What are “fire and rehire” and “fire and replace”?
“Fire and rehire” is the practice of dismissing an employee and simultaneously offering them new employment on new terms. Employers generally use it to push through changes to terms and conditions that an employee refuses to agree. If an employee has refused to consent to a change in terms, the employer dismisses them, whilst hoping that the employee will prefer the terms that the employer is able to employ them on over being without a job at all. The employer also hopes that if the employee brings an unfair dismissal claim, the dismissal will be deemed fair for “some other substantial reason” (or at any rate any damages will be reduced because the employee has failed to mitigate loss by accepting the new position).
As a variation of “fire and rehire”, “fire and replace” is the practice of dismissing an employee and simultaneously engaging someone else to carry out the work on inferior terms. This practice has been perceived by the trade union movement as employers exploiting the fact that there are people willing to work on inferior terms to undercut existing employees. The adoption of a variation on this approach by P&O Ferries in 2022 led to significant publicity and reputational damage for the company.
In practice, most employers don’t use “fire and rehire” or “fire and replace” except as last resort because of the effect on staff morale, and the risks of claims and reputational damage. The employer can only avoid unfair dismissal claims if it has a strong business rationale for the change, such as trying to harmonise terms across a business, reduce benefit costs or change working patterns. And, to avoid claims, the employer should also follow a fair procedure, which includes consulting with employees and trying to get their agreement to the change. If an employer proposes making at least 20 redundancies, the practice may also trigger collective redundancies consultation obligations.
What is the current law on “fire and rehire”?
Following the P&O Ferries incident, a code of practice was published in July 2024, encouraging employers to act fairly and only use “fire and rehire” when all other options have been exhausted. Although this code did not impose significant new legal obligations on employers, it could be taken into account by employment tribunals and tribunal awards could be increased or decreased for a failure to comply with the code (as discussed more fully in our article at the time).
Although there’s no real evidence that significant numbers of employers were acting in breach of the code, the Labour party committed to outlawing the practice of “fire and rehire” and, after winning the general election, its subsequent Employment Rights Act 2025 (ERA) made provision to restrict the circumstances in which employers could use it to change terms.
What changes does the ERA propose on “fire and rehire”?
The ERA provides that dismissals made in order to change certain core contractual terms will be automatically unfair if the reason for the dismissal is that the employee has not agreed to the change or so that the employer can employ someone else on different terms to do substantially the same role. No qualifying service will be necessary to bring an unfair dismissal claim. And, by the time the law is implemented in March 2027, uncapped compensation will be available for all unfair dismissal claims.
The key changes affected are known as “restricted variations” and include changes to an employee’s:
- Pay;
- Number of required working hours;
- Pension;
- Shift times and length;
- Time off rights;
and other changes to be defined in regulations.
Changes to non-contractual terms will not be “restricted variations”, consistent with employers already being entitled to make such changes without needing to resort to “fire and rehire”. And you can include flexibility clauses in employment contracts for new employees and rely on existing flexibility clauses in contracts. But imposing a new flexibility clause on an existing employee to permit the employer to make a restricted variation will also be a restricted variation.
There is a very narrow exemption, which will apply if the employer is experiencing severe and imminent financial difficulties (the exact test depends upon whether the employer is private or public sector, see more detail below).
And dismissals to effect changes to non-restricted contractual terms will not be automatically unfair but will be subject to so-called “enhanced” unfair dismissal protections. The ERA provides that matters that must be considered when determining the question of whether the dismissal is fair or unfair include the reason for the variation, any consultation with the employee or a recognised trade union (or other person who has authority to receive information and be consulted on the employee’s behalf), anything offered to the employee in return for agreeing to the variation and any matters set out in regulations.
The new draft code of practice on dismissal and re-engagement (which we discuss further below) states that there will be a duty to share information and to conduct “meaningful” consultation. It suggests that the tribunal should consider whether or not the employer should have offered anything to the employee in return for agreeing the variation (for example, such as relocation assistance) and that the tribunal should consider whether or not the employer had made “exhaustive” attempts to reach agreement on the changes and found no reasonable alternative options other than dismissal. It is not clear whether the obligation to make “exhaustive” attempts to reach agreement will be included within regulations and thus affect the legality of the dismissal, or whether it will be confined to the code of practice and principally affect only whether or not the compensation uplift will apply.
