Preparing for New Restrictions on Fire and Rehire Under the Employment Rights Act 2025

The Employment Rights Act 2025 (ERA 2025) will overhaul the legal framework surrounding the practice of fire and rehire and impose far stricter limits on when it can be used. With restrictions expected to take effect from January 2027, employers need to understand and prepare for these changes to mitigate future legal risk.

What is Fire and Rehire?

Fire and rehire, also known as dismissal and re-engagement, is a practice where an employer terminates employees’ existing contracts of employment and then offers continued employment on different, often less favourable, terms. This can be used by employers where they have a sound business reason for seeking to change a contract of employment, such as responding to economic challenges and changing working practices, where the situation doesn’t amount to redundancy.

To understand when redundancy rules apply instead, employers can refer to the UK Government’s redundancy guidance.

Employers usually consider fire and rehire when:

• They want to change employees’ terms and conditions;
• Employees do not agree to those changes; and
• The employer believes it cannot implement the changes in any other way.

In such cases, an employee may be able to claim:

• Wrongful dismissal, if the employer fails to give the appropriate period of notice.
• Unfair dismissal, where the employer has not acted reasonably, even if the employee chooses to accept re-employment on new terms.
• Breach of collective consultation requirements, if the employer proposes to dismiss 20 or more employees.

The Controversial Practice of Fire and Rehire

There has been controversy surrounding the practice of ‘fire and rehire’ in recent years, not least, following the high-profile case in which P&O Ferries dismissed 800 members of its shipping staff with immediate effect in 2022.

The Conservative government introduced a statutory code of practice on dismissal and re-engagement (the Code) in July 2024, under which employers who unreasonably fail to follow the Code could face an adjustment in any compensation awarded in a claim by up to 25%.

The ERA 2025 will bring significant changes to the legal framework surrounding fire and rehire, which will make it a less attractive and riskier option for employers.

Fire and Rehire Restricted from January 2027

Whilst the government’s original proposal for an outright ban on rehire and rehire was dropped, the ability for employers to fire and rehire staff will be severely restricted from January 2027.

The government’s intention behind the change is to end unscrupulous fire and rehire tactics, whilst still enabling businesses to restructure to remain viable where there is genuinely no alternative.

Other than in circumstances of “financial difficulty”, an employee will be automatically unfairly dismissed where the reason, or principal reason, for their dismissal is one of the following:

• The employer sought to vary the employee’s contract of employment to make a “restricted variation” and the employee did not agree to the restricted variation.
• To enable the employer to employ another person, or to re-engage the employee, under a varied contract of employment to carry out the same (or substantially the same) duties as the employee carried out before being dismissed, where one or more of the differences between the two sets of terms is a restricted variation.

A “restricted variation” is that which broadly concerns pay, hours, holiday or the inclusion of a variation clause. The Secretary of State will be able to add to this list, although the government doesn’t intend to do so at present. The finer detail of what amounts to a restricted variation is currently being consulted on.

An employee’s dismissal will not be unfair if the employer is able to show it is in “financial difficulties”. This exception will only apply in very limited situations, essentially that the employer’s ability to continue in business was at risk.

Where contracts of employment are varied and the variation is not a restricted variation, a related dismissal will not be automatically unfair. However, a tribunal will still need to assess whether the dismissal is unfair under ordinary principles.

Fire and Rehire Code to be Updated

The government has confirmed that it will update the Code to reflect the upcoming changes under the ERA 2025. This is expected during 2026.

The Code allows an employment tribunal to award a 25% uplift on a ‘protective award’ in the event of an employer’s unreasonable failure to comply with it. The protective award is awarded for an employer’s failure to comply with its collective consultation obligations. The protective award will be doubled from 90 days’ pay to 180 days’ pay from 6 April 2026, meaning that the uplift could be worth an additional 45 days’ pay.

How Employers Should Prepare for the Changes to Fire and Rehire

The ERA 2025 and the updated Code will make fire and rehire significantly more restrictive and higher‑risk from 2027. Employers should start preparing for these employment law changes now to ensure compliance and reduce legal exposure.

1. Review variation clauses

• Audit all employment contracts to identify whether variation clauses exist and whether they are sufficiently robust.
• For future hires, continue to include clear and lawful variation clauses where appropriate.

2. Plan for limited ability to use fire and rehire

• Ensure any business rationale for proposed contractual changes is well-documented, particularly where financial difficulty may be relevant.
• Recognise that dismissals connected to restricted variations (e.g., changes to pay, hours, holiday, variation clauses) will be likely to be automatically unfair unless the employer is in serious financial difficulty.
• Where variations relate to non-restricted terms, dismissal may still be unfair under ordinary principles.

3. Strengthen consultation processes

• Enhance consultation procedures to ensure they are thorough, fair and well-evidenced.
• For any proposals affecting 20 or more employees, ensure collective consultation obligations are fully understood and followed.

4. Prioritise alternative approaches to contractual changes

• Explore non-contractual adjustments first.
• Invest time in genuine negotiation to secure agreement to contractual changes wherever possible.
• Consider phased changes, offering incentives and transitional arrangements.

Key Takeaways for Employers

With the new fire and rehire restrictions set to take effect from January 2027, early preparation will be essential to ensure compliance, reduce legal risk, and build trust through fair and transparent decision‑making. Employers must act now to strengthen consultation practices, review contractual terms, and prioritise collaborative approaches to change.