Tesco offered employees 'permanent' retained pay as an inducement to relocate to new distribution centres instead of accepting redundancy. When Tesco later sought to remove retained pay by dismissing and re-engaging employees on new terms, the Supreme Court held an implied term prevented this and granted injunctive relief.
Background
In 2007, Tesco embarked on an expansion programme involving the closure of existing distribution centres and the opening of new sites. Employees at closing sites, including Crick, faced redundancy. To retain experienced staff, Tesco negotiated with the Union of Shop, Distributive and Allied Workers (USDAW) an arrangement whereby employees who relocated to new sites would receive ‘retained pay’ — a sum preserving the difference between their old and new contractual pay — instead of accepting a redundancy payment of between £6,000 and £8,000. The retained pay constituted approximately 32% to 39% of the affected employees’ wages.
The retained pay term, incorporated into individual contracts of employment via a collective agreement signed on 18 February 2010, provided:
Retained pay will remain a permanent feature of an individual’s contractual eligibility subject to the following principles: (i) retained pay can only be changed by mutual consent (ii) on promotion to a new role it will cease (iii) when an individual requests a change to working patterns such as nights to days the premium payment element will be adjusted (iv) if Tesco make shift changes it will not be subject to change or adjustment.
Pre-contractual documents described the retained pay as ‘protection for life’, ‘guaranteed for life’, and something that ‘remains for as long as you are employed by Tesco in your current role’ and ‘cannot be negotiated away by either Tesco, USDAW or USDAW Shop Stewards’.
In January 2021, Tesco announced its intention to remove retained pay. Employees were offered an advance payment of 18 months’ retained pay to agree to its removal. Those who refused faced dismissal and re-engagement on the same terms but without retained pay — a practice referred to as being ‘fired and rehired’.
The Issue(s)
Two principal issues arose before the Supreme Court:
1. Contractual Interpretation and Implied Term
Whether the express retained pay term, promising that retained pay would be a ‘permanent feature’ of the employee’s contractual entitlement, was qualified by an implied term preventing Tesco from exercising its contractual right to terminate employment on notice for the purpose of removing or diminishing the right to retained pay.
2. Remedy: Injunction or Damages
Whether, if the employees’ contractual rights were established, the appropriate remedy was an injunction (amounting to indirect specific performance of the employment contract) or whether damages would suffice.
The Parties’ Key Arguments
Tesco’s Position
Tesco argued that the word ‘permanent’ meant only that retained pay could not be removed through collective bargaining, and that, like any other contractual entitlement, it was subject to Tesco’s express and unqualified right to terminate on notice. There was therefore no inconsistency between the two express terms. Tesco further contended that no implied term could be established because the tests of business efficacy and obviousness were not met, and that any injunction would amount to impermissible indirect specific performance of a contract of employment.
The Claimants’ Position
The claimants submitted that the promise of ‘permanent’ retained pay was intended as an inducement to relocate and that its purpose would be entirely defeated if Tesco could simply dismiss employees on notice to remove the benefit. They argued a term must be implied by fact preventing Tesco from exercising its power of dismissal for the purpose of removing retained pay, and that an injunction was the appropriate remedy because damages would be inadequate.
The Court’s Reasoning
Interpretation and Implication
The joint judgment of Lord Burrows and Lady Simler (with whom Lord Lloyd-Jones agreed) identified the fundamental problem with Tesco’s interpretation:
First, an employee’s contractual benefits only ever last as long as the contract providing them lasts. If this is all the word ‘permanent’ means, it adds nothing and could simply be deleted from the clause.
The Court held that the word ‘permanent’ conveyed that retained pay was not time-limited and would continue for as long as the employee’s employment in the same role continued, subject only to the specified qualifications. Tesco’s interpretation would deprive the promise of any substance.
Moving to implication, the Court held that a term must be implied by fact — applying the business efficacy test (or, alternatively, the obviousness test) — to qualify Tesco’s otherwise unrestricted right to dismiss on notice:
Objectively, it is inconceivable that the mutual intention of the parties was that Tesco would retain a unilateral right to terminate the contracts of employees in order to bring retained pay to an end whenever it suited Tesco’s business purposes to do so. This would have been viewed, objectively, as unrealistic and as flouting industrial common sense by both sides.
