Tesco Fire and Rehire Case: UK Supreme Court Blocks “Permanent” Pay Cuts

Most employers proceed on the basis that contractual terms can be altered if they are prepared to terminate employment and offer re-engagement. The Supreme Court of the United Kingdom has clarified that this assumption does not hold where termination is used to defeat a contractual entitlement.

In Tesco Stores Ltd v Union of Shop, Distributive and Allied Workers, the Court held that an employer could not exercise its contractual right to terminate employment for the purpose of removing a benefit expressly described as “permanent,” notwithstanding the existence of a notice provision.

The legal position is therefore more constrained than often assumed. Dismissal and re-engagement remains a recognised mechanism in UK employment law, but its use is limited where it would undermine the substance of the contractual agreement.

In such cases, the courts may restrict how termination rights are exercised, exposing employers to injunction risk and ongoing contractual liability.

Background to the Dispute

The dispute originates from a 2007 restructuring by Tesco Stores Ltd, during which employees were incentivised to relocate between distribution centres.

As part of that arrangement, Tesco agreed to enhanced remuneration, referred to as Retained Pay, which was incorporated into individual employment contracts. The entitlement was expressly framed as a permanent feature of those contracts and subject to variation only by mutual consent.

In 2021, Tesco sought to withdraw that entitlement. Employees were offered a financial inducement to accept revised terms. Where consent was not obtained, Tesco proposed to terminate existing contracts and offer re-engagement on amended terms excluding Retained Pay.

Employees, supported by Union of Shop, Distributive and Allied Workers, commenced proceedings in the High Court seeking declaratory and injunctive relief. The High Court granted an injunction restraining dismissal.

That decision was overturned by the Court of Appeal, which held that Tesco’s contractual right to terminate on notice remained effective.

On further appeal, the Supreme Court of the United Kingdom unanimously allowed the employees’ appeal and restored the injunction.

The Court concluded that the employer’s right to terminate could not lawfully be exercised for the purpose of removing the contractual entitlement to retained pay.

How Fire and Rehire Is Limited in Practice

The decision does not remove fire and rehire as a lawful mechanism. It establishes where its use is legally constrained. Where dismissal is deployed to remove a contractual entitlement intended to endure, the courts may restrict the exercise of that right.

Guidance from Advisory, Conciliation and Arbitration Service reflects that dismissal and re-engagement remains a recognised route where agreement on contractual changes cannot be reached. The effect of this judgment is to define the boundary of that approach in contractual terms rather than policy.

The dispute turned on a conflict within the same contract: a general right to terminate on notice alongside a specific commitment that retained pay would remain permanent.

The Supreme Court of the United Kingdom rejected the interpretation that “permanent” meant no more than “until termination.” Interpreted in that way, the promise would carry no practical effect, as it could be removed immediately through dismissal.

Instead, the Court imposed a limitation on how the termination right could be exercised. It concluded that dismissal could not be used for the purpose of removing retained pay.

That restriction arose not from an express clause, but from what was necessary to give the contract coherent meaning. Without it, the promise of permanence would be deprived of substance.

The practical effect is a more disciplined approach to contract variation. Where a benefit is framed as enduring and forms part of the basis on which employees accepted contractual terms, it cannot be removed simply by terminating the contract and offering re-engagement. Termination rights remain available, but their use is constrained where it would defeat the underlying contractual arrangement.

From a compliance perspective, the risk is clear. Employers relying on dismissal and re-engagement to vary contracts may face injunctions and ongoing liability where the change targets a protected contractual benefit.

The judgment also confirms that collective agreements, once incorporated into employment contracts, can create binding obligations that persist beyond their original commercial context.

Business Impact and Wider Significance

The practical risk is not that fire and rehire is unlawful. It is that it may fail in the circumstances where businesses rely on it most when seeking to remove contractual benefits that have been defined as enduring or fundamental to the employment relationship.

Employers cannot assume that termination provides a reliable mechanism to reset contractual terms. Where benefits are expressed as permanent or form part of a negotiated arrangement, the courts may restrict the use of dismissal to prevent those rights from being undermined.

In those situations, attempts to impose change through termination and re-engagement can expose the business to injunctions and ongoing contractual liability. The decision also highlights the long-term impact of contractual drafting.

Terms introduced to achieve short-term operational objectives such as relocation incentives or transitional pay protections can become binding commitments that persist well beyond their original purpose. Once embedded, they may not be capable of removal through unilateral action.

More broadly, the case reflects a structural tension within UK employment law between contractual certainty and employer flexibility.

While termination remains a core contractual right, its use as a tool for contract variation is not unrestricted. Where its exercise would defeat a substantive contractual promise, the courts may intervene to preserve the integrity of the agreement.

The result is a clearer legal boundary around how contractual change can be achieved, and a more risk-sensitive environment for employers considering dismissal and re-engagement as a route to variation.

What This Means for Employers Now

The ruling in Tesco Stores Ltd v Union of Shop, Distributive and Allied Workers ([2024] UKSC 28) establishes a clear principle, but its application will turn on the wording and structure of individual contracts.

In practice, employers are likely to review existing agreements for provisions that indicate permanence, restrict variation to mutual consent, or were introduced as part of a negotiated arrangement. Where such features are present, reliance on termination and re-engagement to implement change may carry a material risk of challenge.

From a compliance perspective, the immediate exposure is to injunctive relief and continuing contractual liability where dismissal is used to remove a protected benefit. Legal teams will need to assess not only whether termination is permitted in form, but whether its purpose could be characterised as defeating a contractual right.

The decision shifts the focus back to how contracts are written and managed in practice. Clearer variation clauses and earlier engagement with employees are likely to matter more where changes are planned. How far the courts take this will depend on future cases.