit, flew in the face of a deal that was intended to last for as long as the employees were employed. 

Employers may be hoping that reality will kick in and that the government may water down that commitment.

The court recognised that there was a tension here: on the one hand, Tesco had offered a benefit for life. 

On the other hand, surely employers have the contractual right to terminate employment contracts by exercising notice periods. The court resolved the conundrum in the following way: 

Yes, Tesco could terminate their employees’ contracts for all sorts of reasons but they implied a term that termination was not permitted, where the purpose of dismissal was simply to deprive employees of their rights to permanent retained pay. 

Tips for employers

Based on these facts, the decision does not appear so radical after all. However, in the light of the court’s decision, employers negotiating new benefits with their staff may want to take precautions: 

• be careful with your language. Where possible, avoid any indication in contracts, policy documents, or announcements, that a negotiated benefit is “for life,” or “permanent.” That kind of language may sound good from a communications perspective, but it may come back to bite the employer in the long term;

• as the Supreme Court indicated, where a cash benefit is being offered as an incentive to change terms, consider limiting the shelf life of that benefit. The benefit could be offered for a set period of time to help employees adjust to the change, after which it is removed; 

• alternatively, make clear in employment contracts, that the existence of particular benefits or incentives, does not prevent the employer terminating the employment contract. A clear express clause like that can make it difficult for the courts to imply a term that runs counter to it;

• the Supreme Court also suggested that Tesco might have improved their position if they had introduced a term that expressly allowed them to make changes to the retained pay benefit, through the mechanism of fire and rehire. Fine, but we are doubtful that this particular recommendation reflects workplace reality. Any employer who attempted to advance that position would probably be faced with a firm rejection from its employees.

So where does that leave fire and rehire?

The reality is that the decision of the Supreme Court does not represent the last word on the topic. Even if the judgement did not sound the death knell for fire and rehire, change is also underway at the political level.

The last Conservative government, while not opting to ban fire and rehire as a way of changing employment contracts, did ask ACAS to investigate the practice. 

The result was eventually a statutory Code of Practice on Dismissal and Re-engagement, which came into force on 18 July 2024. This emphasises that:

• fire and rehire is a tactic of last resort; 
• employers must provide employees with as much information about their change proposals as possible; 
• consultations should go on for as long as reasonably possible and be conducted in good faith and with a view to reaching agreement.

Further, if employers fall foul of the Code, there is potential for compensation awarded to employees bringing certain claims against their employer, to be uplifted by up to 25%. 

Many employers would consider that the new Code reflects a fair balance between the interests of employees and employers. 

only time will tell what the government decides to do

However, the new Labour government disagrees: the government has described the Code as “inadequate” and announced it wants to ban outright, fire and rehire as a means of changing employment terms. 

Employers may be hoping that reality will kick in and that the government may water down that commitment. After all, there are times when perfectly reasonable proposals to change terms, are rejected by employees, however much consultation has taken place. 

Fire and rehire may be the only way to implement the proposed changes. The alternative is that employers are stuck with outdated terms and practices, the continuation of which will damage the business and ultimately the job prospects of the employees concerned. 

However, only time will tell what the government decides to do.