Major changes to ‘fire and rehire’ practice are coming into force on 1 January 2027. Whilst many employers may assume the provisions will not affect them, in fact the rules introduce the most extensive changes to changing terms and conditions practices we have seen in decades and have the potential to give rise to substantial risks and expensive claims against unsuspecting employers. Going forward, it will be substantially harder for employers to make changes to terms and conditions of employment and in some cases, may simply not be possible.
What does ‘fire and rehire’ mean and why is the law changing?
‘Fire and rehire’ describes an employer’s practice of dismissing employees and offering immediate re-engagement on new, typically less favourable, terms. Historically, this may have been acceptable as a last resort where changes to employment contracts could not be agreed and the employer had genuinely consulted with employees about the proposed changes. This practice has often been used to harmonise terms and conditions after acquisitions, change working patterns, or to adjust or remove employee benefits.
However, recent high-profile cases have prompted legislative reform. The Employment Rights Act 2025 (the Act) introduces a new, far more restrictive regime from 1 January 2027, fundamentally altering the scope for employers to make certain restricted contractual changes and substantially increasing the legal risks for those that do. This goes well beyond ‘fire and rehire’ situations and covers attempts to make changes to certain contractual terms. Employers looking to make changes to terms and conditions of employment from 1 January 2027 need to be aware of the changes or face claims of unlimited compensation.
What are the key changes being introduced by the Act?
- Automatic unfair dismissal for “restricted variations”
From 1 January 2027, it will be automatically unfair to dismiss an employee by any means, because they refuse to accept changes to certain “restricted variation” terms. The new regime applies not only to dismissals followed by re-engagement, but also where an employer simply replaces the employee with someone else willing to accept the new terms. Importantly, this will become a “day-one right” and the employee will not need six months’ qualifying service to claim automatic unfair dismissal.
- What is a “restricted variation”?
A “restricted variation” includes any of the following types of changes, which are not consented to by the employee:
- a reduction or removal of an entitlement to pay or payment in kind (or, when pay is linked to a work output or performance measure such as targets, a variation of that measure);
- a variation of a term or condition relating to pension;
- the number of working hours;
- shift times (subject to conditions to be specified in regulations); and
- a reduction in rights to time off.
The Act prevents employers from introducing new clauses from 1 January 2027 that would give them the right to unilaterally change any “restricted variation” terms in future. Attempting to do so will itself count as a restricted variation. Therefore, if an employer wants to have the right to make changes to terms and conditions, it would need to incorporate an express right to do so in the employment contract, before 1 January 2027.
- Removal of qualifying service and unfair dismissal compensation cap
Claims for automatic unfair dismissal in the context of a unilateral change constituting a “restricted variation” are a “day one right”; no qualifying period is required. From 1 January 2027, the statutory cap on compensatory awards for unfair dismissal (currently the lower of 52 weeks’ pay or £123,543) will also be abolished, exposing employers to significantly higher potential claims. For example, a secretary on £45,000 per annum whose entitlement to company sick pay is unilaterally reduced on or after 1 January 2027, could claim unlimited financial compensation.
- Exception in cases of severe financial difficulty
In some circumstances, if the employer can show the restricted variation was essential to address financial difficulties threatening the ongoing viability of the business, it may be able to justify the variation. However, the bar to meet this test is very high. Mere cost savings or harmonisation after an acquisition will not be enough. The employer must evidence that the change was unavoidable to prevent insolvency (with full consideration and record-keeping). In practice, very few employers will be able to evidence this and those that do would need to disclose compelling financial information to support their case.
- Changes which are not “restricted variations”
For contract changes not caught by the restricted variation rules (such as changes to place of work or duties), the existing law of unfair dismissal continues to apply. However, from January 2027, tribunals must also consider specific statutory fairness factors:
- The reason for the variation;
- Consultation with the employee or representatives;
- Anything offered in exchange for agreement; and
- Any other matters which may be set by future regulations.
What can employers do now to help prepare for the changes?
Pre-2027:
- Employers may wish to review all existing employment contracts, focusing on two key issues:
- Determine whether there are any changes it might wish to make in the future, to accelerate those changes so they take effect before 24 December 2026. For example, if the employer might want to make a change to sick pay entitlement, it may be safer and less difficult to do so now.
- Add specific flexibility and variation clauses to your employment contracts before 1 January 2027, so in the event you want to make changes in the future, it will be easier to do so. For example, if your revised bonus clause includes a right to change the terms of a bonus scheme to reduce the maximum bonus payable, if you reduce the maximum bonus payable in a future bonus year, you would be doing so pursuant to the express terms of the contract and this would not be a change to the contract constituting a restricted variation.
- Update contract templates for new hires.
- Establish or refine policies on consultation, record-keeping, and decision-making relating to contractual changes.
- Train managers on the new legal requirements and risks.
Planning for 2027 and beyond:
- Recognise that meaningful consultation and employee agreement will become crucial for any changes to matters such as pay, hours, pensions, and time off. Employers will need to adjust to this new normal. Getting it wrong can lead to claims for unlimited financial compensation for all employees affected.
- Document all business decisions and alternatives considered, especially where financial hardship may be cited. Do not assume you can rely on financial hardship without seeking legal advice.
- Prepare for more complex and potentially higher-value Employment Tribunal claims.
What are the key takeaways to note for employers?
From 1 January 2027, dismissals linked to changes in core terms may be automatically unfair, with no qualifying period and no compensation. The risks may be so great that employers may be stuck with their terms and conditions and unable to amend them. Employers should therefore think about acting now to review contracts, policies, and practices to seek to minimise future risks and financial exposure.
If you have questions or concerns about the changes to fire and rehire provisions, please contact Michelle Last.
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