Firing and Rehiring: An agenda for reform

Thanks to Professor Michael Ford QC and Professor Keith Ewing for comments on an earlier draft.

The English judiciary are not averse to the odd pious homily on the solemnity and sanctity of contractual bargains. In the Court of Appeal in Kalwak, for example, the learned judge opined that ‘It is not the function of the court or an employment tribunal to re-cast the parties’ bargain.’ Presumably, it is the job of the court to enforce that bargain. It is one thing for courts to assert the sanctity of contractual bargains when the employer is seeking to circumvent statutory protections by excluding worker status through labyrinthine documents. Yet it is remarkable how the sanctity of the contractual bargain slips from view during serious economic downturns of the kind we are currently experiencing.

Sanctity of contract would demand that current terms and conditions guaranteed by the employment contract should be protected from unilateral downgrading by the employer. If the securing of the contractual bargain means anything, it surely means this. So how can it be that British Gas and British Airways appear to be downgrading contractual bargains for thousands of staff with apparent legal impunity? The Labour Party has expressed some interest in addressing this legal problem. The purpose of this blog is to examine the current legal position, and to suggest some proposals for reform.

Firing and rehiring – the legal position

Formally, at least, the variation of contractually binding terms and conditions is guarded jealously by the courts, and an effective variation depends upon employee consent. The case of Rigby v Ferodo illustrates this point. In Rigby, the mere fact that employees continued working after a purported imposition of inferior conditions by the employer was not sufficient to constitute an implied acceptance of the variation. This would enable the employees to claim damages reflecting the difference between the originally agreed and the degraded terms, to reflect the fact that the original agreement was still binding on the parties. In cases like Rigby where there are ambiguities about consent to the variation, this can be very expensive for employers. To avoid this uncertainty, the more usual approach is for an employer to terminate the existing contracts and to rehire staff on new contracts with reduced terms and conditions of employment. It is the strategy of choice for large well-advised employers like British Gas and British Airways. The employer offers varied terms and conditions to employees, which they are given the ‘opportunity’ to agree to in writing (sometimes with a small carrot, to ensure there is consideration). Anyone who agrees in writing has agreed to the variation. Those who don’t are given notices of dismissal coupled with an offer of re-engagement on a new, and worse, contract. By either route the employees have ‘agreed’ to the new terms.

As cases like Catamaran Cruisers Ltd v Williams demonstrate, dismissal and re-engagement provides a generally safe route whereby the contractual bargain gets lost quickly in the corporate shuffle of business reorganization. It is a question of fact and degree whether fundamental changes to terms and conditions amount to a dismissal (Alcan v Yates [1996] IRLR 327), so the employer might as well put the matter beyond doubt by expressly dismissing everyone with the requisite notice. Under the current legal framework, there are three main elements to determining the lawfulness of such an approach: the contractual position on dismissal (wrongful dismissal); the statutory position on dismissal (unfair dismissal); and the consultation obligations triggered under the redundancy consultation framework (redundancy consultation). Let us deal with each of these in turn.

At common law, the dismissal will invariably be lawful where it is compliant with the relevant notice periods. The common law restrictions on the prerogative to dismiss are still light as a feather, in much the same way as the foundational cases at the turn of the twentieth century such as Addis v Gramophone Co.

Where there is a dismissal followed by re-engagement, this does not preclude there being a ‘dismissal’ within the meaning of Section 95 (1) (a) of the Employment Rights Act 1996. Where there is a ‘dismissal’ and an employee qualifies for statutory unfair dismissal protection, e.g. she has the requisite two years’ continuous employment, the dismissal can be challenged under the unfair dismissal legislation. Such dismissals will generally fall within the scope of ‘SOSR’ (Some Other Substantial Reason’) dismissals. As a ‘potentially fair’ reason for dismissal, the tribunal will then scrutinise the dismissal under the ‘band of reasonable responses’. In Catamaran Cruisers Ltd v Williams, the tribunal had effectively used a ‘necessity’ approach under the unfair dismissal jurisdiction: was it economically necessary for the employer to implement such significant changes to the employees’ terms in order to ensure the survival of the business? The EAT rejected this strict approach as unsupported by the authorities, and it remitted the case to the tribunal for it to use a more balanced approach to the employer’s and employee’s interests, taking into account the input of the trade union into the process and the extent to which other employees had accepted the new terms. The effect of Williams was to give a more standard deferential approach to the determination of unreasonableness. Even if the dismissal is found to be unfair because of a procedural defect in the dismissal process, levels of compensation are likely to be low because the tribunal may well conclude that the employee would still have been dismissed even if it had acted reasonably.

Finally, and perhaps surprisingly, these dismissals may also be subject to the redundancy consultation procedures under Section 188 Trade Union and Labour Relations (Consolidation) Act 1992 (TULRCA) 1992, so long as the employer is proposing to dismiss 20 or more employees within a 90-day period in order to effect changes. The legal duties of collective consultation in Section 188 TULRCA are quite extensive, and they are also backed by penal sanctions. The European Court of Justice has offered a wide interpretation of redundancy, so that it now extends to dismissal for a reason ‘not related to the individual concerned’ (see now Section 195 TULRCA 1992) and this is very likely to encompass the situation in many of these cases. This has the potential to provide trade union representatives with some legal leverage in the consultation process, given the legal duties to consult in good faith with a view to reaching an agreement (although strike action may be a more effective intervention in many of these cases where the employer is determined to see the contract changes through).

