Fire and rehire under the Employment Rights Act 2025 – what employers need to know

The Employment Rights Act 2025 will introduce a prohibition on 'fire and rehire' and 'fire and replace' other than in limited circumstances. We take a look at what this means in practice for employers.

What is dismissal and re-engagement / fire and rehire?

If an employer is unable to get employees’ consent to changes to terms and conditions of employment, one option is to terminate existing contracts on notice and offer immediate re-engagement on new terms. This practice is known as dismissal and re-engagement or 'fire and rehire'.

Although it can be fair to dismiss and re-engage (if there are good reasons for the change and a fair procedure is followed), there are risks including, depending on the circumstances, claims for unfair dismissal, discrimination and a protective award - plus the potential for industrial action and reputational damage.

The previous Government introduced a statutory Code of Practice on dismissal and re-engagement in July 2024 which states that fire and rehire should be a 'last resort', emphasising the importance of sharing information, undertaking meaningful consultation and exploring other alternatives first. An unreasonable failure to follow the Code can result in a 25% increase in awards for certain tribunal claims including unfair dismissal compensation and protective awards.

The Employment Rights Act 2025: what will change?

Although it does not go as far as prohibiting the practices of ‘fire and rehire’ and ‘fire and replace’, the Employment Rights Act 2025 will significantly restrict their use. The following changes will apply irrespective of the number of employees involved and are expected to come into force in January 2027.

It will be automatically unfair to dismiss an employee for either of the following reasons:

The employer sought to vary the employee's contract of employment, and the employee did not agree to the 'restricted variation';
To enable the employer to employ another person, or to re-engage the employee, under a varied contract of employment to carry out the same duties, or substantially the same duties, as the employee carried out before being dismissed, where at least one of the differences between the two sets of terms is a restricted variation.

There are separate provisions dealing with the dismissal of an employee in order to replace them with someone who is not employed, for example, an agency worker or contractor.

It seems likely that individuals may seek to argue that the new provisions also apply where, rather than dismissing and offering re-engagement, the employer has imposed new terms unilaterally and the employee has resigned and claimed constructive dismissal in response to a material breach.

Restricted variations

A 'restricted variation' is one which covers one or more of the following:

Reductions to pay
Where pay is linked to measures of work done (such as targets), changes to those measures/targets
Changes to pensions
Changes to total working hours
Reduction in leave entitlement
Changes to shift patterns (as specified in regulations)
The inclusion of a variation clause in a contract of employment
Any other variation specified in regulations.

A consultation on exactly which expenses, benefits, and shift changes should be treated as ‘restricted variations’ closed on 1 April 2026.

Financial difficulties exception

A dismissal will not be automatically unfair if:

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.

This exception is expected to only apply in very limited circumstances. There is a slightly different financial difficulties exception for public sector employers.

If the 'financial difficulties' test is satisfied, the dismissal will not be automatically unfair, but the tribunal will still need to assess whether the dismissal was fair in all the circumstances and must consider whether any consultation was carried out and if anything was offered to the employee in return for agreeing to the variation.

Non-restricted variations

If the proposed change to terms and conditions is not a restricted variation (e.g. change to the place of work) any dismissal for failing to agree to the change will not be automatically unfair. However, when considering whether there is an ordinary unfair dismissal the tribunal must take into account the reason for the variation, any consultation carried out, and anything offered to the employee in return for agreeing to the variation.

Code of Practice

The Government has criticised the existing Code of Practice as being inadequate and plans to update it in due course to reflect the changes to be made under the Employment Rights Act 2025.

Other Employment Rights Act 2025 reforms

The collective consultation obligations are triggered where an employer is proposing to dismiss and re-engage 20 or more employees on new terms at one establishment within 90 days. In this regard:

The maximum protective award doubled to 180 days' gross pay (uncapped) per employee in respect of dismissals on or after 6 April 2026.
A new organisation-wide threshold for collective consultation is set to apply from sometime in 2027: find out more in our earlier blog.

Impact on employers

These changes will make it significantly harder for employers to make changes to terms and conditions of employment without individual or collective support. In the meantime:

Seek advice on implementing any contractual changes ahead of the reforms
Audit the use of general and/or specific variation clauses and assess whether to amend contracts for existing or new employees
Train relevant staff.