The future of fire and rehire | Could a new Code of Practice put a stop to pay cut ultimatums?
Written by James Tamm on 2 February 2023
Last week, the UK government published a draft Code of Practice on Dismissal and Re-engagement, outlining a prescriptive procedure for employers to follow when they need to negotiate or impose changes to employees’ terms and conditions, such as substantial changes to working hours or pay.
Similar to the Acas Code of Practice on disciplinary and grievance procedures, a Tribunal will take the Code into account in any unfair dismissal claim. Once in effect, if an employer fails to comply with it, and an employee successfully brings a claim against them, the employee will be entitled to an uplift in compensation.
For now, nothing is set in stone – we only know what the Code could look like. However, if it does come to fruition – and it’s likely that it will – it could be significant for employers as a failure to follow the process set out will have financial consequences.
In this blog, we recap what fire and rehire is, why it’s a contentious issue, and what the proposed Code could mean for employers.
What is fire and rehire?
‘Fire and rehire’ – also known as dismissal and reengagement – refers to the practice of terminating employees’ existing contracts and offering them new contracts with reduced pay and/or worse working conditions. It’s legal, but certainly controversial.
Firing and rehiring is often considered a harsh and disruptive approach to employment changes and is often advised against because:
- It can result in decreased employee morale, trust, and motivation, as employees may feel devalued or betrayed by their employer.
- It can cause a breakdown in industrial relations, particularly if the employer imposes changes without consulting employees or their representatives.
- It may constitute a breach of contract and could lead to legal action against the employer.
Beyond this, businesses that resort to fire and rehire may also damage their reputation and negatively impact their brand image. Indeed, in the last couple of years, companies such as P&O Ferries and British Gas have come under fire for forcing tougher employment terms on their staff, with many calling for these “dirty, bullying” tactics to be made illegal.
Given the strong public sentiment, it’s recommended that employers explore alternative solutions and engage in meaningful consultation with employees before considering such a step.
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What's the background?
The term ‘fire and rehire’ became popular in the UK in 2020, during the COVID pandemic. With decreased demand and economic uncertainty, some employers used this strategy to cut costs and reduce their workforce, particularly after the furlough scheme ended.
As more companies took this approach, firing and rehiring garnered more attention and criticism. Notably, one study found that three quarters of the UK public are against this approach, and unions have even called for a ban on such practices, arguing that they are unethical and demanding stronger protections for workers.
In December 2021, Acas published a report on fire and rehire practices in the UK, which investigated the widespread use of these tactics by employers during the pandemic. In it, it called for greater transparency, fairness and dialogue between employers and employees and recommended that employers should only resort to fire and rehire as a last resort, after exploring alternative options such as voluntary redundancies.
The report also suggested that the government consider strengthening the legal framework to better protect workers from unfair dismissal, and that employers should be more proactive in engaging with employees and their representatives to resolve disputes.
All of this has put pressure on the government to act.
So, what does the Code say?
As well as setting out a best-practice process for employers to follow, the draft Code:
- Sets out a step-by-step process that the employer should follow to explore alternatives to dismissal and engage in meaningful consultation with employees and/or their representatives.
- Emphasises that employers should not use threats of dismissal as a negotiating tool and that unilateral changes to contracts are likely to harm industrial relations.
- Considers dismissal and re-engagement as a last resort, and requires employers to provide as much notice as possible and consider the specific needs of employees.
- Recommends that if agreement cannot be reached over changes to terms and conditions, the employer actively re-examines its business strategy in light of the potentially serious consequences for employees.
- Recommends that if multiple changes to terms and conditions are sought, they should be implemented (where possible) over a period of time. It also recommends that if the reason for changing terms ceases to be relevant, original terms be reintroduced.
At the moment, this is just draft legislation. The final version of the Code, which will not impose legal obligations but can impact Employment Tribunal decisions, will take effect sometime after the consultation period ends on April 18, 2023, “when parliamentary time allows”.
What could this mean for employers?
While we don’t know exactly when it might come to fruition, the new fire and rehire Code will make it more difficult for less scrupulous employers to inflict new terms through fire and rehire ultimatums.
Of course, with employers battling rising costs, keeping staff employed on their current terms may no longer be viable, and in some cases a reduction in employees’ hours or pay may seem like the only option for cash-strapped businesses who would otherwise be forced to make staff redundant.
It’s important to keep in mind that while reducing employees’ hours or pay can provide short-term financial relief, fire and rehire practices may have negative consequences that can harm a company’s long-term success, including decreased employee morale and talent retention issues, not to mention legal implications. The Code will only increase the risks to employers who seek to go down this route by clearly defining what employers should and shouldn’t do in these scenarios, allowing less room for maneuver.
Further, if an employer fails to follow the Code, any award or compensation to affected employees can be increased by 25%. Given most dismissal and re-engagement situations involve groups of employees, the financial consequences could be severe.
As such, employers who find themselves facing financial difficulties should instead explore alternative cost-saving measures and engage in open and transparent communication with employees before making such changes. Otherwise, you may soon find yourself having to defend claims against a much more rigorous set of requirements.
Need help making contractual changes?
The average award for unfair dismissal is £10,812, and claims for breach of contract may cost employers much more. As such, when attempting to change employees’ terms and conditions, it’s always safest to seek advice first.
Our qualified Employment Law specialists can talk through your plans with you and help you to execute them compliantly, saving you time and minimising the potential for disputes and legal risk. For support, call 0345 226 8393 or request your free consultation using the button below.