Tesco Stores Ltd v Union of Shop, Distributive and Allied Workers and others

Factual and Procedural Background

In 2007, Company A decided to restructure its distribution network, which required closing certain centres and opening new ones at different locations. To ensure the transfer of experienced employees rather than losing them to redundancy, Company A negotiated with Union A to create an incentive dubbed “retained pay.” Employees who relocated were told that this additional pay would continue “for as long as they were employed by Company A in their current role,” and many claimants relied on that assurance when moving home and securing mortgages.

On 18 February 2010, Company A and Union A signed a collective agreement containing a “retained pay clause” stating that retained pay “will remain a permanent feature of an individual’s contractual entitlement,” subject to limited exceptions. Although the collective agreement itself was not legally binding under the Trade Union and Labour Relations (Consolidation) Act 1992, its terms were incorporated into each claimant’s contract of employment. Those contracts also contained a standard termination clause allowing Company A to dismiss an employee on notice.

In January 2021 Company A announced plans to remove retained pay. Employees were told they could agree to the change or face dismissal followed by re-engagement on new terms excluding retained pay. The claimants contested this proposal, leading to the present litigation and subsequent appeal.

Legal Issues Presented

1. Whether the retained-pay clause, once incorporated into individual employment contracts, prevents Company A from exercising its contractual power to dismiss employees on notice for the purpose of eliminating retained pay and re-engaging them on less favourable terms.
2. Whether an implied term should qualify Company A’s express right of termination so that it cannot be used to defeat the employees’ entitlement to retained pay.

Arguments of the Parties

The opinion does not contain a detailed account of the parties' legal arguments.

Table of Precedents Cited

Court's Reasoning and Analysis

1. Express terms construed separately. The termination clause clearly empowered Company A to dismiss employees on notice without qualification. The retained-pay clause just as clearly promised that retained pay would continue for as long as the employee remained in post.

2. Necessity for an implied term. Reading the two clauses together would allow Company A to undermine the very purpose of retained pay by dismissing and rehiring employees at will. To avoid rendering the retained-pay promise illusory, the court implied a term restricting the exercise of the termination power when its purpose is to strip employees of retained pay.

3. Business context and inducement. Retained pay was negotiated to induce experienced staff to relocate instead of accepting redundancy. The employees relied on that promise in making significant life decisions, such as taking on mortgages. A construction permitting Company A to revoke the benefit unilaterally through dismissal would defeat the parties’ commercial objective, something no reasonable person in their position would have intended.

4. Limited use of wider good-faith doctrines. While acknowledging parts of Judge Leggatt’s discussion, the concurring opinion expressly declined to adopt a broad principle that all contractual powers are generally constrained by duties of good faith or non-arbitrariness, noting potential conflict with earlier authority.

5. Role of collective-agreement intentions. The court accepted that, where a collective agreement is incorporated into individual contracts, the objective intentions of the original negotiating parties constitute part of the factual matrix, supporting the implied limitation on Company A’s termination power.

Holding and Implications

APPEAL ALLOWED.

Company A may not lawfully dismiss the claimants on notice merely to remove retained pay and then re-engage them on inferior terms. The decision protects employees’ contractual entitlement to retained pay and underscores the availability of implied terms to prevent an employer from using an express power in a way that frustrates the fundamental purpose of a negotiated benefit. No broad, new duty of good faith was established; the ruling is confined to the specific factual matrix of retained pay as an inducement to relocate.