Fire-and-rehire: HR Managers breathed collectively a few days back when the Supreme Court ruled that Tesco couldn’t force changes to the employment contracts of its employees by terminating employment and then offering them employment with changed terms.
The device that employers use to change employment contracts despite employee resistance seemed doomed. A closer look reveals the situation is not as simple as it seems.
Do not overlook the facts
In the headlines, the facts upon which the court’s decision was based are frequently glossed over. They are both important and rare.
Tesco made a deal in 2007 with a few of its employees. In exchange for a retainer of pay, the employees agreed to move to a new site. So far so good.
The agreement was not only incorporated in the employee’s contract, but it was also described as a “permanent feature” within the employee’s contract. The agreement could only be altered by mutual consent, or under very limited circumstances.
Tesco referred to the benefit as “protection for life” and made other statements that were consistent with it being permanent.
Many years later
Tesco, no longer happy with the agreement, tried to convince the USDAW union to change it. Tesco offered a choice to the employees after the union refused.
The company could either pay a compensation to the employee or terminate their contract and offer employment with terms that did not include the retained salary.
USDAW challenged Tesco in court and the Supreme Court granted an injunction preventing Tesco from imposing the changes by threatening dismissal and rehire.
The courts have a ploy
The court banned employers from using a threat of dismissal or rehire to alter contracts in any circumstances.
No. Several factors influenced the decision. Tesco made it clear from the start that the retained salary was a permanent benefit. The court ruled that Tesco’s use of fire and rehire was in violation of the agreement that the benefit would last as long as employees remained employed.
Some employers may hope that reality will set in and the government will back down on its commitment.
The court acknowledged that there was tension in this case: Tesco, on one hand had offered an advantage for life.
The employer has the right to terminate the employment contract by giving notice. The court solved the conundrum by the following method:
Tesco can terminate employee contracts for a variety of reasons, but implied that terminations were not allowed if the sole purpose of the dismissal was to deny employees their right to a permanent retained salary.
Employers: Tips and tricks
In light of these facts, it does not seem so radical. Employers who are negotiating with their employees about new benefits may wish to be cautious in light of this court decision.
- Be careful with the language you use. Avoid indicating in documents or contracts that the benefit is “forever” or “permanent”. This may sound great from a communication perspective, but could come back and bite your employer.
- As the Supreme Court has indicated, if a cash incentive is offered to encourage a change in terms, limit the shelf-life of the benefit. The benefit can be provided for a certain period to allow employees to adjust to the changes, and then removed.
- Alternatively, in employment contracts make it clear that the employer can terminate the contract despite the fact that certain benefits or incentives are provided. It is difficult for courts to infer a clause that contradicts a clear and express clause.
- The Supreme Court suggested that Tesco could have improved its position by introducing a clause that explicitly allowed it to change the retained pay benefit through the mechanism “fire and rehire”. We doubt that this recommendation is a reflection of the workplace. If an employer tried to promote this position, it would likely be met with a strong rejection by its employees.
What happens to fire and rehire then?
In reality, the Supreme Court’s decision is not the final word in this matter. Even if this judgement didn’t spell the end of fire and hire, there are changes underway on the political front.
While the last Conservative government did not ban this method of changing employment contracts by firing and rehiring, it did request that ACAS investigate the practice.
The Code of Practice on Dismissal and Re-engagement was enacted on 18 July 2024. This highlights that:
- It is only a last resort to fire someone and then rehire them.
- Employers must give employees as much information as possible about the proposed changes;
- Consultations should continue for as long and in good faith as possible, with the aim of reaching an agreement.
If employers violate the Code, compensation for employees who bring certain claims against their employer could be increased by as much as 25%.
Many employers believe that the new Code represents a fair balance of interests between employees and employers.
Only time will tell what government decides
The new Labour government is not in agreement: it has called the Code “inadequate”, and stated that it will ban firing and rehiring as a way to change employment conditions.
The employers may hope that the reality will set in, and that government will soften its commitment. There are instances when employees reject perfectly reasonable changes to terms and conditions, even after extensive consultation.
The only way to implement proposed changes may be through a fire and rehire policy. If employers continue to use outdated practices and terms, they will harm their business and the prospects of employees.
Only time will tell if the government takes any action.