In short, a determined employer with the right legal advice can achieve its goal of reducing terms and conditions with relative ease. English law provides the signposts to navigate the way, abetted by a wide scope for legally compliant business reorganization dismissals. In other words, the contractual bargain is sacrosanct in English law except when it runs up against the employer’s powers of dismissal, the totemic managerial prerogative of the English common law.

How the law should be reformed

What can the law do to improve this state of affairs and to make good on protecting the parties’ bargain? Legal reform must tread a delicate path. If the restrictions on ‘dismissal and re-engagement’ become too onerous, this creates incentives for employers either to restrict or even cease business operations and become insolvent. In these situations, the cure is worse than the disease. Consequently, a simple prohibition would be unworkable and counterproductive. The following measures should be considered in any future reform legislation on ‘dismissal and re-engagement’ strategies:

• The first measure is to clarify the current statutory position under Section 145B and the making of direct contractual ‘offers’ to workers where there is a recognised trade union. This provision attaches financial penalties to ‘offers’ where it is the employer’s ‘sole or main purpose’ that terms and conditions of employment will not or will no longer be determined by collective agreement. As Section 145D suggests, the tribunal may make an inference that the employer has a prohibited purpose where the employer is not acting in accordance with the agreed arrangements for dispute resolution in a procedure agreement. It should be a clear statutory policy that the employer honours its own procedural commitments owed to the recognised trade union under a collective agreement.Section 145D should be modified so that a failure to follow agreed dispute resolution procedures would give rise to an irrebutable presumption of prohibited purpose under Section 145B. This would support genuine collective negotiations about the economic state of the company, and it would deter the employer going over the head of the union and directly to the workforce before it has exhausted its negotiation procedures with the union.
• ‘Dismissal and re-engagement’ dismissals should give rise to ‘day 1’ scrutiny under the unfair dismissal legislation. This ‘day 1’ approach is justified by the serious public policy issues these dismissals raise in terms of the ‘sanctity of contracts’ and the wider economic consequences of in-work poverty. These considerations also support ‘interim relief’, maintaining the contracts in place pending a full hearing on the merits. Where these dismissals are adjudged ‘unfair’, the primary remedy should be reinstatement on the basis of the ‘core’ elements of the wage-work bargain. This does not preclude the scope for flexible adjustment of work organisation in the event of reinstatement. As cases like Cresswell v Inland Revenue demonstrate, the general duty of contractual cooperation requires both parties to engage constructively with new challenges and technological developments in the workplace.
• The unfair dismissal legislation should specify that dismissals are unfair where the employer had reasonable economic alternatives open to it such that it could have avoided the result. This would be to reinstitute the original tribunal’s approach in Williams.
• The unfair dismissal legislation should also specify that it is relevant to the fairness determination that the employer can demonstrate that it has consulted with a representative trade union and the trade union is supportive of the employer’s proposed course of action. Following the approach of Langstaff J. in Garside and Laycock v Booth, the statutory specification of relevant factors should also draw attention to the ‘equity’ of wage cuts in determining the overall reasonableness of the employer’s conduct in dismissing employees. As Langstaff J. has said, the tribunal ‘also has to determine the question, “in accordance with equity.” That word may have a particular force in circumstances where for instance an employer proposes cuts in the wages of the workforce. It may be highly relevant to a decision as to fairness for a Tribunal to consider upon whom of the workforce those cuts would fall.’ ([23]). There would be a value in providing a more structured enquiry, laying out the relevant factors such as this in legislation, rather than leaving this to be developed through case law.

• Section 188 should be extended to ‘workers’ and not only ‘employees’; the numerical thresholds for triggering consultation obligations should be reduced; and legislation should state explicitly that no notices of dismissal can be given until the consultation process is completed – as EU law requires anyway – see Balkaya v Kiesel Abbruch und Recycling Technik GmbH [2015] IRLR 771 and Junk v Kuhnel.
• Legislation should prohibit the use of wide contractual powers that enable employers to vary terms and conditions unilaterally, as in Bateman v ASDA. While such clauses do not appear to have been widely used in practice, restrictions on ‘dismissal and re-engagement’ may well lead to their rediscovery and use. While such clauses are subject to the implied term of trust and confidence, the normative review standards under the implied term are relatively uncertain and unlikely to provide an effective practical tool to prevent abuses of power. Unilateral variation clauses subvert the general requirement of reciprocity that underpins all bilateral contracts, and such terms should be treated as void through statute.
• The government should seek data on the extent to which employers have used ‘dismissal and re-engagement’. This should inform its public procurement decisions in the award of public contracts. The government should examine the scope for barring access to government support and business loan schemes where employers have used ‘dismissal and re-engagement’ dismissals above a certain threshold related to the size of the company. The data on ‘dismissal and re-engagement’ dismissals should be published on the Department for Business, Energy and Industrial Strategy (BEIS) website, to ensure that company responses to the pandemic are public and transparent.

In certain circumstances, ‘dismissal and re-engagement’ may be unavoidable. Where it is a genuine last resort, it should be permitted by the legal framework because the alternative outcomes may be much worse for the affected workers. The current position is far too permissive, however, in allowing ‘dismissal and re-engagement’ without effective independent scrutiny of the employer’s decision-making. If we are to take contractual bargains seriously, this must hold good for employees as much as employers. Otherwise, the solemn legal rhetoric about sanctity of contract starts to have the whiff of hypocrisy.