The practices of ‘fire and rehire’ or ‘fire and replace’ have been the subject of significant attention in recent years, it was used prolifically during COVID and you may recall P&O Ferries scandal which led to the firing of 800 workers in 2022.
The Labour government’s new Employment Rights Bill, introduced in October 2024, will severely restrict this controversial practice of ‘fire and rehire’ in fact to all intents and purposes it will be simply unlawful.
The reforms proposed in the Employment Rights Bill seek to limit the circumstances in which employers can use such arguably unscrupulous practices even where they have been adopted for sound business reasons.
For example, after these reforms come into force if an employer wants to withdraw a contractual commission or bonus scheme and the employees reject such a change, they cannot be dismissed and re-engaged on such new terms.
If an employer’s client changes its service hours and the employer needs to adjust staff working hours to reflect such a change it will no longer be an option to enforce the change through dismissal and re-engagement.
Only if the business genuinely has financial difficulties and can prove this will fire, and re-hire be an option and only then if such difficulties would affect its ability to carry on the business. It must also show that it could not reasonably have avoided the need to make the variation.
Current Position
The term ‘fire and rehire’ refers to the practice of changing employment terms and conditions by way of dismissal and re-engagement usually in situations where it hasn’t been possible to obtain employee or trade union consent. ‘Fire and replace’ refers to the practice of dismissing existing employees and engaging new employees on different terms to replace them. Such practices have always been the last resort, and only rarely used in the way in which P&O did, but it has always been a draconian measure which allowed employers to ultimately make changes they wanted to leaving employees powerless to object, in the end.
Although subject to increased scrutiny, following the high-profile P&O Ferries scandal these practices remain lawful, albeit risky from a reputational and industrial relations perspective.
In response, a new Code of Practice on Fire and Rehire came into effect in July 2024.
The Code, however, did not introduce any new binding legal obligations on employers but is admissible in evidence in legal proceedings.
This means any relevant provision of the Code must be considered by courts and Employment Tribunals, and failure to comply could result in a 25% increase in awards for certain Tribunal claims.
The Employment Rights Bill
Whilst the Bill does not seek to completely outlaw ‘fire and rehire’ and ‘fire and replace’ practices it will severely restrict employers’ ability to use these practices.
The Bill would make it automatically unfair to dismiss an employee for refusing to agree to a variation of their terms and conditions of employment, or because an employer intended to employ another person on varied terms to carry out substantially the same role.
There is a limited exception provided for by the Bill in which a dismissal will not be deemed automatically unfair if the employer can show that they were acting in response to financial difficulties affecting their ability to carry on business as a going concern.
However, even in those circumstances, the employer must also not have been able reasonably to avoid the need to make the variation to terms and have acted fairly in all the circumstances, including in accordance with any further regulations to be published.
A separate consultation was launched shortly after the initial publication of the Bill, seeking views on “strengthening remedies against abuse of rules”.
The consultation response did make a significant change that will affect fire and rehire practices, by doubling the maximum protective award for failure to consult from 90 to 180 days’ pay per affected employee, and this has been added to the Bill.
If 20 or more dismissals are being proposed, the employer is required to consult employee representatives about the proposals, in the same way as for collective redundancies. The protective award is the penalty for failing to consult properly. As noted in the consultation response, the 25% uplift for failing to follow the Code of Practice on fire and rehire will apply to the protective award as well as to any unfair dismissal compensation.
With the protective award doubled and in addition the uplift, this will result in a major financial cost to getting this wrong.
Practical Impact for Employers
The strict approach proposed by the government will make it significantly harder for employers to make changes to terms and conditions without employee agreement.
The measures in the Bill are not limited to reductions in pay or hours and apply to any contractual change whatsoever. For example, an employer would not be able to change employee working hours (while maintaining the same overall number of hours).
Another issue that remains unclear is the test of the employer’s ability to carry on the business as a going concern. Does this mean the entire business or just the part of the larger business needing to make the contractual changes? Unfortunately, this issue has not been clarified in the latest amendments to the Bill.
The government itself acknowledges that employers may have sound business reasons for seeking to change terms and conditions of employment. However, unless employers can show that they are facing financial difficulties, they will no longer be able to rely on fire and rehire as a last resort to force through changes.
As a result, there is a real risk that the new protections could result in more redundancies. Where it would have been possible to avoid job losses through changes to terms and conditions now employers, unable to do so, will simply make redundancies.
What Should Employers Do Now?
It remains unclear when these reforms will come into effect, though it seems most likely that they will be implemented next year, in 2026.
Businesses which are currently considering potential changes to contractual terms that are unlikely to attract employee consent may wish to consider whether to do so sooner rather than later, during the limited window in which dismissal and re-engagement remains a potential option.
We may also see businesses trying to mitigate the potential impact of these reforms by expanding the use of flexibility clauses in their employment contracts.
As flexibility clauses give employers the contractual right to unilaterally make changes (such as to an employee’s benefit package or the times at which they work), they could avoid the need to obtain employee consent. Employers may therefore seek to get ahead of the forthcoming restrictions by reviewing their contracts to ensure that any flexibility clauses are drafted as widely and as effectively as possible. However, anyone adopting this strategy will need to be mindful of the large body of case law limiting the scope and enforceability of flexibility clauses when used to make changes to employees’ detriment. It also remains to be seen whether the government may include anti-avoidance measures targeting this potential use of flexibility clauses in future legislation. This seems likely given the overall direction of travel.
Our employment law solicitors can advise you on all areas of employment law and offer a highly personal and bespoke retained in-house lawyer service.
Please contact Zoe on 0203 858 9765 or email zoe@mulberryssolicitors.com.
Mulberry’s has offices in Brighton and London.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.
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