Restructures and fire and rehire

Changing terms of employment

If an employer wants to change its employment contracts but the affected employee(s), or their trade union through collective agreement, don’t agree, the employer can dismiss those employees and offer them re-engagement under the revised terms that were not initially accepted. This practice is commonly known as “fire and rehire”.

This process is typically a last resort, as it carries clear risks of breach of contract, failure to consult (where 20 or more employees are affected), and/or unfair dismissal claims in an Employment Tribunal.

The new position under the ERA 2025

The Employment Rights Act 2025 has now been enacted and will significantly restrict the use of fire and rehire, although much of the underlying detail has been left to secondary legislation and remains subject to consultation. The changes are expected to come into force on 1 January 2027 and will apply irrespective of the number of employees involved.

The government’s original proposal was to make it automatically unfair to dismiss an employee for refusing any variation to their employment terms. This was subsequently watered down. Under the Act as enacted, a dismissal will be automatically unfair where the reason (or principal reason) is either that the employee refused to agree to a “restricted variation”, or that the employer wished to dismiss and re-engage the employee (or engage someone else) under a varied contract containing a restricted variation to carry out substantially the same duties.

A “restricted variation” covers changes to the following core terms:

• Pay (including pension)
• Hours of work
• Shift patterns
• Time off / annual leave
• A provision allowing the employer to change any of the above terms at a later date without the employee’s express consent — attempting to introduce such a unilateral variation clause in relation to a restricted term is itself treated as a restricted variation, and employers are prohibited from varying contracts to insert one.

The financial difficulties exception

An employer facing financial difficulty could make a restricted variation without it being automatically unfair, but this exception is expected to apply only in very limited circumstances. It is aimed at employers in very serious financial distress — effectively on the brink of insolvency — and routine cost-saving measures during a difficult trading period are unlikely to suffice. The employer must also show that it could not reasonably have avoided the variation, that it has complied with the (to-be-updated) Code of Practice on Dismissal and Re-engagement, and that it has explored alternatives.

Even where the exception is met, the dismissal is not automatically fair: the tribunal will still assess whether the dismissal was fair in all the circumstances, including any consultation carried out and anything offered to the employee in return. There is a slightly different financial difficulties test for public sector employers. This exception should be approached with considerable caution.

Non-restricted variations

It will not be automatically unfair for an employer to dismiss and re-engage employees to change terms that are not restricted variations (such as location or job role). However, such a dismissal may still be found to be ordinarily unfair. For these changes, an enhanced ordinary unfair dismissal test applies: the tribunal must specifically take into account the reason for the variation, any individual or collective consultation, and anything offered to the employee in return for agreeing to the change. These enhanced protections take effect at the same time as the restricted-variation rules.

“Fire and replace”

The Act also targets “fire and replace”. An employee will be treated as automatically unfairly dismissed where they are dismissed and replaced by a self-employed contractor, an agency worker, a worker who is not an employee, or any other individual who is not employed by the employer but who performs substantially the same work.

Impact

The intention is to protect employees from dismissal in these circumstances and to strengthen their negotiating position when employers seek to amend their contracts of employment. It will become considerably more difficult for employers to change core employment terms, though the final position is not as restrictive as originally proposed. Every employer will need to exercise considerable caution when approaching contractual variations.

It is also worth noting that the government is reducing the qualifying period for ordinary unfair dismissal claims from 2 years to 6 months. This 6-month qualifying period will apply to claims of unfair dismissal brought by employees where an employer uses fire and rehire to make non-restricted variations to contracts.

Timeline

The Government has issued a revised implementation timetable, with the fire and rehire changes now expected to take effect on 1 January 2027.

Employer actions now

Review your employment contracts and consider whether any proposed changes could be implemented now, before the new rules take effect. The starting point should always be to seek amendments to contracts with employees’ consent. Where this isn’t possible, and changes relate to restricted terms such as pay, holiday or hours, employers could consider fire and rehire before the ERA provisions come into force — but this window is genuinely time-limited, and any programme of contractual change should be started well in advance to complete before 1 January 2027.

Where employers do need to commence collective consultation and nominate or elect representatives, organising a training session for them is a good idea. It helps to provide comfort and direction for the reps, and to ensure that the process kicks off and runs as smoothly as possible. Our legally qualified trainers are very experienced in providing employee rep training and in managing the practicalities of a consultation exercise. This means that we have a good understanding of the common concerns and questions that arise. See details here.