Employment Rights Bill unpacked: 'fire and rehire'

The practices of ‘fire and rehire’ and ‘fire and replace’ have been the subject of significant attention in recent years. The reforms proposed in the Employment Rights Bill seek to limit the circumstances in which employers can use these practices, making good on Labour’s promise to bring an end to so-called “unscrupulous” employment practices, even where it recognises they have been adopted for a “sound business reason”.

In this article, we summarise the current position, explain the government’s plans (including further proposed reforms set out in a new consultation) and look at their potential impact for employers.

Current law 

The practice of ‘fire and rehire’ refers to the practice of changing employment terms and conditions by way of dismissal and re-engagement, typically 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. 

Although subject to increased scrutiny, largely as a result of the high-profile P&O Ferries scandal, which saw the firing of 800 workers in 2022, these practices remain lawful, albeit risky from a reputational and industrial relations perspective.

In response, a new Code of Practice was introduced by the last government, which sought to encourage employers to act fairly and responsibly in negotiations over changes to terms and conditions and emphasised that fire and rehire should only be used as a “last resort”. The Code of Practice came into effect in July 2024. 

The Code didn’t introduce any new binding legal obligations on employers but is admissible in evidence in legal proceedings. That 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.

Labour have previously criticised the Code as being “inadequate”. However, it is currently unclear whether it intends to amend, replace or repeal it altogether. 

Planned changes under the Employment Rights Bill and accompanying consultation 

Planned changes 

Whilst the Bill doesn’t seek to ban the ‘fire and rehire’ and ‘fire and replace’ practices in their entirety, it would severely restrict employers’ ability to use these practices by “closing the loopholes which allow firms to engage in these unscrupulous 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.

Consultation 

A separate consultation was launched shortly after the publication of the Bill, on 21 October 2024, seeking views on “strengthening remedies against abuse of rules”, including around fire and rehire, partly as an attempt to prevent employers from “buying out” claims. This includes a proposal to make interim relief available to employees who allege that they have been fired in a ‘fire and rehire’ or ‘fire and replace’ context.

If implemented, an award of interim relief would see employees continue to be paid (if not re-instated or re-engaged) their full salary and benefits pending the final hearing. However, interim relief would only be awarded where the employee can show their claim is ‘likely’ to succeed.

The consultation closes on 2 December 2024.

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 workforce support. It represents a major victory for the trade union movement, as workers and their representatives will gain more leverage to obtain concessions from businesses wishing to change contractual terms.

However, there is a real risk that measures which appear to have been driven by a small number of extreme but high-profile examples (such as P&O Ferries) will have far-reaching, unintended consequences. 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 existential 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, it is plausible that the new protections will actually result in more redundancies, where it would currently be possible to avoid job losses through changes to terms and conditions.     

In addition, employers may increasingly seek to use pay increases as a strategic ‘bargaining chip’. If businesses will no longer be able to force through changes to contractual terms, they may seek to hold back favourable changes which are in their control (such as salary increases or promotions) unless employees agree to desired measures, or potentially even until there are measures which they will need employee consent for in return. Counter-intuitively, seemingly pro-worker restrictions on fire and rehire could therefore mean that employers become more reluctant to award pay increases to staff.

Next steps and what employers can do

It currently remains unclear when these reforms will come into effect, though it seems most likely that they will be implemented at some point in 2026.

In the meantime, any use of fire and rehire by employers is likely to carry greater reputational risks than ever. However, businesses which are currently considering potential changes to contractual terms that are unlikely to attract employee consent may nonetheless wish to consider whether to do so sooner rather than later, during the limited window in which dismissal and re-engagement still remains a potential option.

We may also see business 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 template 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 established 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 the Employment Rights Bill or other future legislation.