The concept of “fire and rehire” is a catchy name for the process of dismissing employees and subsequently re-engaging them on changed terms and conditions of employment, usually in a scenario where the employer has been unable to secure the employees’ express agreement to the changes.

It throws up many tricky legal issues, including in relation to redundancy, the need to collectively inform and consult where 20 or more employees are involved, and the risk of unfair dismissal claims. It is also understandably unpopular with trade unions, and there have been several recent high-profile disputes (e.g. British Airways and British Gas) involving this tactic over the course of the Covid pandemic.

While the current ACAS guidance on fire and rehire highlights that it is an extreme step that can damage staff morale, trust, and working relations, the government has clarified that it does not intend to legislate to prevent employers from firing and rehiring their staff.

In the recent case of USDAW & others v Tesco Stores Limited, an injunction was granted by the court to prevent the use of fire and rehire by Tesco.

Facts of the Tesco case

The trade union USDAW is recognised by Tesco for collective bargaining purposes and had a historic agreement for “Retained Pay” which had become a contractual entitlement for employees.

The “Retained Pay” concept had been included as an alternative to lump sum redundancy payments and a relocation incentive, at a time when Tesco had been reorganising its distribution centres. A joint statement at the time had described the payment as “guaranteed for life” and Tesco had been clear with staff that it would remain for as long as they were employed in their roles.

Despite those assurances, in 2021 Tesco attempted to remove the benefit by offering a lump sum of 18 months’ Retained Pay in exchange for giving it up. Should the employees not agree to that trade, dismissal and re-engagement was threatened as an alternative.

USDAW sought an injunction and asked the High Court to declare that the employees’ contracts contained an implied term preventing Tesco from exercising its right to terminate employment for that specific purpose.

High Court decision

The High Court agreed with USDAW and granted the injunction. Damages were held not be an adequate remedy. A reasonable person would interpret the word “permanent” in this context to mean “for as long as the relevant employee is employed by Tesco in the same substantive role”. Tesco had deliberately emphasised its permanence when the contract was negotiated, rather than include a long-stop date.

As such, the Hight Court held that there was an implied term preventing Tesco from removing the employees’ permanent right to the Retained Pay by exercising its right to terminate the employment contracts on notice. This was deemed reasonable in the “extreme” facts of the case and was a limit (rather than a contradiction of) Tesco’s contractual termination right.

Tesco remained free to terminate the employees’ employment in other genuine scenarios, such as redundancy or gross misconduct, even if the knock-on practical effect was termination of the Retained Pay which had been guaranteed.

Is fire & rehire now too risky?

The legal risks of fire and rehire, as a means of imposing changes to employment terms, remain broadly the same as they were before the Tesco case. The specific facts, including the existence of a permanent contractual pay term that was collectively agreed, mean that Tesco had less contractual termination flexibility than would usually be the case for an employer.

Outside of this context, there may be a commercial imperative for employers to implement contractual changes as quickly as possible. Factors such as a business downturn and subsequent need to reduce overheads may drive the process and the timing.

In the face of employee resistance, terminating an existing contract on notice and offering continued employment on new terms may still be an option for employers to explore, even if it is best used as a last resort.

While employers will obviously wish to avoid damaging the employment relationship and avoid unfair dismissal claims, an offer of re-engagement will at least assist with arguing that there has been an opportunity for employees to mitigate their losses. However, we would recommend a full assessment of the background context and the risk of employment claims before the decision to proceed with fire and rehire is made.  

For further practical guidance on minimising the risks that arise during the process of dismissal and re-engagement of an employee, you can sign up here for our HRLaw training – changing terms and conditions (“fire & rehire”) on 29 March 2022.

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