Recent Supreme Court judgments with significant implications for employment law

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In recent months, while many practitioners have been focused on the Employment Rights Bill 2024, the Supreme Court has handed down two judgments with significant implications for contract and employment law, National Union of Rail, Maritime and Transport Workers and another v Tyne and Wear Passenger Transport Executive T/A Nexus [2024] UKSC 37 and Tesco Stores Ltd v Union of Shop, Distributive and Allied Workers and others [2024] UKSC 28.

Nexus

In 2012, Nexus and two unions, Unite the Union and the National Union of Rail, Maritime and Transport Workers, agreed to consolidate an existing 25.5% basic pay uplift (misleadingly called a “productivity bonus”) into basic salary. This agreement was reflected in a document known as “the letter agreement”.

The unions then said that the effect of this agreement was that the 25.5% “productivity bonus” had been consolidated not only into basic pay but also into the shift allowance, which, historically, had been calculated with reference to basic pay. Nexus disagreed and did not pay its employees the increased shift allowance.

In 2015, 70 Nexus employees brought a complaint of unauthorised deduction from wages in respect of the underpaid shift allowances. These proceedings became known as the Anderson proceedings (after the name of the lead claimant). The Anderson claimants succeeded in the employment tribunal. However, the remedy hearing was stayed pending appeals by Nexus to the EAT and Court of Appeal. Both appeals were unsuccessful.

With dogged determination Nexus then brought fresh proceedings in the Chancery Division of the High Court claiming rectification, albeit against the two unions, not its employees. The issues for the Supreme Court were whether the Court of Appeal was right to hold (i) that rectification is not available for a collective agreement which is not intended to be a legally enforceable contract and (ii) that Nexus had sued the wrong defendants.

In a unanimous and compelling decision delivered by Lord Leggatt and Lady Simler, the Supreme Court began by summarising the principles of rectification. The test for rectification is subjective. It is a discretionary remedy, the effect of which is to alter legal rights, because by correcting mistakes in documents, the documents must thereafter be interpreted in accordance with the reinterpreted wording. [26-35, 45].

The Supreme Court departed from the Court of Appeal by holding that although the letter agreement between Nexus and the unions was not a legally enforceable contract (by operation of s.179(1) TULR(C)A 1992), it nonetheless created legal rights for the employees into whose contracts its wording was incorporated. In such circumstances the courts could make an order for rectification [48].

However, the Supreme Court agreed with the Court of Appeal that Nexus had aimed at the wrong target. Rectifying the letter agreement would not affect legal rights between Nexus and the unions but rather between Nexus and its employee [55].

Moreover, while the Supreme Court agreed with Underhill LJ’s decision that an employment tribunal had no power to order rectification [71, 74], it held that “where the conditions for rectifying a document are met, the document may be treated for the purposes of determining the parties’ legal rights as rectified without a formal order for rectification” and that the employment tribunal could do this. This reference to the practice in the employment tribunal of a judge making findings of fact and construing contracts in order to determine contract and wages claims should not, in this author’s opinion, be understood as anything more than that.

The Supreme Court also twice referred to its recent decision of Tesco: first, to make the point that Nexus could sue its employees using the representative procedure available under CPR Part 19 [59] as had been done in Tesco, and second, when suggesting that, if relevant, it might be permissible to consider the objective intentions of employees and trade union negotiators when construing the contract of employment, because unless there is reason to the contrary, it can usually be assumed that the objective intentions of the trade union negotiators are the same as those of the employees [43].

Tesco

That brings us to Tesco, which was handed down just two months before Nexus, and in which the employer also tried to wriggle out of a collective agreement.

In 2007 Tesco closed some of its distribution centres, expanded others, and opened a new site. It wanted to retain experienced staff to work at the new and expanded distribution centres, so instead of making staff at the closed sites redundant, it offered them “retained pay” as an incentive to encourage them – or, using the words of the Supreme Court, to induce them – to relocate. The retained pay offer was recorded in a collective agreement with its recognised union, the USDAW.

15 years later, in 2021, Tesco announced its intention to remove retained pay arrangements. Employees on retained pay contracts were offered 18 months’ retained pay in exchange for agreeing to relinquish their right to retained pay; if they did not agree, they would be dismissed and re-engaged on the same terms but without the retained pay term (otherwise known as “fire and rehire”).

At first instance Ellenbogen J granted a final injunction restraining Tesco, directly or indirectly, from giving notice to terminate the contract of employment for the purpose of removing or diminishing the employee’s right to receive retained pay. Bean LJ in the Court of Appeal overturned this decision. On appeal, the Supreme Court’s task was contract interpretation. It restored Ellenbogen’s decision.

In respect of its interpretation of the contractual agreement, the Supreme Court held that:
a. The purpose of the retained pay term was to induce the employees to relocate [44, 56, 110, 148];

b. Assessed objectively, the mutual intention of the parties was to preserve retained pay for so long as the employees remained employed by Tesco subject to the qualifications that (i) it could be changed by mutual consent (ii) it would cease on promotion and (iii) it would be adjusted when the employee requested a change to shift patterns [40, 44, 48];

c. There was therefore a conflict between the employee’s “permanent” entitlement to retained pay and Tesco’s express contractual right to terminate the contract on notice, meaning it was necessary to imply a term that Tesco could not exercise its right to terminate for the purpose of removing or diminishing the retained pay term [43, 48];

d. This implied term qualified rather than contradicted Tesco’s right to terminate on notice, meaning Tesco could still dismiss employees for unrelated reasons including lack of capability, misconduct, or redundancy [46, 48)].

In respect of whether to grant an injunction which would amount to indirect specific performance, the Supreme Court held that it would be appropriate to do so, despite this running contrary to the established principle that the courts will generally not grant an injunction which requires the employer to continue employing an employee.

In deciding that on the facts of this case it was just to grant such an injunction, the Court placed particular weight on its finding that damages would not be an adequate remedy [77-78, 80]. Three judges (Lady Simler and Lord Burrows, with whom Lord Lloyd-Jones agreed) held that one of the reasons damages would be inadequate was that they would not compensate for the claimants’ loss of job satisfaction, anxiety and upheaval: “if this is to be regarded as, to some extent, side-stepping Addis v Gramophone Co Ltd [so be it” [78].

Addis v Gramophone Co Ltd [1909] AC 488, which established the principle that damages for wrongful dismissal are not recoverable for non-pecuniary loss (e.g. loss of job satisfaction, or anxiety caused by losing one’s job), cannot be “side-stepped” without causing a few ripples. This unexpected element of Tesco, along with the Supreme Court’s decision to grant an injunction which amounts to indirect specific performance, will need to be assessed in the coming years. In the author’s opinion, the courts are likely to limit its interpretation to mean that mental distress may be one factor, amongst others, which judges may take into account when deciding whether to grant injunctive relief.

To read the full case summary on National Union of Rail, Maritime and Transport Workers and another v Tyne and Wear Passenger Transport Executive T/A Nexus [2024] UKSC 37, click here.

To read the full case summary on Tesco Stores Ltd v Union of Shop, Distributive and Allied Workers and others [2024] UKSC 28, click here.