Fire and rehire reform: What employers need to know

Described by the government as “the biggest upgrade to workers’ rights in a generation”, the ERA 2025 introduces new protections making it automatically unfair to dismiss employees refusing to agree to “restricted variations” to their employment contracts.

Where are we now?

Presently, an employer wishing to change employment terms and conditions generally has three options:

• Reach an agreement with the employee to change by consent
• Push through the changes unilaterally, for which there may be consequences for breach of contract
• Dismiss the employee, with notice, and immediately offer re-engagement on new terms.

That’s been the way for as long as many of us can remember, and employers and employees know where they stand.

In 2024 a Code of Practice was introduced, primarily to deal with the third option. The Code sought to inform employers on procedural fairness and stresses dismissal should only be used as a last resort, with meaningful and timely consultation and agreement being the preferred choice.

However come January 2027 all that will change, and with it some potential implications when dealing with the renewal of fixed term contracts, redundancy procedures and if TUPE isn’t complex enough, for future outsourcing arrangements.

Whilst little may currently be known about Section 28 of the 2025 Act, it won’t be long before Board level and senior decision makers, HR teams and those having management responsibilities become all too familiar with its application, and its implications.

What is Section 28 of the ERA 2025 Act?

Section 28 of the ERA 2025 introduces three new provisions into the Employment Rights Act 1996 (ERA 1996) covering dismissal where an employee does not agree to certain contractual changes. The new sections, 104I, 104J and 104K, cover restricted contractual variations, other contractual variations and the replacement of employees with non-employees.

What will the changes mean for employers?

The key risk for employers under Section 28 will be automatically unfair dismissals. In particular, sections 104I and 104K introduce new protections where an employee is dismissed because they have refused certain contractual changes, or where an employer seeks to replace them following a refusal.

Restricted variations

Section 104I applies where the reason, or principal reason, for an employees’ dismissal is either:

• the employee refused to agree to the restricted variation; or
• the employer sought to re-engage that employee, or replace them with another employee, under a contract that includes a restricted variation.

In both scenarios the dismissal will be automatically unfair. There are exemptions to this if the employer can prove financial difficulty, but they are limited, and in most scenarios will not apply.

Restricted variations include changes to:

• pay or the way an employee’s work or performance is measured
• pension terms
• the number of working hours
• the timing and duration of shift arrangements
• the amount of time off an employee is entitled to take

A contractual term which allows an employer to make one of those changes without the employee’s agreement can also amount to a restricted variation. Important to note is the definition of sums payable to an employee does not require the payment to be made by the employer. This means it could encompass all manner of third-party payments from permanent health insurance payments to tips received from customers.

There is a limited exception where an employer can demonstrate that the restricted variation was necessary to address significant financial difficulties affecting, or likely to affect, its ability to continue as an ongoing concern, and that the need for the variation could not reasonably have been avoided. For public sector employees, the test relates to the financial sustainability of carrying out statutory functions.

Even when this exception applies, the dismissal must still be considered under the ordinary unfair dismissal test, including factors such as the consultation undertaken, and anything offered to the employee in return for agreeing to the variation.

Other contractual changes

Section 104J deals with non-restricted contractual variations. Here there is no automatically unfair dismissal, but rather a series of considerations for a tribunal to apply when determining the fairness, or otherwise, of a dismissal. Again this applies when an employee does not accept the contractual change, or the employer is looking to re-engage that employee or replace them with another.

Replacing employees with non-employees

Section 104K deals with situations where an employer dismisses employees with a view to replacing them with a non-employee, such as an agency worker or self-employed contractor to carry out the same or substantially the same duties.

In these circumstances, the dismissal will also be automatically unfair, subject to a similar limited exception where the employer can demonstrate significant difficulties and that the replacement could not have been avoided.

Practical implications for employers to consider

The changes represent a significant shift from the current legal position. At present, an employer can fairly dismiss an employee for refusing to accept varied terms provided the employer has sound business reasons and has acted within the range of reasonable responses. The changes do not require the variation to be crucial to business survival. Under the new framework, some dismissals that are currently fair will in many cases no longer be so.

Where an employer seeks to rely on the financial difficulty exception tribunals will need to consider the employers financial position, its ability to continue as a going concern, and whether the contractual variation could reasonably have been avoided. Employers may therefore need to provide detailed financial evidence to support their position.

Realistically most scenarios requiring contractual changes will not be due to financial hardship, but for ordinary commercial reasons required when running a business. These too will need to be considered under the new framework. This may affect an employer’s bargaining position where employees and their representatives are aware that dismissal has become riskier for employers and may feel emboldened to resist detrimental changes. This will be compounded by the removal of the cap next year on unfair dismissal compensation, making it difficult for employers to assess the cost of dismissing in these circumstances.

Employers should also be aware of the potential implications beyond traditional fire and rehire situations, including redundancies, the correction of contractual errors when preparing a written contract, non-renewal of fixed term contracts and renewal on different terms, and the introduction of additional rights where employers seek to dismiss and re-engage as part of a TUPE outsourcing. Whilst the ERA 2025 will soon reduce the qualifying service period from 2 years to 6 months, employees who do not meet this service threshold under TUPE could in theory, be able to pursue a claim under section 104l for automatically unfair dismissal.

So, from January 2027 a seismic change is coming meaning the time for employers to understand the reforms, and their implications, is most definitely now.

Employment Rights Act check-up