28/03/2022

P&O Ferries: what does it mean for fire and rehire?

David Sheppard and Sioned Thomas take a look at the legalities of “fire and rehire” practices, recently brought into focus by the P&O Ferries case.

P&O Ferries’ decision to immediately dismiss around 800 of their UK-based crew members by pre-recorded zoom call on 18 March has been strongly condemned across the political spectrum. By his own admission when questioned by a Parliamentary committee on 24 March, P&O’s chief executive confirmed that the company had elected to breach its legal obligations to consult with trade unions, and was offering compensation packages to the dismissed workers.

The company’s failure to comply with the legal duty to consult with trade unions where 20 or more redundancies are proposed has been widely commented on – as was their decision to replace employed crew members with cheaper agency workers, with wages reportedly below the UK national minimum wage. This wholesale replacement of employees engaged on one set of terms and conditions, to be substituted by workers on far inferior terms, brings into renewed focus the legalities of “fire and rehire”.

Fire and rehire: a harsh yet lawful practice

Fire and rehire, or “termination and re-engagement” in HR-speak, is the practice of dismissing employees with notice before offering to re-employ them immediately after termination on different (and usually less generous) terms.  Such dismissals can be fair, even if the employee has a reasonable basis for refusing the new terms (such as lower pay), as long as employers:

  • consult with employees beforehand to try and obtain their consensual agreement to the change in terms
  • have a sound business reason for making the changes which can be supported by evidence.

If consultations reach an impasse and the employer is planning to issue termination and re-engagement notices, employees will be placed in a very difficult situation. They will either lose their job or agree to continue doing the same job for reduced benefits.

Even if their dismissal is unfair, the employees will face lengthy tribunal proceedings, and will have to pay lawyers to bring such claims. Besides, any compensation could be limited, on the basis that the offer of re-engagement was a reasonable opportunity for the employee to mitigate their losses.

With the financial and emotional pressures that the threat of fire and rehire poses on employees, it is a well-known option for businesses that are contemplating significant restructuring and introducing difficult changes to terms and conditions. Although very tough on the workforce, it is in principle an entirely lawful if appropriate consultation has taken place.

Unions challenging the legality of fire and rehire practices

Earlier this year, the Union of Shop, Distributive and Allied Workers (USDAW) won a high court case against Tesco. A group of workers were facing changes to their employment terms resulting in wage reductions.

The workers were contractually entitled to a specific payment referred to as ‘retained pay’ to keep them in the business. Tesco proposed to remove this entitlement, by firing the employees and rehiring them on contracts with no retained pay provisions.

The court found that the workers would lose a significant proportion of remuneration that was currently payable and issued a formal order restraining Tesco from giving notice to terminate the contracts of the employees. In practice, this case did prevent Tesco from ‘fire and rehiring’ a number of employees, but not because the practice itself being illegal. The court’s decision was based on an implied term in the worker’s contracts, that the general right of an employer to terminate employment could not be exercised if the only aim was to remove their entitlement to ‘retained pay’.

This case is significant, as it limits the general common law principle that regardless of any statutory rights to unfair dismissal or consultation, contracts of employment can usually be terminated at any time for any reason, provided notice to terminate is provided in accordance with the terms of that contract.

Relevance of the USDAW ruling on P&O Ferries and beyond

P&O has explained on record to Parliament that it did not commence consultation with the unions because its proposed new agency worker terms would never be accepted. The potential broader reach of the USDAW ruling may also have been a factor – as it creates a principle in common law that contracts of employment in some circumstances can be prevented from being terminated with notice for certain reasons, such as removing entitlements to certain contractual benefits.

You’re maybe wondering – could the unions obtain a court order requiring employees to be reinstated to their roles, and for P&O to comply with its collective consultation obligations? This will again require a significant decision of the high courts or above, as the forced re-employment of previously dismissed employees instead of compensation will conflict against the common law principle that contracts of employment are voluntarily agreed by both employer and employee. The USDAW judgment indicates that the courts may be more willing to qualify this principle, particularly in the exceptional circumstances of the P&O case.

Employees who are found to be unfairly dismissed can seek an order for reinstatement or re-engagement, but these are very rarely given. Even if an order is made, employers can choose not to comply, and pay further compensation to that employee equivalent to 6-12 months’ pay. A court order compelling  employees to return to work will represent a significant new layer of protection to employees under the common law.

What happens next?

As we approach a general election within the next year or so, the issue of fire and rehire will become a major political issue. Last October, the Government blocked a private members’ bill to regulate fire and rehire (limiting it to certain circumstances and place consultation on a statutory footing) on the basis that it believed legislation on this issue was not appropriate.

The P&O situation has led to renewed calls by the Opposition for legislation. An emergency vote in Parliament on 21 March unanimously sought the Government to urgently bring forward a bill outlawing fire and rehire. Conservative MPs were required to abstain from this vote though, so it remains to be seen if political pressure will result in the Government bringing forward any legislation regulating fire and rehire.

Regardless of the legalities of P&O’s actions, the court of public opinion has clearly condemned these kinds of tactics. This highlights that in managing employee relations, employers not only need to focus on the law, but also on the wider potential environmental, social and governance (ESG) implications of their decisions. The prominence of ESG means reputational damage and employee relations is a major factor in determining restructuring decision-making.

Is your business considering making redundancies?

As the P&O case illustrates, clear planning and consultation process is essential when considering redundancies, to avoid financial and reputational damage. Our next (free) webinar, on 5th April 2022, will give guidance on how to collectively consult employees before a redundancy process and arrange effective workforce protection against adverse economic effects. You can sign up here, or get in touch at d.sheppard@capitallaw.co.uk should you have any question.