By Rachel Halliday, Partner & Regional Employment Rights Manager &
Neil Todd, Partner, Head of Trade Union Law Group
In this week’s article on the Employment Rights Act 2025 we look at changes to the law on fire and rehire, which are expected to come into force in January 2027. Fire and rehire is colloquial term for a strategy used by some employers to impose changes to their employees’ contractual rights. Fire and rehire means dismissing employees and then offering to re-employ them on inferior contracts. The Act will make fire and rehire dismissals automatically unlawful but only if the reason for the dismissal is a ‘restricted variation’ and the employer cannot show that the financial difficulties exception applies.
The current position
Fire and rehire dismissals are lawful if the employer can show that it has a ‘sound good business reason’ for making contractual changes and that it acted reasonably in treating that reason as a sufficient reason for using fire and rehire.
The ‘sound good business reason’ test is a low threshold for employers. The employer only needs to satisfy an employment tribunal that the change would lead to a discernible advantage to the business; there is no requirement for the employer to show that the survival of the business is under threat.
In assessing whether the employer has acted reasonably, employment tribunals focus primarily on the process adopted by the employer, in terms of whether the employer has consulted with employees and their representatives, and sought to agree the changes, before the decision to dismiss was taken.
In 2024, the previous government issued statutory guidance in the form of a Code of Practice on dismissal and re-engagement. The Code of Practice offers little meaningful protection for employees. It says that employers should treat fire and rehire ‘as a last resort’ but makes it clear that fire and rehire dismissals can be lawful.
Changes
It will become automatically unfair for employers to use fire and rehire if the reason for the dismissal is a ‘restricted variation’.
In summary, a restricted variation means (subject to the consultation referred to below):
- A reduction of or removal of any entitlement to any sum payable to an employee in connection with the employment
- A variation of any term relating to pensions
- A variation in the number of hours which an employee is required to work
- A variation in the timing or duration of a shift
- A reduction in the amount of time off which an employee is entitled to take
- Adding a term to a contract enabling the employer to make any of the above variations without the employee’s agreement
On 4 February 2026, the government published a consultation, seeking views in relation to changes to contractual expenses, benefits and shift patterns. The consultation says that the government’s preferred option is that changes to expenses and benefits in kind will not be restricted variations. So far as shift patterns are concerned, the government proposes that shift changes will only be restricted variations if they involve a new requirement to work in the night/daytime or to work on weekdays/weekends. The deadline to respond to the consultation is Wednesday 1 April 2026.
Fire and rehire dismissals will not be automatically unfair if the employer can satisfy an employment tribunal 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 likely in the immediate future to affect the employer’s ability to carry on the business as a going concern. The tribunal must also be satisfied that, in all the circumstances, the employer could not reasonably have avoided the need to make the variation.
A public sector employer will be able to rely on the exception if it is in financial difficulties affecting the financial sustainability of carrying out its functions. In the case of local authorities, the exception will only apply if there has been a relevant intervention by central government.
If, either, the contractual change is not a restricted variation or the financial difficulties exception applies, then the dismissal will not be automatically unfair. Instead, in determining whether or not the dismissal was fair or unfair, employment tribunals will be required to consider: the reason for the change, the extent of any consultation with employees and their representatives and anything which the employer offered to the employees in return for agreeing to the change.
Impact of the changes
Whilst the Act does not fulfil the commitment in Labour’s Plan to Make Work Pay to “end the scourges of ‘fire and rehire’”, it is still likely to lead to a significant reduction in the use of fire and rehire.
The options assessment, published by the government in February 2026, estimates that 60% of fire and rehire cases involved restricted variations and that only 14% of fire and rehire cases involved employers who were in severe financial difficulties.
There is still an opportunity for workers and their representatives to express their views on the government’s proposed narrowing of the definition of ‘restricted variation’ in relation to benefits, expenses and shift patterns, by responding to the consultation before the 1 April 2026 deadline. Further information can be found here. We at Thompsons will be opposing any further narrowing of restricted variations.
It is unfortunate that workers will have to wait longer for better protection against fire and rehire, the changes had been expected to take place in October 2026 but, in February 2026 the implementation date was put back until January 2027. However, the revised date does mean that implementation of the changes is likely to coincide with the removal of both the two year qualifying period for unfair dismissal claims and the statutory cap on compensatory awards, both of which are likely to make the changes to the law on fire on rehire more powerful, in terms of making it a much less attractive option for unscrupulous employers.
