Tesco v USDAW: retained pay and the real limits of fire and rehire

The TL;DR from Tesco Stores Ltd v USDAW is that the Supreme Court dealt a significant blow to fire and rehire. That is true, but it is also slightly misleading. The judgment did not proclaim dismissal and re-engagement to be unlawful in principle. It did something more precise, and arguably more important: it held that an employer cannot rely on an ordinary contractual right to terminate on notice in order to strip away a benefit which, properly understood, the contract was designed to protect.

That distinction matters. It means the case is not a broad moral lecture on management tactics, nor a judicial ban on restructuring by dismissal and re-engagement. It is a contract case of unusual force. It tells employers that a notice clause is not always the universal solvent it is sometimes assumed to be. And it tells employment lawyers that, in the right case, common law contract principles can do far more than simply award damages after the event.

The facts are worth dwelling on, because they explain why the Court was prepared to intervene so firmly. Tesco was reorganising its distribution network. Existing sites were closing, new ones were opening, and the business needed experienced staff to relocate rather than take redundancy. To secure that move, Tesco and USDAW negotiated “retained pay”: a substantial contractual enhancement for employees who transferred to the new sites. For some employees, this was not some incidental allowance. It represented a very material part of their pay. It was the inducement that made relocation bearable and, in commercial terms, it was part of the price Tesco paid to preserve continuity and expertise.

The later collective agreement described retained pay as a “permanent feature” of the employee’s contractual entitlement. It could be changed only by mutual consent, and it was subject to specific, limited exceptions such as promotion. On one view, that language was strikingly strong. On another, it was also potentially fragile, because the employees’ contracts still contained an ordinary notice clause permitting Tesco to terminate employment on notice. When Tesco later decided it wanted to remove retained pay, it offered employees a payment if they agreed. If they did not, Tesco proposed to dismiss them and offer re-engagement on the same terms save for the disappearance of retained pay.

That was the pressure point. If Tesco could do that, what had “permanent” really meant?

The most interesting feature of the Supreme Court’s reasoning is that it did not answer that question in a glib or overblown way. The tempting slogan would have been: permanent means permanent. But the Court’s reasoning was more careful than that. The judges did not say that the employees had jobs for life, nor that retained pay survived any and every termination of employment. On the contrary, the Court accepted that the termination clause meant what it said: Tesco could terminate on notice. It also accepted that retained pay lasted only while the employment relationship in the relevant role continued.

The employees therefore did not win by pure interpretation alone. They won because the Court held that the contracts contained a further term, implied in fact, which prevented Tesco from exercising its power of termination for the purpose of removing or diminishing the right to retained pay.

That is the real doctrinal core of the decision. The Supreme Court did not rewrite the contracts because it disliked fire and rehire as a practice. It held that, without the implied term, Tesco’s promise of permanent retained pay would be emptied of substantive value. A contractual benefit offered as a decisive inducement for relocation could be destroyed at will by the very party who promised it. That, the Court held, could not sensibly have been the objective bargain.

Seen in that light, the case sits in a recognisable line of authority, even if the facts are unusual. The Court drew support from the permanent health insurance cases, and from decisions such as Jenvey* and Ali**, where the employer was not permitted to use a contractual power in a way that would defeat the very benefit the contract had promised. The point is not that every valuable benefit is termination-proof. It is that some benefits are so closely tied to the contractual purpose of the arrangement that allowing termination to destroy them would make the bargain incoherent.

That is why Tesco matters for fire and rehire. It establishes no general rule that dismissal and re-engagement is wrongful whenever it is used to change terms. Employers should not read the case as outlawing the technique. But nor can they safely read it as leaving the technique untouched. The real lesson is that dismissal and re-engagement may be contractually impermissible where it is deployed to nullify a separately negotiated entitlement that the contract, read in context, was meant to secure on an enduring basis.

In other words, the vice was not merely the mechanism. It was the use of that mechanism to destroy the bargain.

That is an important warning for employers, because employment disputes of this kind are rarely about a single clause viewed in isolation. They are about the architecture of the deal. Why was the benefit introduced? What problem was it meant to solve? What was said to employees at the time? Was it part of a relocation package, a retention device, a long-term protection, a redundancy substitute, or a promise made to induce surrender of some other right? If the answer is yes, the contractual right to terminate may not be as unqualified as it first appears.

