A high-profile issue for employers at the moment is the practice of ‘fire and re-hire’ – where an employer dismisses employees and then re-employs them under different (usually less beneficial) contracts.
On Friday, 15 July 2022, the Court of Appeal in England handed down a decision on whether the High Court was right to grant an injunction which stopped Tesco from using ‘fire and re-hire’ to change the terms of a group of employees.
This is the latest in a series of developments on this controversial topic, which has been the subject to intense scrutiny - and even calls for a ban - over the last year or so.
In this Briefing we explain the issues, where we are now and what changes to expect in future.
Background and controversy
Why do employers use ‘fire and re-hire’ or ‘dismissal and re-engagement’ processes? Usually, when an employer wants to change employees’ contracts of employment and the changes can’t be agreed with the employees; it’s a way of breaking an impasse.
How does ‘dismissal and re-engagement’ work?
In brief, the steps are as follows.
1. The employer establishes a business case for the change.
2. The employer enters into consultation with employees.
3. Notice is issued under the employees’ original contracts of employment. The “potentially fair reason for dismissal” falls under the ‘catch all’ provision in the Employment Rights Act 1996 (Employment Rights (Northern Ireland) Order 1996): ‘some other substantial reason’.
4. The employer immediately re-offers the dismissed employees substantively the same role but with an amended contract, incorporating the changes sought.
For further guidance, please see our article, Fire and rehire tactics: your questions answered.
The sting in the tail is that the cost of getting this - somewhat cumbersome procedure - wrong can be steep: if large numbers of employees are being dismissed and re-engaged at the same establishment, this will trigger the duty to collectively consult under the Trade Union and Labour Relations (Consolidation) Act 1992 (article 216 of the Employment Rights (Northern Ireland) Order 1996 for employers based in Northern Ireland).
Failure to follow the steps under the collective consultation procedure can mean that employees are entitled to significant awards of compensation: up to 90 days, or 13 weeks’ pay for each affected employee.
Although dismissal and re-engagement is lawful if conducted properly, it was subject to criticism by Unions and the press at the end of 2021 and early 2022.
And practice of dismissal and re-engagement hit the headlines again in March 2022, when P&O Ferries controversially dismissed a group of employees without notice or consultation. Although this was not a dismissal and re-engagement process as such (there was no re-engagement), it prompted renewed calls for the government to address fire and re-hire – some going as far as suggesting that this practice should be banned.
New Acas advice
The government has declined to put forward new legislation curbing or outlawing the ability of employers to fire and rehire. However, it did ask Acas to review the practice. As a result, Acas published advice for employers making changes to employment contracts – this can be downloaded here.
Acas advises that ‘fire and re-hire’ is an extreme step that has the potential to be damaging to employee relations and productivity. Acas also flags the risk of legal claims and industrial action. The Acas advice suggests ways in which employers and employees can keep discussions open and stay focussed on trying to reach agreement.
It is important to note that this is advice rather than formal guidance or a code of practice; there is no obligation on employers to follow the Acas advice and Courts and Employment Tribunals do not have to take it into account.
Employers in Northern Ireland should be mindful that to the extent any legislative changes were proposed by Westminster with regard to fire and rehire, they would not apply in Northern Ireland unless the devolved institutions introduced similar statutory provisions.
Tesco’s fire and re-hire injunction
In February 2022, the High Court granted an injunction against Tesco preventing it from using termination and re-engagement to remove an entitlement to ‘retained pay’.
The retained pay was described as ‘protection for life’ and ‘guaranteed for life’ and a ‘permanent feature’ of an individual’s contractual entitlement.
The High Court found that an ordinary understanding of the word ‘permanent’ and the other phrases used by Tesco (‘guaranteed’ and ‘for life’) meant a reasonable person would have understood the retained pay would remain in place as long as the employee undertook the same substantive role. Therefore, it found that there was an implied term that Tesco would not exercise its right to give notice for the purpose of removing the right to retained pay.
On 15 July 2022, the Court of Appeal (CA) overturned that decision. In USDAW and others v Tesco Stores Limited, the CA said that the statements used in relation to retained pay were not sufficiently clear to indicate any intention that the pay was intended to be ‘guaranteed for life’ – the CA noted that the wording used would not prevent, for example, Tesco from dismissing an employee if they were found to have stolen from the company.
The CA said that the retained pay arrangements were not comparable to Permanent Health Insurance Benefits - noting that if an employee has the benefit of an employer’s permanent disability insurance, that benefit would be worthless if the employer could dismiss him on the grounds of that disability.
This case turned very much on its own unusual facts, but its wider relevance for employers rests more on the ongoing scrutiny of dismissal and re-engagement practices. The CA’s decision marks a return to more conventional thinking about an employer’s freedom to terminate an employee’s contract of employment on notice.
It remains to be seen whether USDAW will appeal the Court of Appeal’s decision.
However, we do know that the government will introduce a new statutory code of practice on dismissal and re-engagement. The Code will set out how employers should hold fair, transparent and meaningful consultations on proposed changes to terms of employment.
As a statutory Code, Courts and Employment Tribunals in Great Britain will be required to take it into account when deciding relevant cases.
If an employer unreasonably fails to comply with the code, any compensation linked to that failure will be increased by 25%.
Employers will need to review the draft Code when it is published for consultation. Once it is finalised and in force, it will be important to ensure that its requirements are built into processes for changes terms and conditions. There is no timescale at present for publication of a draft Code but given everything that is happening in Westminster at present, we do not expect the Code to be published in the immediate future.
Note that the Code of Practice, when implemented will not have application in Northern Ireland.
Dismissal and re-engagement remains a lawful practice, despite opposition from Unions and workers.
However, it is not a step to be taken lightly.
Even if payments are described as ‘permanent’, it may be possible to remove them using dismissal and re-engagement.
In order to be lawful, the process outlined above must be followed carefully.
It is important to ensure that collective consultation is entered into if the employer proposes to dismiss more than 20 employees at one establishment within a 90-day period. Compensation for getting this wrong can be substantial.
The government has no plans to limit or ban the use of dismissal and re-engagement.
There is a statutory Code of Practice on its way which will apply to employers in Great Britain.