In Tesco Stores Ltd v. USDAW and others, the Court of Appeal has handed down a decision that overturns the injunction previously granted by the High Court to prevent Tesco from dismissing and re-engaging a group of workers.
The Union of Shop, Distributive and Allied Workers (USDAW) is recognised by Tesco for collective bargaining. The parties had previously entered into an arrangement for “Retained Pay”, which was inserted into the employment contracts of individual workers. The Retained Pay clauses were introduced as an alternative to a lump-sum redundancy payment during a time where Tesco was restructuring the business. Tesco used the retained pay as an incentive for staff to move to a different store, rather than accepting redundancy.
Retained Pay was given a monetary value and then compared with the value of any newly-negotiated contractual benefits. The difference between the two amounts was protected by the Retained Pay contractual provisions in individual employment contracts.
Tesco had informed staff that the Retained Pay contractual provisions could not be negotiated out of their employment contracts while they remained in their current role, and would increase each year in line with pay rises. In 2010, Tesco and USDAW entered into a collective agreement confirming that Retained Pay would be a permanent feature of each individual’s contractual entitlement. The agreement provided that retained pay could only be altered when an individual was promoted, by mutual agreement or where an employee requested a change to their working patterns.
This agreement remained in place without any issues until January 2021 when Tesco announced that it intended to remove the Retained Pay benefit from employment contracts. Tesco offered employees a lump-sum payment in exchange for accepting the contractual changes. Employees that did not accept the changes would have their existing contracts terminated and be offered ongoing employment under new contracts that did not include the Retained Pay clauses.
The High Court decision
USDAW applied to the High Court for a declaration that the contracts of the affected employees were subject to an implied term that protected those employees from Tesco exercising its ordinary contractual right to terminate their employment in order to remove or diminish their right to Retained Pay. An injunction was also sought to prevent Tesco from terminating the relevant contracts.
USDAW was successful and the High Court made the declaration and granted the injunction. The court held that the word “permanent” in relation to the contractual right to Retained Pay meant that, for as long as the employee was employed by Tesco, they were entitled to Retained Pay. The implied term did not prevent Tesco from dismissing employees for reasons of gross misconduct or redundancy, but did protect employees from being dismissed in order to remove a contractual provision.
Tesco appealed the High Court decision to the Court of Appeal, which allowed the appeal. It held that the High Court had erred in finding that “permanent” in this context meant there was a mutual intention for the contracts to continue for life or until retirement age, instead of until the end of the contract. The Court did not agree that the circumstances in which Tesco was able to use its ordinary termination rights under the contracts should be limited. It explained that the express terms of the employment contracts should be interpreted in accordance with their natural and ordinary meaning which, in this case, was that the Retained Pay provisions would terminate when the contract did. The Court of Appeal also stated that the implied term accepted by the High Court was “insufficiently clear”.
When considering the injunction, the Court of Appeal held that it was not justified in this case, even if the High Court had interpreted the relevant terms correctly. There had been no other case where a private employer was prevented from dismissing employees for an indefinite period, and this case should not be an exception. Instead, a financial remedy would have been more appropriate.
The Court of Appeal decision serves as a reminder that the test when considering whether to imply a term into the contract is whether the term is necessary, not whether the term is fair and reasonable. A term can only be implied into a contract where the parties would have agreed to the term forming part of the contract at the time the contract was made.
The High Court decision could have provided an employee-friendly precedent, allowing employees in future cases to argue that their employer could not change or terminate an employment contract based on earlier discussions. This would have created a significant level of risk for employers, who could have been held to comments made during contractual negotiations many years prior. Still, it is better to be clear and precise about what any offer actually means!