One of the central reforms set out in the Government’s Employment Rights Bill, which is currently making its way through Parliament, is to limit an employer’s ability to “fire and rehire” when it seeks to impose changes to employment contracts.
‘Fire and rehire’ refers to the process of modifying employment terms and conditions by dismissing employees and offering to re-engage them on revised terms.
The practice has been commonly used by employers when consent for the changes cannot be secured from employees or their representatives.
It is a divisive topic. Employees may be wary of employers trying to change terms which undermine their rights, whereas employers may be frustrated by restrictions on efficiencies, particularly as they grapple with issues such as increased international competition and high-speed technological evolution driven by AI. There is a balance to be struck, and the precise formulation of that fault line is, and will continue to be, a contentious issue.
Fire and re-hire has faced growing scrutiny due to high-profile cases, including the P&O Ferries scandal in 2022 where 800 workers were fired and P&O sought to replace them with cheaper staff. The controversy caused in this particular case served as a stark reminder to employers of the risk of reputational damage when attempting fire and re-hire exercises. The then Conservative government responded by publishing a Code of Practice on Dismissal and Re-engagement, which has been effective since July 2024.
This code emphasises that the controversial practice should only be used as a last option. Non-compliance of the code of practice allows Employment Tribunals to increase compensation by up to 25%. However, the Government’s proposed reforms go further, as we discuss in this article.
What does the Employment Rights Bill say?
The Bill specifies that it is an automatically unfair dismissal to dismiss an employee if the sole or principal reason for the dismissal was as follows:
- the employer sought to vary the employee’s employment terms (including terms outside of the employment contract and those agreed verbally), but the employee did not agree to the variation; or
- to enable the employer to employ another person, or to 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.
The only exception currently in the draft legislation is if an employer can prove financial necessity, i.e. where the changes to employment terms are needed to prevent or significantly mitigate financial difficulties, which may affect the viability of the business and where the changes could not reasonably have been avoided.
Even if the employer falls within this narrow exception, which is unlikely to apply in many cases, employment tribunals would still need to consider whether an ordinary unfair dismissal claim would be successful, including by considering whether the employer has made adequate consultation efforts with the employees or offered suitable benefits in return for the proposed changes. The draft legislation allows for secondary legislation, which may outline additional considerations for the employment tribunal to take into account.
Implications of the Bill
The proposed legislation marks a substantial change from the existing legal framework, which permits ‘fire and rehire’ practices if the employer can justify them with a valid business reason and proper procedures.
Where the Employment Tribunal finds the dismissal automatically unfair, the penalty may include basic and compensatory awards. Failure to consult, where there are a substantial number of employees affected, could also result in a protective award of up to 180 days’ pay, plus a 25% uplift to the award for non-compliance with the fire and rehire code in addition to any unfair dismissal compensation.
Undoubtedly, this proposed legislation will make it significantly more difficult for employers to make changes to terms and conditions of employment in response to evolving business needs without support from the workforce. Employers will no longer be able to rely on ‘fire and rehire’ as a last resort to force through changes.
The Bill is also unique in that it will oblige employment tribunals to make an assessment as to the financial resilience of the employer, which arguably, is a task it is not set up to do currently. It also means that whilst demonstrably failing businesses may be able to change employment terms using fire and rehire, businesses facing a slower but ultimately terminal decline may not.
In turn, there is a concern that businesses may resort to more drastic steps such as pure redundancy exercises, although these may bring about cost savings, they may not deal with the inherent issues with employment practices which may be contributing to the decline of the business. It also remains to be seen whether anti-avoidance measures will be introduced to stop employers taking such approaches.
Moreover, the Bill has also caused some consternation as it will be easier for an employer of a failing business to change employment terms than an employer endeavouring to deal with discriminatory practices or changes to the underlying legal position.
Practical steps
Although it is unclear exactly when the reforms will come into effect, it is likely that the implementation date will be at some point next year. Using ‘fire and rehire’ practices continue to carry great reputational risk.
In the meantime, employers may wish to consider the following steps:
- review and update employment terms and conditions provided to new joiners to ensure that where permissible, clauses are sufficiently flexible to allow a degree of change to be made by the employer if necessary in the future; and
- risk-assess the wording in the current employment terms and conditions applicable to existing employees and the extent to which the clauses provides flexibility to make changes. Consider if contractual changes may be beneficial prior to the legislation coming into force and evaluate associated risks.
Fox Williams closely monitors the changes proposed by the Bill and will continue to provide updates on their potential impact to businesses.
How we can help
If you have questions on how these changes may affect your business or require support with strategy and compliance, please contact our Employment team.
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