Fire and rehire: what the latest government announcements mean for employers

We explain what has changed and what employers should do to prepare.  

What are the changes?

Dismissal and re-engagement, often called ‘fire and rehire’, is where an employer dismisses an employee and offers to re-employ them on different contractual terms. It can also involve dismissing an employee and replacing them with someone else on different terms.  

The current code of practice on dismissal and re-engagement ('the Code') has been in force since 18 July 2024. It requires employers to explore alternatives to dismissal and consult meaningfully with employees before dismissing and offering to re-engage them.

Although the Code is not legally binding, employment tribunals can take it into account and, where applicable, increase compensation by up to 25% if an employer unreasonably fails to follow it.  

The government believes that the current framework does not give employees enough protection. The Employment Rights Act 2025 ('ERA 2025') therefore introduces significant restrictions on the use of fire and rehire. 

Under the new rules, it will be automatically unfair to dismiss an employee to impose a ‘restricted variation’ to their contract without their agreement, unless the employer is in severe financial difficulty and has no reasonable alternative.

Restricted variations will include: 

• Reducing pay
• Where pay is linked to measures of work done (such as targets), changing those measures/targets
• Changes to pensions (although pension terms are not usually contractual)
• Changes to the total number of hours worked
• Reducing the amount of holiday
• Changes to shift patterns 
• The inclusion in a contract of employment of a term enabling the employer to make any of the above changes without the employee's agreement.

If a proposed contractual change does not fall within the list of restricted variations, you may still be able to dismiss an employee and offer to re-engage them on the new terms without the dismissal being automatically unfair. However, the employee may still bring an ordinary unfair dismissal claim. You will therefore still need to act reasonably and follow a fair process, including meaningful consultation.  

What has the government decided following its consultation?

The government consulted on the scope of some of the restricted variations and has now published its response. 

Expenses and benefits in kind 

The government considered whether it should exclude some or all expenses and benefits in kind from the restrictions. 

It has decided that certain types of travel expenses, including mileage, accommodation expenses and accommodation provided as a benefit in kind will be restricted variations. However, changes to share schemes will not. 

This means that it will be automatically unfair to dismiss an employee to impose a change to a contractual term relating to travel expenses, accommodation expenses or accommodation provided as a benefit in kind.

Importantly, the government states that employers may still be able to make changes to expenses and benefits that are restricted variations where the employment contract already gives them flexibility do so, for example through a variation clause.

The government considers that this strikes an appropriate balance between protecting employees and giving employers flexibility. 

Shift patterns

The government also considered whether employees need greater protection against significant changes to their contractual shift patterns and decided that they do.

It will therefore be automatically unfair to dismiss an employee to impose a contractual change that requires them to:

1. work at night (between 11pm and 6am) when they were not previously required to do so, or work during the day when they were not previously required to do so; or

2. work at weekends when they were not previously required to do so, or work on weekdays when they were not previously required to do so. 

What does the new draft Code of Practice say?

The government has published a new draft Code of Practice on dismissal and re-engagement ('the draft Code') to reflect the forthcoming changes and is consulting on its contents. 

The draft Code retains the existing emphasis on meaningful consultation, genuine consideration of alternatives and using dismissal and re-engagement only as a last resort. 

However, it also reflects the new legal framework and includes specific guidance on the financial difficulties exception. 

For private sector employers, the draft Code explains that the exception may apply where the employer can show that it needs to make the restricted variation to:

• eliminate the financial difficulties (or remove the financial pressures all together)

• prevent the financial difficulties getting to the point where they would threaten the organisation; or

• significantly reduce or significantly mitigate the effects of financial difficulties

The employer must also show that the financial difficulties are affecting, or are very likely in the immediate future to affect, its ability to continue as a going concern. Without the proposed changes, the organisation would have to make redundancies or close. Also, the employer must show that, in all the circumstances, it could not reasonably have avoided the need to dismiss and re-engage the employee to make the restricted variation.

The draft Code contains separate sections for public sector and local authority because different tests apply. 

The consultation closes at 11:59pm on 17 December 2026. 

When will the new restrictions take effect?

The government had previously planned to introduce the new fire and rehire restrictions in January 2027. However, its implementation timeline now states that the changes will take effect in March 2027. 

The new Code of Practice will not come into force until Summer 2027. 

What should employers do now?

Review your employment contracts now. The new rules will make it much harder to use dismissal and re-engagement to make certain contractual changes. 

It is particularly important to consider variation clauses. You will not be able to dismiss and re-engage an employee simply to introduce a new variation clause. This is because introducing that type of clause will itself amount to a restricted variation. 

Existing variation clauses may still give you some flexibility once the new rules take effect, depending on their wording and the circumstances. However, there are limits on when and how you can rely on them, so you should take legal advice before relying on a variation clause to make changes.  

More broadly, this is a good opportunity to make sure your contracts are up to date and reflect the wider changes introduced by the ERA 2025.

We can review your contracts of employment and identify the required changes. Please speak to Gordon Rodham for more information.

You can find out more about the ERA 2025 changes and how we can help you prepare here. 

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