Whether or not an employer consulted will be something an employment tribunal would have considered anyway, so it is not clear if this more explicit obligation will change outcomes. But arguably a duty to make exhaustive attempts to reach agreement and to have no reasonable alternatives to dismissal go further than are currently required for a fair dismissal.
The normal qualifying period for protection from ordinary unfair dismissal will apply.
Response to original consultation
The government has just published its response to its consultation on Fire and Rehire – changes to expenses, benefits and shift patterns and has confirmed that:
- Changes to contractual travel expenses (including mileage), accommodation expenses and accommodation as a benefit-in-kind – but not other expenses – will be additional restricted variations.
- Big shift changes from day to night shift or weekday to weekend shift (or vice versa), will be restricted variations but other shift changes are not in scope. Nighttime will be defined as the period from 11pm to 6am.
These restrictions will be made by regulations.
This means that benefits other than those specified (including changes to share schemes) will not be in scope. Neither will other changes to shifts, including changes to “availability windows” where an employee is scheduled to work within a range of hours specified in a contract.
New Consultation on code of practice
The government has just started a consultation (open until 17 December 2026) on a new draft code of practice on dismissal and re-engagement. The code will help employers navigate the law by outlining obligations and best practice on information sharing, consultation and negotiation, with the aim of reaching agreement on changes to contracts.
According to the draft code, employers “should seek to share as much information as reasonable and consult for as long as reasonable in good faith, with an aim to reaching an agreed outcome”. Consultation should be meaningful and start at a formative stage when proposals can still be influenced. Employees and trade unions should also act reasonably by engaging in the process in good faith and with a genuine willingness to consider the employer’s case.
As before, employment tribunals will be able to uplift or reduce tribunal compensation by up to 25% for unreasonable failures to comply with the code.
The draft code also deals with the narrow exemption for severe financial difficulties. For private sector employers this means imminent financial difficulties that threaten the viability of the business as a going concern where otherwise the organisation would be forced to conduct redundancies or close. For the public sector, it means difficulties that threaten the sustainability of its statutory functions. For a local authority, it means a government intervention direction has imposed conditions on the authority’s financial management. In all cases, the variation must be necessary to address the difficulties and there must be no reasonable alternative.
The old code will be withdrawn in March 2027 when the law comes into effect, but the new code will not be in force until Summer 2027 leaving a gap of several months.
Things for employers to consider now
There is some welcome news for employers in the narrowing of the scope of deemed restricted variations, although the “enhanced” unfair dismissal protections will make all contractual changes, not just changes to restricted variations, more challenging.
As the implementation date for the new law has been pushed back to March 2027, employers also now have a little more breathing space.
But, when it does come into effect, the new law will make it much more difficult for employers to change certain terms and conditions. It is also likely to lead to conflict arising in different ways. For example, an employer may not be able to resort to “fire and rehire” to change certain terms and conditions, but, subject to minimum wage requirements and any contractual obligations, it is also not required to give employees a pay rise. It is therefore likely that employers will increasingly make pay rises conditional on receiving consent to other contractual variations, especially in the context of collective bargaining when a trade union can bind all employees to, for example, work a new shift pattern.
In extremis, it is also possible that an employer that cannot “fire and rehire” or “fire and replace” will simply “fire” without rehiring or replacing. This might happen if its existing employees’ terms and conditions make it uneconomical for it to continue to operate the part of its business in which they work, but the high bar of the financial solvency of the overall business being in question isn’t met to enable it to “fire and rehire” or “fire and replace”.
In terms of steps that employers should be considering now:
- Employers should review their current contracts and consider what contractual provisions would be covered by the “restricted variation” provisions. Do you have any flexibility or variation clauses covering these contractual provisions and, if not, should you take steps now to introduce these?
- Employers should also consider adding flexibility or variation clauses to new joiner’s contracts.
- The scope to operate flexibility clauses is limited by case law, so ensure they are drafted as widely and effectively as possible.
- Review current working arrangements, such as shift patterns. Do these still meet your needs? Would it be better to try to change them (if necessary) before the new law takes effect? Do be careful though if you think you might want to dismiss and reengage before March, as there are various hazards to be negotiated, such as the removal of the cap on unfair dismissal compensation from 1 January 2027 and the possible requirement for collective consultation if proposed dismissals would reach the threshold.
- Consider how you might get agreement to contractual variations in the future, such as by making future pay rises or promotions conditional on agreeing the change.
