“Fire and rehire” has become a major focus of employment law reform. Employers have long been able to dismiss employees and offer to re-engage them on new terms. However, even when this approach is only used as a last resort, it can create significant legal, employee relations and reputational risks.
The Employment Rights Act 2025 (ERA) marks a significant change in approach. The government initially suggested that “fire and rehire” might be banned altogether, but its position changed as the legislation made its way through parliament.
Once the relevant provisions come into force, the ERA 2025 will significantly limit when an employer can dismiss an employee who refuses to agree to a contractual change without the dismissal being automatically unfair. In practice:
It will be automatically unfair to dismiss an employee because they have not agreed to a “restricted variation”. This will cover most of the changes employers commonly seek to make, including changes to working hours, pay, incentives, pensions, benefits and holiday, as well as introducing contractual variation clauses.
It will also be automatically unfair to dismiss an employee to replace them with a “non-employee” engaged by the employer, such as a contractor or agency worker.
There will be a limited exception where the change is needed to avoid or reduce genuine financial difficulties that threaten the business as a going concern. A similar test will apply to public sector employers.
Further regulations are needed before these changes can take effect, but they are expected to come into force on 1 January 2027.
At our recent ERA roadshow in Manchester, we discussed what restructuring, alongside changing employment terms, could look like in this higher-risk environment. For many employers, restructuring, changing T&Cs and cost-cutting are commercial realities, and difficult decisions need to be made quickly.
Most attendees at the roadshow already viewed “fire and rehire” as a last resort. Even so, there was a clear sense that the legal risk and potential exposure for employers will increase once the reforms take effect. Some attendees expected the changes to have only a limited impact on their organisation, while others anticipated greater challenges because of their industry, workforce structure or employee relations environment.
The risks involved in changing contractual terms will also be amplified by other ERA reforms. Collective consultation obligations are triggered where an employer proposes dismissals to bring about a contractual change, such as in a “fire and rehire” exercise. If an employer fails to meet those obligations, each affected employee may now receive an award of up to 180 days’ gross pay. From 1 January 2027, the statutory cap on the compensatory award for unfair dismissal will also be removed. An employee could therefore bring an automatic unfair dismissal claim with potentially uncapped compensation, alongside a claim for failure to inform and consult. Taken together, these changes significantly increase the legal and financial risks associated with “fire and rehire”.
Employers are also considering how the reforms may affect their bargaining position. With dismissal carrying greater risk, employees and their representatives may feel better placed to resist proposed changes to contractual terms. Negotiations could take longer, particularly where an employer wants to update legacy terms that no longer suit the business.
One point that attracted broad agreement at our roadshow is that “fire and rehire” should remain a last resort. Attendees emphasised the value of meaningful consultation, clear communication and giving managers the skills to explain the business reasons for change and engage employees effectively. Several also suggested that the reforms could lead to better conversations at an earlier stage, encouraging employers to communicate more openly and explore alternatives before dismissal is considered.
One option employers may want to explore now is whether their contracts include suitably drafted variation clauses and, if not, whether these should be introduced for new starters or agreed with existing employees before the reforms come into force. A clearly drafted variation clause may give an employer more flexibility to make certain changes without relying on “fire and rehire”, but it will not be a complete workaround. The wording will be interpreted carefully, and employers will still need to act reasonably when relying on it, including consulting affected employees, giving appropriate notice and considering the impact of the proposed change, for the change to be enforceable.
What is clear is that the commercial pressures that lead employers to consider contractual changes are not going away. While the reforms are likely to make the process more challenging and potentially more costly, they also offer a useful opportunity to take stock. By considering alternatives early, communicating openly and approaching consultation genuinely, employers will be better placed to manage contractual changes positively and find a way forward that works for both the business and its people.
For more information, please get in touch with one of our employment law experts.
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