The Employment Rights Act has ‘fire and rehire’ in its sights

There are only three ways to change a contract: (one) by agreement; (two) by imposing the change and hoping the other party accepts what you’ve done; or (three) by issuing notice to terminate the contract and offering continued employment on new contractual terms to start immediately after the original contract ends. This third route has gained the moniker ‘fire and rehire’. It has attracted negative commentary, and is about to be heavily restricted by changes being brought in by the Employment Rights Act 2025.

The current position on fire and rehire

Currently, in a case of fire and rehire, the termination of the existing contract can be a fair dismissal where there is a sound business reason for the change; a fair process is followed; and the dismissal is, in the circumstances, reasonable. Since July 2024, employers have also been required to comply with the statutory Code of Practice on Dismissal and Re-engagement. While this does not prevent the use of fire and rehire, an unreasonable failure to comply with the Code can lead to an ‘adjustment of compensation’ of up to 25% in cases of unfair dismissal following a “fire and re-hire” dismissal.

What is changing due to the Employment Rights Act?

The Employment Rights Act introduces changes that significantly restrict employers’ ability to fire and rehire.

A new type of automatically unfair dismissal will be introduced, where an employee is dismissed for refusing to agree to a “restricted variation”. The scope of restricted variations is wide. It includes those related to pay or pensions, hours, leave entitlement and shift patterns, as well as the introduction of contract variation clauses.

The dismissal will be automatically unfair unless the employer is able to use what is colloquially known as the ‘financial difficulties exemption’. To do this, they must show that the reason for the restricted variation was to eliminate, prevent or significantly reduce, or significantly mitigate the effect of, any financial difficulties which, at the time of the dismissal, were affecting, or were likely in the immediate future to affect, the employer’s ability to carry on the business as a going concern and, in all the circumstances, the employer could not reasonably have avoided the need to make the restricted variation. Where the employer is a public sector employer (other than a local authority), the ‘ability to carry on the business as a going concern’ is replaced by ‘the financial sustainability of carrying out the employer’s statutory functions’.

The bar to meeting this exemption appears to be a high one. It is anticipated that it will only apply in very limited circumstances.

The Act will also introduce a further new right of automatic unfair dismissal where, subject to certain criteria, an employee is dismissed to enable the employer to replace the employee with someone who is not an employee, such as a contract or agency worker. Again, there will be a financial difficulties exception (but this will be available only in very limited circumstances).

Finally, even where the proposed contractual variation is not a restricted variation, or where it is a restricted variation to which the financial difficulties exemption applies, any tribunal will still need to assess whether the dismissal is unfair under the existing principles. And when it does so, there is a new requirement to consider the “fairness factors”, in addition to the reason for the variation. These factors include the consultation process followed with the employee and any trade union, offers made to the employee in return for agreeing to the changes, and any other matters specified in regulations.

When will this change take effect?

1 January 2027.

What is the consequence of the severe restriction on the ability to “fire and rehire”?

As we set out at the outset of this article, there are only three ways to change a contract. If the third route is severely limited, then you are left with agreeing the change or imposing the change and hoping the employee accepts it. Obviously, agreeing changes to terms and conditions of employment is always the best option where this can be achieved. From 1 January 2027, where agreement to the proposed changes cannot be achieved, the employer is potentially stuck – imposing the change and hoping for the best is clearly a sub-optimal option when an employee has already made clear they are not prepared to agree to the change. With the severe restriction of “fire and rehire”, an employer who cannot agree contractual changes with the employee may be stuck with the original contract.

If the original contract includes a variation clause, the employer might be able to rely on this to make the desired change without the employee’s agreement. The legality of this will depend on the precise terms of the variation clause and the precise nature of the change the employer is making. A variation clause has to be used lawfully, so not arbitrarily, vexatiously, capriciously or manifestly unreasonably. Care needs to be taken.

What employers should do now

Employers should:

Check whether template contracts have existing variation clauses. If they do, then that might provide some comfort. If they don’t, then adding such clauses to your templates would be prudent.
Consider whether you can build a degree of flexibility into your template contracts now in relation to key terms such as working hours, shift patterns, rotas etc. to provide flexibility for changes within the terms of the existing contract.
Consider what you say about pay reviews. If an employee does not have a contractual entitlement to a pay increase, then going forward employers could make the offer of a pay increase conditional on the employee accepting changes to their terms and conditions to support the employer’s ability to obtain agreement to any future changes.
Consider whether any contractual changes should be made before these restrictions come into force, although in many cases it may already be too late to make changes fairly using “fire and rehire” under the existing rules
Ensure that systems are in place to ensure that any contractual changes – not covered by a variation clause or permissible within the terms of the existing contract – are made following thorough, good-faith consultation
Train managers so that they are aware of the change in the law

If you’d like to have a discussion that’s more specific to your particular circumstances, feel free to contact a member of our Employment team.

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