The practice of “fire and rehire”, dismissing employees and offering re-engagement on new, often less favourable terms, has long been a controversial feature of UK employment law. Where supported by a fair process and sound business rationale, the practice has been lawful, it has often been criticised as undermining employee trust and being used as a tactical negotiating tool rather than a true last resort.
Recent developments via the Employment Rights Act 2025 (ERA 2025), signals a significant shift in approach.
How it is changing?
Increased scrutiny of fire and rehire practices has been seen following high-profile cases such as the P&O Ferries dismissals in 2022, where approximately 800 staff were terminated without consultation and replaced with agency workers. The backlash led to the introduction of the Statutory Code of Practice on Dismissal and Re-engagement in July 2024, which emphasises that fire and rehire should only be used as a last resort.
Failure to follow the Code can result in a 25% uplift in compensation for certain tribunal claims, including unfair dismissal and protective awards.
Building on this, the ERA 2025 introduces a more structured and restrictive legal framework. The practice will not be subject to an outright ban, but its use will be significantly curtailed, with greater legal and financial risk for employers.
A New Statutory Framework
A Tiered Approach to Contractual Changes
The ERA 2025 and associated framework will introduce a distinction between ‘restricted’ and ‘non-restricted’ contractual variations.
Restricted variations
These include many of the core fundamental aspects of the employment relationship, such as:
- Pay reductions
- Changes to performance-related pay measures
- Pension entitlements
- Total working hours
- Leave entitlement
- Certain shift pattern changes
- Introducing contractual clauses allowing unilateral changes to these terms
These changes are subject to enhanced protection, reflecting their importance to employees’ financial security and work-life balance.
Non-restricted variations
Those, arguably, less fundamental changes; such as role responsibilities, workplace location, or non-contractual policy updates, fall into this category. These remain subject to a more familiar “reasonableness” test, affording employers comparatively greater flexibility.
Presumptively Unfair Dismissals
A key feature of the new legal framework is that dismissals to impose restricted variations will be automatically unfair, unless very strict conditions are met.
Employers must demonstrate:
(a) A serious economic justification
The change must be necessary to:
- Prevent or mitigate genuine financial difficulties
This represents a high bar. General cost-saving, efficiency improvements, or profit enhancement will not be sufficient to meet this requirement.
(b) No reasonable alternative
Employers must show that the change could not reasonably have been avoided, effectively embedding a “last resort” test into statute.
(c) Procedural fairness
Tribunals will also closely assess whether the employer:
- Undertook meaningful consultation (both individual and collective where relevant)
- Provided adequate notice
- Genuinely engaged with employee concerns
Failures in consultation are likely to weigh heavily against employers.
Restrictions on Workforce Replacement
The ERA 2025 also targets the practice of dismissing employees to replace them with:
- Agency workers
- Self-employed contractors
- Other non-employee arrangements
Such dismissals will similarly be considered unfair unless the same high economic justification threshold is met, significantly limiting the ability to reduce costs through outsourcing or workforce restructuring.
Non-Restricted Variations: A Lower Threshold
Dismissals linked to non-core contractual changes will still be assessed under the more traditional unfair dismissal framework, taking into account:
- The employer’s business rationale
- The extent and quality of consultation
- The overall reasonableness of the decision
However, Employment Tribunals are expected to scrutinise whether the employer is acting out of genuine business need rather than just convenience.
Practical Implications for Employers
The reforms do not eliminate fire and rehire completely, but they fundamentally alter the current approach, increasingly risk profile and limiting viability.
Key takeaways:
- Higher risk: Fire and rehire is now a legally complex and high-risk strategy, particularly where core terms are affected.
- Stronger justification required: Employers must evidence serious financial pressure, not simply commercial advantage.
- Consultation is critical: Meaningful engagement with employees is essential, both legally and reputationally.
- Alternatives must be explored: Options such as voluntary agreement, phased changes, or incentives should be actively considered and documented.
- Outsourcing is scrutinised: Replacing employees with non-employees is now subject to similar legal constraints.
What This Means in Practice
In practical terms, employers should expect that:
- Using dismissal to impose pay cuts or reduced hours will only be defensible in exceptional situations (for example, where there is a genuine risk of insolvency or business closure).
- Litigation risk is likely to increase, particularly where employees challenge whether changes were truly necessary.
- The threat of dismissal will carry less weight as a negotiating tool when seeking contractual changes.
After introduction of these changes, employers would be well advised should therefore plan early, engage openly with their workforce, and take legal advice before embarking on any restructuring that may affect contractual terms.
Conclusion
With these reforms expected to take effect on 1 January 2027, employers should use the intervening period to review their approach to contractual change and workforce planning. The reforms are intended to balance the need for businesses to respond to financial challenges with greater protections for employees against changes to fundamental terms of employment. While fire and rehire will remain available in limited circumstances, the higher legal threshold may lead some employers to consider alternative options, including redundancy processes, when implementing structural or cost saving measures. Ultimately, the practical significance will also depend on how tribunals interpret key concepts such as ‘necessity’, ‘financial difficulty’ and ‘reasonable alternatives’ in the years ahead.
How We Can Help
If you would like to understand how these changes may affect your organisation or need support navigating contractual change, our employment team would be pleased to assist.
