“Permanent” enhanced pay entitlement could not be defeated by fire and re-hire

The High Court has granted an injunction to prevent Tesco from dismissing staff in order to remove entitlement to “retained pay”, which it had originally agreed to provide indefinitely.

The proceedings were launched by the union USDAW and three representative claimants who had been promised pay protection on a “permanent” basis in return for agreeing to relocate and giving up their redundancy entitlements. This was known as “retained pay”. Tesco had confirmed that this entitlement could not be removed expect by mutual consent and would continue to be paid while they remained in the same substantive post.

These arrangements dated back a number of years and were reflected in a collective agreement made in 2010. However, in January 2021 Tesco announced its intention to buy out this entitlement in return for a one-off payment equivalent to 18 months’ retained pay. Staff who did not accept this offer would be dismissed and offered re-engagement on terms which excluded the right to retained pay.

Tesco argued that it was entitled to take this step, since the promise of retained pay on a permanent basis was overridden by the standard contractual term which entitled it to terminate the claimants’ contracts of employment on giving the required period of notice.

However, the Hight Court decided that in these exceptional circumstances, it would imply a term to the effect that Tesco’s right to terminate an employment contract on notice could not be exercised for the purpose of removing or diminishing the right of that employee to retained pay. That did not mean that the contract could not be terminated for other legitimate reasons – for example in the case of redundancy or misconduct – though it was noted a tribunal would be likely to scrutinise the reasons given for such dismissals carefully.

It is rare for a term like this to be implied, but not without precedent. For example there are a number of earlier decisions where an employer’s ability to terminate a contract on notice has been constrained if this would remove an employee’s entitlement to benefits under a permanent health insurance policy.

The lesson for employers is that if they plan confer long-term benefits on employees, they need to think about whether this might constrain their normal freedom to bring their contracts to an end by giving the required contractual notice.

Tesco was refused permission to appeal by the High Court, but it is not known whether Tesco will now seek to obtain permission directly from the Court of Appeal.

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