Tesco has lost a high-profile “fire and rehire” case in the UK’s supreme court over proposals by the supermarket to let some staff go and re-employ them on lower pay.

The dispute with the shopworkers’ union Usdaw began in 2021 and centred on moves to use firings or the threat of dismissal to remove retention payments awarded years earlier to some workers at distribution centres.

The UK’s highest court ruled that Tesco Stores Ltd could not terminate the employment contracts of staff to stop them receiving the retention payments and then rehire them on new contracts without the top-up.

The case has been closely watched because it raises wider questions about the practice of “fire and rehire” and an employer’s right to terminate a contract by giving notice to the employee and then re-employing them on less generous terms.

The Labour government, which is due to unveil new employment rights legislation, has said it would ban exploitative zero-hours contracts, end fire-and-rehire practices, and introduce basic employment rights from day one on the job. It has yet to publish details of its proposals.

The Tesco lawsuit centres around “retained pay” that the retailer gave to staff in 2007 when it closed a number of distribution centres and wanted to encourage existing staff to relocate to other sites.

The supermarket agreed with Usdaw that it would provide the top-up payments to staff who agreed to relocate and the right to receive them was then incorporated permanently into staff employment contracts. A separate clause in the contracts gave Tesco a right to dismiss the employee without cause, on provision of specified notice.

However, in 2021, Tesco sought to end the retained pay and told staff if they did not agree to the removal, they would be dismissed and rehired on lower-paidcontracts with no right to a top-up included.

The move sparked a legal battle between Tesco and the Usdaw-backed workers, who refused to give up their retained pay and sought an injunction preventing the termination of their contracts. Tesco won at the court of appeal and the supermarket staff appealed to supreme court which has now found in their favour.

In its ruling, the supreme court said the offer of permanent retained pay was intended as an inducement to employees to make permanent changes to their lives by relocating to the new distribution centres rather than accepting redundancy.

Lord Burrows and Lady Simler, justices of the supreme court, said in their ruling: “It is inconceivable that the mutual intention of the parties was that Tesco would retain a unilateral right to terminate the contracts of employees in order to bring retained pay to an end whenever it suited Tesco’s business purposes to do so.”

The judges said it had been up to Tesco in 2007 to negotiate an end date for the entitlement to retained pay, but it had not done this.

Usdaw said it was “delighted to get this outcome, which is a win for the trade union movement as a whole”.

Tesco said it accepted the supreme court’s ruling: “Today’s judgment relates to a contractual dispute brought on behalf of a very small number of colleagues in our UK distribution network who receive a supplement to their pay.”

The supermarket added: “This supplement was offered many years ago as an incentive to retain certain colleagues and the vast majority of our distribution colleagues today do not receive this top-up.

“In 2021, we took the decision to phase it out. We made a competitive offer to affected colleagues at that time, and many of them chose to accept this. Our aim has always been to engage constructively with Usdaw and the small number of colleagues affected.”

A spokesperson for the Department for Business and Trade said: “We are committed to updating Britain’s employment protections so they are fit for our modern economy and the future of work.

“We will be bringing forward legislation soon to put an end to unscrupulous fire and rehire practices, which have no place in a modern labour market.”