Where the express terms of an employment contract fail to adequately deal with the intentions of the employer and employee at the time of entering into it, the courts may imply 'in fact' terms to give effect to this.
Facts
In 2007, following a company reorganisation, Tesco (respondent) reviewed its distribution centres, which resulted in the opening of new centres and the closure of some existing sites. Those sites marked for closure created a redundancy situation for employees operating from them. However, Tesco wanted to retain its experienced staff and relocate individuals to new or expanded sites.
To incentivise employees to relocate, USDAW (Tesco's trade union and applicant) and Tesco negotiated an enhanced financial entitlement called 'retained pay', which would form part of individual employment contracts. Tesco informed employees facing redundancy that the entitlement to retained pay was 'guaranteed for life' (as long as the employee stayed within their current role), could not be negotiated away and would rise yearly in line with any general pay rise.
In 2010, USDAW and Tesco finalised the retained pay incentive, which was said to be a 'permanent feature' of an individual's contractual entitlement. The term could only be varied through mutual agreement or promotion into a new role.
In 2021, Tesco announced its intention to remove the retained pay benefit. Affected employees could either agree to terminate the retained pay and receive a one-off advanced payment, or they would be dismissed and re-engaged on the same terms as their current contract save for the right to retained pay ('fired and rehired').
USDAW issued High Court proceedings seeking declaratory and injunctive relief to prevent Tesco from unilaterally removing the right to retained pay by way of a fire and rehire mechanism.
High Court
The High Court found in favour of the USDAW and granted declaratory and injunctive relief (see below).
Statements
Firstly, the High Court considered the statements used in describing Retained Pay such as 'permanent', 'guaranteed/protection for life' and 'for as long as you are employed by Tesco in your current role'.
A reasonable person with knowledge of the facts would construe the word 'permanent' to mean 'for as long as the relevant employee is employed by Tesco in the same substantive role'. The intention was to retain the pay that the employee had enjoyed at their original sites to incentivise relocation.
The High Court found there was an inherent conflict between the right to Retained Pay and the right to terminate the contract on notice for the purpose of removing the right to Retained Pay.
Implied term
The court found that there was an overriding implied term that Tesco would not exercise its right to give notice to terminate the contract for the purposes of removing the right to Retained Pay.
The court found that this term must be implied for the contract to be commercially and practically coherent (business efficacy test).
Further, if the 'officious bystander' was asked whether the implied term was so obvious that it did not need to be expressly stated within the contract, the answer would be yes (obviousness test). Without this implied term, giving contractual notice of dismissal would contradict the purpose of using the Retained Pay entitlement, that is to incentivise employee relocation and continuing employment with Tesco.
Remedies
The court granted declaratory relief to USDAW by inserting an express contractual term that laid out the implied term. Essentially, this qualified Tesco's right to terminate the contract on notice for the purpose of removing the retained pay entitlement.
The court also imposed an injunction on Tesco which prohibited the serving of notice to terminate the contract in order to remove the retained pay benefit.
Tesco appealed the High Court's decision.
Court of Appeal
The Court of Appeal overturned the High Court injunction preventing Tesco from firing and rehiring employees to remove their retained pay.
The Court of Appeal did not construe the statements as the parties' mutual intention, and there was no evidence suggesting any thought was put into the possibility of employees being fired and rehired. Further, the Court of Appeal did not accept that it was the mutual intention of the parties to limit the circumstances in which Tesco could bring the contract to an end.
Moreover, the Court of Appeal stated that the contractual wording should be given its ordinary meaning. If Tesco gives the employees sufficient contractual notice when dismissing them, then the employee should not have a claim for breach of contract, albeit there being a potential unfair dismissal claim.
The Court of Appeal held that the obviousness test was not satisfied as it was unclear what exactly should be implied. The 'officious bystander' would not necessarily think that employees have a right to remain in their post forever.
In any event, the Court of Appeal argued that even where there was a breach of the implied duty, an injunction is not justifiable under the circumstances and there had been no previous cases where an injunction had been granted to restrict a private sector employer for dismissing an employee for an unknown period of time.
The claimants appealed the Court of Appeal decision.
Supreme Court
The Supreme Court allowed the appeal and reinstated the injunction against Tesco.
Tesco argued that the retained pay right was qualified by its express and unqualified contractual right to terminate the contract on notice. The Supreme Court rejected this argument and held that the word 'permanent' in the retained pay term conveyed that the right to retained pay was not time-limited.
Instead, the Supreme Court held that Tesco's right to terminate employment contracts on notice was qualified by the implied term that they cannot do so by way of fire and rehire specifically to remove the retained pay clause. When looking at the reality of the situation, the mutual objective intention was to preserve the retained pay offer to incentivise employees to relocate.
It was essential to imply this term for the proper function of the contractual promise of permanent retained pay to operate.
The government
Conservative implementation
On 18 July 2024, a new statutory 'Code of Practice on Dismissal and Re-engagement' came into force which aimed to regulate the use of fire and rehire practices when an employer wants to vary the terms of an employment contract.
The code sets out a process that an employer should follow when considering changing the terms of an employment contract. This process includes information sharing, meaningful consultation, raising prospects of dismissal and re-engagement, re-examination of the employer's proposals, and unilateral imposition of new terms. Employers may use dismissal and re-engagement where reasonable alternatives have been considered.
Labour proposals
In the King's Speech 2024, the new Labour government have committed to banning fire and rehiring as a mechanism to change the contractual terms of an employment contract unless there is 'genuinely no alternative' under its 'Plan to Make Work Pay' initiative.
It is ambiguous what falls within the remit of 'genuinely no alternative', but Labour submits that if the mechanism is used, it 'must follow a proper process based on dialogue and common understanding between employers and workers'.
Tips for employers
- Ensure terms within an employment contract are clear and unambiguous;
- Take care when negotiating the length of contractual terms and, if possible, have a termination date for benefits that may otherwise appear to be long-term;
- Recognise and review the 'reality' of the employment situation rather than relying on what is expressed in writing in the contract in isolation;
- Clearly record the intent when entering into an employment contract, in particular contracts or terms relating to any niche or bespoke clauses, and
- Be alert to legislative updates and developments, particularly Labour's proposal to ban 'fire and rehire'.