The implied term was formulated as follows: Tesco’s contractual right to terminate on notice cannot be exercised for the purpose of removing or diminishing the right of that employee to receive retained pay. Crucially, this did not prevent Tesco from dismissing for any reason unconnected with retained pay, such as lack of capability, misconduct or genuine redundancy.
The Court drew on an established line of authority concerning permanent health insurance benefits (the PHI cases), including Aspden v Webbs Poultry and Meat Group (Holdings) Ltd [1996] IRLR 521 and Awan v ICTS (UK) Ltd [2019] ICR 696, as well as Jenvey v Australian Broadcasting Corpn [2003] ICR 79 and Ali v Petroleum Co of Trinidad and Tobago [2017] ICR 531, confirming the principle that:
These cases exemplify the principle that a term implied by fact may be required to qualify an employer’s otherwise unqualified contractual right to dismiss in circumstances where to do so would defeat or undermine the purpose of the contract by denying the very benefit that was promised.
Lord Leggatt’s Concurring Judgment
Lord Leggatt concurred, offering a detailed analysis grounded in the business efficacy test as articulated in The Moorcock (1889) 14 PD 64 and as applied in Equitable Life Assurance Society v Hyman [2002] 1 AC 408. He identified the contractual purpose of the retained pay promise and held that its protection would be rendered ‘effectively worthless’ if Tesco could remove it unilaterally:
The minimum, however, that employees promised that retained pay would remain a permanent contractual entitlement would reasonably expect is that they would not, by the very fact of possessing that entitlement, be exposed to greater risk of having their employment terminated than if they did not have that entitlement.
Lord Leggatt also addressed broader questions regarding good faith restrictions on contractual powers, though Lord Reed expressly declined to endorse the wider proposition that all contractual powers are generally subject to an implied good faith restriction.
Remedy
The Court accepted that the injunction granted by Ellenbogen J amounted in substance to indirect specific performance against the employer. It acknowledged the general rule against specific performance of employment contracts but held that an exception was justified. Applying the principles from Hill v C A Parsons & Co Ltd [1972] Ch 305 and Powell v Brent London Borough Council [1988] ICR 176, the Court found that Tesco retained sufficient confidence in the employees — demonstrated by its willingness to re-engage them on the same terms minus retained pay:
In my view, there is no rule of law that a court should not compel an employer to perform a contract of employment. Rather, there is a principle that a court should not compel the employer to continue to employ an individual in whom the employer has lost confidence. That principle does not apply here.
On adequacy of damages, the Court held that damages would be inadequate because their assessment would require speculation about how long employment would have continued and the prospects of mitigation, and because non-pecuniary losses (such as job satisfaction and anxiety) would be irrecoverable under the rule in Addis v Gramophone Co Ltd [1909] AC 488.
Practical Significance
This decision is of considerable practical significance in several respects. First, it confirms and extends the principle derived from the PHI cases that an employer’s otherwise unqualified contractual right to dismiss on notice may be limited by an implied term where exercising that right would defeat or undermine the purpose of a specific contractual benefit. The Court emphasised that this principle is not confined to any particular type of benefit scheme. Secondly, the case establishes that an injunction amounting to indirect specific performance may be granted against an employer in an appropriate case — particularly where there has been no breakdown of mutual confidence and damages would be inadequate. Thirdly, the decision sends a strong signal regarding ‘fire and rehire’ practices: where an employer has promised a permanent contractual benefit as an inducement, it cannot circumvent that promise by the expedient of dismissal and re-engagement on lesser terms. The case is likely to be of enduring importance in the law of employment contracts and contractual interpretation more broadly.
Verdict: The Supreme Court unanimously allowed the appeal, reversing the Court of Appeal’s decision and reinstating the order of Ellenbogen J. The Court held that there was an implied term in the employees’ contracts of employment that Tesco’s contractual right to terminate on notice could not be exercised for the purpose of removing or diminishing the employees’ right to receive retained pay. The final injunction granted by Ellenbogen J — restraining Tesco from giving notice to terminate the contracts for the purpose of removing retained pay — was reinstated.
Source: Tesco Stores Ltd v Union of Shop, Distributive and Allied Workers and others [2024] UKSC 28
