Before coming to power Labour committed to ending "fire and rehire" and promised to reform the law to provide effective remedies against abuse, as well as implementing a "strengthened code of practice". Now that it's in government and has published the Employment Rights Bill (the Bill) we know a bit more about its proposals.
So, what's the aim of the government's reforms? In its 'Fire and rehire' Factsheet the government states that it "wants to end unscrupulous fire and rehire tactics that leave working people at the mercy of bullying threats". While it recognises the importance of businesses being able to restructure to remain viable "when there is genuinely no alternative" it states that this must be based on a proper process.
What's the current position?
Changes to terms and conditions of employment can be made following a fair consultation process which either leads to employees agreeing to the change or, where agreement cannot be reached, and the employer has a sound business case for making the changes, by dismissal and re-engagement on the new terms and conditions.
As of 18 July 2024, employers should also follow the statutory Code of Practice on Dismissal and Re-engagement (the Code).
An Order came into force on 20 January 2025 which contains the power for employment tribunals to apply an uplift or reduction in compensation in collective consultation claims where a party fails to follow the Code. The effect of this change is that if a successful protective award claim is brought where the Code applies and an employer or employee has unreasonably failed to comply with it, compensation can be increased or reduced by up to 25%.
The Code provides that "fire and rehire" should only be used as a last resort and that alternatives should be explored by employers. It introduces a requirement to consult for as long as reasonably practicable, states that employers should contact Acas at an early stage before they raise "fire and rehire" with the workforce, and points out that threats of dismissal should not be used to coerce employees into signing new terms and conditions.
What does the Employment Rights Bill say?
The Bill will change the law so that a dismissal is automatically unfair (with no qualifying service needed) if the reason or principal reason is:
- the employer sought to vary the employee's contract of employment and the employee did not agree to the variation; or
- to enable the employer to employ another person, or re-engage the employee, under a varied contract of employment to carry out substantially the same duties as the employee carried out before being dismissed.
As originally drafted, the nature or extent of the proposed variation was irrelevant but during the Bill's passage through the House of Lords the government has limited the protection to a "restricted variation".
What constitutes a "restricted variation"? In essence anything related to pay, hours and holidays and any additional matters specified by the Secretary of State via regulations.
What if the dismissal relates to a non-restricted variation? Employers won't automatically be in the clear. The Employment Rights Act 1996 (the ERA 1996) will be amended to require the employment tribunal to consider various factors, including: the reason for the variation; any consultation carried out with the employee (or appropriate representatives); what was offered to the employee in return for agreeing to the variation; and other matters specified by the Secretary of State via regulations.
There is an exception to this if:
- the employer can show that the reason for the 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 or otherwise to carry on the activities constituting the business; and
- in all the circumstances the employer could not reasonably have avoided the need to make the variation.
Following the Bill's passage through the Lords two new tests have been introduced. These apply for:
- public sector bodies – the exception will apply if the employer faces financial difficulties that are likely in the immediate future to affect "the financial sustainability of carrying out the employer's statutory functions"; and
- local authorities – the exception will apply if financial difficulties have resulted in a "relevant intervention direction" relating to the financial management or governance of the authority.
If the exceptions apply then the dismissal will not be automatically unfair, but the employment tribunal will consider if the dismissal was fair in the circumstances. In doing this, it will consider mandatory factors including whether the employer consulted with the employee and a trade union (if one is recognised) or other employee representatives, and whether the employee was offered anything in return for agreeing to the variation,
What this means is that employers will not be able to change terms and conditions of employment based on a sound business reason for doing so. The employer will need to be in "financial difficulties". We think this will be construed very narrowly given the wording in the government's consultation paper on remedies for fire and rehire which comments that the changed law, "will ensure that employers can only use the practice of fire and rehire if they can demonstrate that they were facing financial difficulties that threatened their viability …e.g. it was the only way to prevent insolvency".
In our experience, it is rare that employers change terms and conditions of employment in circumstances akin to insolvency. What is clear is that the situations in which employers will be able to use fire and rehire will be significantly restricted in future.
In the first draft version of the Bill employers could have dismissed employees and replaced them with non-employees. This loophole will be closed. Dismissal will be automatically unfair when the principal reason is replacing employees with non-employees (agency workers or contractors) carrying out substantially the same activities, unless it's a genuine redundancy situation.
Strengthening remedies
The government issued a 'Consultation on strengthening remedies against abuse of rules on collective redundancy and fire and rehire' last year which closed on 2 December 2024.
Following the consultation, the Bill has been amended to increase the cap on protective awards in collective redundancy situations from 90 days to 180 days. So in successful claims the employment tribunal can award compensation of up to 180 days per affected employee. The risk of substantial sums being awarded is being used to encourage compliance.
There is also the impact of failing to follow the Code given the potential uplift of 25% to a protective award if an employer's failure to comply with the Code is unreasonable. In this situation, under the amended Bill, an employer who has failed to comply with its collective consultation obligations will be facing a significant liability.
The good news is that the government will not be introducing the right for an employee to make an interim relief application where an employee makes a claim for unfair dismissal in a fire and rehire scenario.
The government intends to gather further views on strengthening the collective redundancy framework this year and will also gather views on updating the Code of Practice on Dismissal and Re-engagement to ensure that it reflects the changes to fire and rehire made by the Bill.
Practical points
Although the new law isn't due to come in until October 2026, there are a few general things to bear in mind:
- It will be important to try and gain consent to changes to terms and conditions.
- Consider offering favourable changes along with the less favourable changes as a way of making the whole package more acceptable.
- Do you have variation clauses in your existing contracts of employment? If so, these may be a way of imposing unilateral change.
- Be aware that it won't be possible for you to circumvent fire and rehire provisions by inserting a variation clause into the contract of employment but existing variation clauses will continue to be valid.
- Ensure that all new contracts contain variation clauses.
- If you're thinking about varying terms and conditions, then do it soon before the new law comes in!