There is another aspect of the judgment that will interest solicitors advising on unionised workforces and legacy terms. The Supreme Court showed a marked willingness to look at explanatory and pre-contractual material in working out what had objectively been agreed. That is significant in the collective bargaining context. Terms incorporated from collective agreements do not arrive in individual contracts out of thin air; they usually come with a history, a purpose, and an industrial setting. In Tesco, the surrounding communications helped show that retained pay was not meant to be a temporary managerial indulgence but part of a settled bargain. That will matter in future disputes about protected pay, location allowances, legacy premiums, transition arrangements and similar inherited terms.

For practitioners, that means the documentary exercise is wider than simply retrieving the signed contract. The real battleground may also include collective agreements, side letters, implementation material, staff briefings, Q&A documents and the industrial narrative surrounding the original deal.

The second great significance of the case lies in remedy. Many employment lawyers are trained to assume that common law’s contribution to dismissal cases is usually monetary and usually limited. Tesco breaks that assumption, or at least shows its limits. The Supreme Court did not merely recognise the implied term. It restored a final injunction restraining Tesco from dismissing the affected employees for the purpose of removing retained pay. In practical terms, that meant compelling Tesco to continue employing them on the existing terms.

That is a remarkable outcome. English law has long been reluctant to order specific performance of employment contracts. Courts do not usually force an employer to keep an employee, or an employee to keep working. Yet the Court held that this was one of the exceptional cases where injunctive relief was appropriate. The reason was plain enough. Tesco was not saying the employees were incompetent, untrustworthy or impossible to work with. On the contrary, it was offering to re-engage them immediately. There was no breakdown in mutual confidence. The problem was not the relationship; it was the term.

Once the case is seen that way, the injunction becomes much easier to understand. Tesco wanted the employees, just not the retained pay. The Court therefore treated the ordinary objections to specific performance as far less compelling than usual. Damages were also inadequate: assessing how long each employee would have remained employed, what mitigation might have occurred, and what non-financial losses dismissal would cause would have been speculative, costly and incomplete. So the Court did something uncommon but principled. It stopped the threatened breach before it happened.

For employees and unions, that is perhaps the most energising part of the decision. Tesco shows that not every dismissal and re-engagement dispute has to be fought only after the notices are served, and not every remedy has to be funnelled through unfair dismissal compensation. In the right contractual setting, declaratory and injunctive relief may be available.

Still, the judgment has to be read with some discipline. It is not a roving commission for courts to police hard bargaining. Nor is it a general requirement that termination powers be exercised in good faith. Lord Leggatt’s concurring judgment ventured into larger territory about contractual powers and proper purposes, but Lord Reed was careful not to endorse a broader principle of that kind. That caution matters. The case is powerful, but it is not a wholesale re-engineering of the law of termination.

Nor did the Court prevent Tesco from ever dismissing the affected employees. The implied term was narrower than that. Tesco could not dismiss them for the purpose of removing retained pay. It remained free to dismiss for other, genuinely unrelated reasons: misconduct, capability, redundancy, or site closure, for example. The judgment therefore protects the bargain without turning the employees into a permanently immovable class.

So what, in practical terms, did Tesco establish about fire and rehire?

It established that dismissal and re-engagement is not merely a statutory or industrial-relations problem. It can be a straightforward breach of contract where the employer uses termination to destroy an entitlement that the contract, properly construed and supplemented by implication, was designed to preserve.

It established that courts may, in rare cases, imply a restriction on an employer’s otherwise express power to terminate on notice where that is necessary to stop the contract being stripped of its intended content.

It established that, in those rare cases, the remedy may be an injunction rather than a retrospective damages exercise.

And it established, perhaps most importantly of all, that the common law is not indifferent to industrial reality. If a term is negotiated as the price of a difficult workforce change, the court may treat that commercial and industrial context as central, not ornamental.

Since July 2024, dismissal and re-engagement has also been governed by a statutory Code of Practice, and the government’s current implementation timetable says further fire and rehire protections are due from January 2027. But Tesco remains significant for a different reason. It shows that even before the next phase of reform arrives, some instances of fire and rehire were never simply robust management tactics. They were attempts to use a notice clause to undo the very promise that had secured the workforce bargain in the first place. In Tesco, the Supreme Court refused to let contract law be used that way. That is why the decision matters, and why it will continue to matter well beyond the current politics of workplace reform.

* Jenvey v Australian Broadcasting Corpn [2002] EWHC 927 (QB), [2003] ICR 79

** Ali v Petroleum Co of Trinidad and Tobago [2017] UKPC 2, [2017] ICR 531

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