Background – permanent nature of pay
This decision has wider employment ramifications. I will focus on the pure contract law aspects.
Tesco closed some of its distribution centres in 2007 and opened new ones in different areas. Employees of the old centres were offered redundancy or the option to relocate to the new centres on advantageous terms aimed at retaining experienced staff. Specifically, the relocating employees were given a contractual right to enhanced “retained pay” which was expressly referred to as being “permanent”.
The relocating employees’ right to retained pay was the subject of collective bargaining negotiations between Tesco and USDAW (the workers’ union). During pre-contractual negotiations, Tesco made several statements about the nature of pay, including that it was “guaranteed for life”.
Attempt to fire and rehire
Tesco sought to remove the entitlement to retained pay in 2021. Employees were told that if they did not accept the lump sum as compensation, they would be dismissed and rehired on terms that did not include retained pay.
Tesco argued that the right to retained pay was never intended to be entirely irrevocable; rather, the references to its permanence had been intended to mean that the right could not be removed via collective bargaining with the relevant workers’ union. Tesco’s position was that the employees were entitled to retained pay for as long as their employment continued under those contracts, but that it was entitled to terminate those contracts in accordance with their express terms.
Implied term to the rescue
The court held that allowing Tesco to fire and rehire the affected employees without retained pay would render meaningless the contractual reference to the retained pay being “permanent”. Applying “the usual objective and contextual approach”, the correct interpretation was that the right to receive retained pay continued for as long as the employees remained in the same role.
As a result, it was necessary to imply a term to the effect that Tesco was not permitted to terminate the contracts for the purpose of substituting them with less favourable payment terms.
While the case was unusual in many respects, the outcome was a reiteration of two standard principles of contract law, namely (1) that express terms must be read in accordance with what a reasonable person with all the relevant background knowledge would have them to mean, and (2) that to imply a term by fact, the term must be necessary for business efficacy or be so obvious that it goes without saying.
Judgment: Tesco v USDAW
