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Fire and rehire reform | New rules, narrow exceptions, and what to do now
Written by Stuart Watkins on 9 April 2025
Of the many changes contained in Labour’s Employment Rights Bill (ERB), one of the most significant – and potentially most imminent – is the proposed clampdown on fire and rehire practices.
At present, employers can potentially lawfully dismiss employees who refuse to accept a change to their terms and conditions and offer to re-engage them on the new terms, provided they have a legitimate business reason and follow the fair process set out in the recently introduced statutory dismissal and re-engagement code of practice. This might be necessary where employees refuse to agree to proposed changes to their terms and conditions, such as those relating to working patterns, hours, or contractual benefits like bonus schemes.
Labour’s proposal would change things dramatically. Under the ERB, if an employee refuses a contractual change and is dismissed in order to be rehired – or replaced – on those proposed new terms, that dismissal would be automatically unfair, unless very limited exceptions apply. This would effectively close off a route that many employers have used to effect organisational change.
This represents a major shift in the balance of power, and although the final wording of the Bill may yet be tweaked as it passes through Parliament, the underlying intention is clear: to restrict fire and rehire except where a business is in serious financial difficulty.
Here’s what employers need to know.
The background: Why fire and rehire is under fire
Labour’s move to legislate against fire and rehire practices was largely driven by public outcry over the P&O Ferries scandal in 2022, when the company dismissed around 800 workers and replaced them with cheaper labour.
While the company failed to follow collective consultation obligations given the number of people involved, it had seemingly taken the commercial decision that the costs of liability in those claims would be outweighed by the cost savings from making the changes in that way.
The incident sparked widespread outrage, with many accusing P&O of exploiting its power to cut costs at the expense of workers’ rights. This prompted widespread calls for reform to prevent employers from using similar tactics in the future. While strictly speaking this was a ‘fire and replace’ strategy, there was also criticism of ‘fire and rehire’. This led to the introduction of the code of practice in 2024.
Labour’s proposals are in part a response to this – though unions have been critical of the practice for years – and aim to close what’s seen as a ‘loophole’ in the law.
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The new rules and the narrow exception
Under the ERB, dismissing an employee for refusing to accept a change in terms – and then seeking to rehire or replace them on the new terms – would be unlawful, unless the employer can show that:
- “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 is a very narrow exception, and appears to be intended only for businesses facing the real risk of financial collapse. Some legal commentators suggest it will apply only where the employer’s viability as a going concern is at stake. And even then, it would have to show it could not reasonably have avoided the change being made.
At this time, we don’t know how Employment Tribunals will approach and assess the level of financial difficulty required to meet this test, but it will be important to ensure that it is fully documented so there is evidence to submit in support.
Crucially, if an employer can’t meet that test, there will be no scope to argue that the dismissal was fair or justified – the only question will be how much compensation is owed.
Even if this test is met, normal unfair dismissal rules will have to be followed. The ERB sets out factors that must be taken into account by a Tribunal when assessing the fairness of such dismissals, including the extent to which employees were properly consulted, as well as following the statutory code of practice mentioned earlier.
It’s important to recognise how big of a change this is. An employer may want, or indeed need, to make changes to terms and conditions for a variety of reasons. For example, it may need to withdraw contractual benefits such as bonuses and allowances, or change contractual working arrangements in response to a client’s needs or requirements. If this requires a change to contractual terms, and the employee refuses to accept them, then dismissal and re-engagement will not be possible unless the exception is met.
Note that this will not apply to redundancy situations, which we may see a lot more of following the introduction of these new measures.
The workaround: Could employers use variation clauses instead?
Anticipating these restrictions, some employers may look to rely more heavily on variation clauses in employment contracts – that is, contractual clauses that allow the employer to make changes to terms without the need to go down the dismissal and re-engagement route. However, this may not be a plausible or safe option in a lot of situations.
Variation clauses must be clearly drafted and used fairly. Tribunals will give careful consideration to whether the clause actually covers the variation being sought, particularly if they are used to impose significant changes. There’s also some uncertainty over whether a refusal to accept a change being made under a variation clause could fall within the new definition of automatic unfair dismissal. In other words, even that route may not be available – this is likely to be dependent on how a Tribunal interprets the wording of the Bill.
There’s also a possibility that future amendments to the ERB could include express restrictions on using variation clauses in this way, although how and to what extent this could be done, we don’t know. For now, it’s a wait-and-see situation – but employers should tread carefully.
The timeline: When might this come into force?
Although regulations will be required to activate this particular provision of the ERB, the detail is already in place, meaning it could be brought into force quite quickly once the Bill becomes law.
It won’t take effect immediately on Royal Assent, but there’s a chance that it may be introduced later this year. It may depend on how much time the government wants to give employers to prepare for the changes, bearing in mind the contents of the Next Steps Policy Paper originally issued in October 2024, which suggested most changes would come into effect in 2026, following detailed consultation with relevant stakeholders.
Employers should stay alert for any changes to the final wording or timeline as the Bill progresses through Parliament.
The impact: What should employers do now?
Labour’s proposal to restrict fire and rehire could fundamentally change how businesses manage contractual changes. While the details are still being finalised, the direction is clear – and employers who rely on this process will need to rethink their approach.
To prepare for this potential shift, employers should:
Review contracts
Ensure your employment contracts include fair and clearly drafted variation clauses (and other key terms like mobility clauses) to suit your business and/or sector. At a minimum, consider updating contracts for new hires.
Plan ahead
Consider any organisational changes that might require contractual variations in the near future and whether action is needed before the new rules come in. Once these new rules take effect, subject to any further changes, it will be far harder to make them.
Get advice
Seek legal advice before initiating any process to change terms and conditions – especially if dismissal and re-engagement is on the table.
With many businesses currently struggling financially and facing tough decisions about how to manage costs, employers will need to be proactive and stay informed about this potential change in the law to avoid costly pitfalls as the legal landscape evolves.
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