Employment Rights Act 2025: A turning point for fire and rehire practices

The Employment Rights Act 2025 seeks to restrict dismissal and re-engagement, commonly known as ‘Fire and Rehire’. The recent launch of a new government consultation now offers insight into how these changes may operate in practice. Is this the end of fire and rehire?

What is Fire and Rehire?

‘Fire and Rehire’ is shorthand for practice of dismissing an employee and then re‑employing them under a new contract, typically on less favourable terms. Employers may use this approach to introduce significant changes to contractual conditions for example, alterations to pay, working hours, or benefits. If an employee refuses to agree to proposed contractual variations, the employer may terminate their existing contract and offer continued employment under the revised terms.

At present, this practice is lawful provided the employer can demonstrate a sufficiently good reason for the dismissal and follows a fair procedure.

For many employers, this approach is typically considered as a last resort when attempting to implement changes to an employee’s contract. In practice, most employers will try to reach agreement with employees. Forcing contractual change can create significant challenges for employee relations.

The practice of “Fire and Rehire” came under significant public scrutiny following the high profile P&O Ferries scandal in 2022, when 800 workers were dismissed and replaced with agency staff. In response, a Code of Practice was published in July 2024, encouraging employers to act fairly and responsibly. The Code stresses that this approach should only be used as a last resort.

What changes can we expect?

From January 2027, dismissing an employee to impose a restricted variation without consent or where the employee objects and is subsequently dismissed will be treated as automatic unfair dismissal. This marks a significant shift in Employment Law.  In practice, this will significantly curtail the use of fire and rehire as a mechanism for imposing core contractual changes, except in limited and tightly defined circumstances.

Restricted variations

Restricted variation includes changes to:

• Pay
• Working hours
• Pension arrangements
• Shift patterns and duration
• Entitlement to time off

The final scope and definition of restricted variations remain subject to consultation and secondary legislation.

Importantly, dismissing and re-hiring in order to add a contractual clause permitting unilateral changes to these areas will itself be treated as a restricted variation and therefore will not be allowed.

If an employee is dismissed and re-engaged to impose a contractual change that does not  amount to a restricted variation, the dismissal will not be automatically unfair (although it will still be subject to the ordinary unfair dismissal test).  Equally, changes to contractual terms which do not involve termination and re-engagement (such as changes by agreement, or by relying on an existing contractual variation clause) will not be prohibited.

Expenses and benefits in kind:

On 4 February 2026, the government launched a consultation on the operation of these provisions, proposing to exclude from the definition of “restricted variation” changes relating to expenses and benefits in kind.  If adopted, this would mean that a dismissal undertaken to change these particular terms would not be automatically unfair,  although the employer would still need to show a fair reason for dismissal and follow a fair process.

This approach would give employers greater flexibility in relation to expenses and benefits, although changes to core pay would remain tightly restricted.

Shift patterns

The government is also seeking views on whether changes to contractual shift patterns should fall within the scope of restricted variations, in part, or at all. It acknowledges that employers may have legitimate operational reasons to adjust shift patterns in response to customer demand. However, it also recognises that even relatively minor alterations to shift times can have a significant impact on employees, particularly in relation to childcare, commuting, and work life balance.

Replacing employees with non-employees

The new rules also cover situation where employers dismiss staff and replace them with self-employed contractors, agency workers, workers who are not employees or any other individuals who are not employed by the employers if those individuals will be performing  the same role. Such a dismissal would be automatically unfair

What is permitted?

Dismissal will not be automatically unfair where:

• The changes are minor changes to shift times, or relate solely to the place of work or job role. Dismissing and re-hiring to effect such changes will still be subject to the usual unfair dismissal test (if the employee has sufficient service) with tribunals assessing the rationale for change, the consultation undertaken and whether the employer acted reasonably in all the circumstances.
• The employer can demonstrate that the change was necessary to eliminate, prevent or significantly reduce, or mitigate the effect of any financial difficulty, that was affecting, or likely to affect in the immediate future, their viability to continue operating. This is a very high hurdle and will only be capable of being met in exceptional cases.

How can employers prepare?

There will inevitably be situations where employers need to amend contractual terms for example, following the acquisition of a new business where roles, reporting lines, or structures need to be harmonised with the existing workforce.

However, the upcoming legislative changes will still create a significant barrier to altering outdated, inconsistent, or commercially unsustainable pay, pension, or working hours arrangements. Even where change is operationally necessary, employers may find their flexibility more constrained than before.

Employers should therefore consider the following steps:

Review existing contracts: Assess flexibility clauses and the extent to which they can lawfully be relied upon without engaging the restricted variation regime.

Plan ahead: Where possible, introduce proposed contractual changes before January 2027.

Consult early: Engage in meaningful consultation with employees or their representatives before making any contractual changes, particularly where dismissal and re-engagement may be at risk.

Update internal processes: Ensure procedures for varying contractual terms clearly identify restricted variations and the steps required before dismissal is contemplated.

Explore alternatives: Where financial necessity cannot be demonstrated, consider incentives or alternative approaches to achieve the desired outcome – i.e. to obtain employee agreement.

Recognise the shift in approach: Fire and rehire can no longer be used as a negotiation tool for restricted variations unless it is genuinely justified by financial necessity.

Draft future proofed contracts: Ensure new contracts include lawful and carefully drafted flexibility clauses to accommodate future change.

If you would like to explore what these changes mean in practice for your organisation, please feel free to contact me or one of the employment team to discuss further.

The government’s consultation on fire and rehire will remain open until 1 April 2026 and can be accessed HERE.

This update contains general information only and does not constitute legal or other professional advice. For further information and advice on this topic, please contact a member of our Employment team.