Fire and rehire: A fundamental change for employers from 2027

The Employment Rights Act 2025 will significantly restrict an employer's ability to use dismissal and re-engagement, commonly known as "fire and rehire", to change employees' contractual terms. The reforms represent an important shift in the balance of risk when organisations restructure, harmonise terms or seek cost savings.

What is "fire and rehire"?

Fire and rehire generally describes a situation in which an employer cannot obtain an employee's agreement to contractual changes and instead dismisses the employee before offering re-engagement on new terms. There have also been recent examples, such as the high-profile P&O Ferries redundancies, where employers have made employees redundant and sought to replace them with other types of workers. 

Under the current regime, dismissal and re-engagement remain an option in some circumstances. Employers should have a sound business reason, explore alternatives and undertake meaningful consultation with affected employees. The statutory Code of Practice on Dismissal and Re-engagement must also be followed, which includes employers considering whether a contractual change is genuinely necessary, exploring alternative solutions and following a fair process.

That position is about to become considerably more restrictive.

What is changing?

The Employment Rights Act 2025 introduces a new automatic unfair dismissal regime in these types of situations.

The new rules protect a category of core contractual terms known as "restricted variations". These include changes such as:

• reductions in pay;
• changes to total working hours;
• reductions in holiday or leave entitlement;
• certain pension changes;
• changes to measures of work which determine an element of pay; and
• specified changes concerning shift patterns.

Importantly, the legislation is not confined to the traditional scenario of dismissing someone and immediately offering that same employee a new contract. The protection also extends to "fire and replace", where the dismissed employee is replaced by another person carrying out the same or substantially the same role on the varied terms.

This substantially changes the risk assessment HR teams will need to undertake before embarking on contractual change exercises.

Narrow financial distress exception

The legislation provides a narrow exception where the employer is experiencing serious financial difficulties.

Broadly, the employer will need evidence that financial difficulties are affecting, or are likely in the immediate future to affect, the organisation's viability; that the contractual changes are intended to eliminate, prevent or significantly mitigate those difficulties; and that the employer could not reasonably have avoided the need to make the changes.

This is a deliberately high threshold. The Government's guidance describes it as an exception designed for situations where restructuring is necessary to keep an organisation viable, save jobs and prevent redundancies where there is no alternative.

Even where an employer satisfies this test, that does not automatically make the dismissal fair. A tribunal must still consider the circumstances, including whether meaningful consultation took place with employees, unions or employee representatives and whether employees were offered something in return for agreeing to the contractual change.

For HR, therefore, consultation remains crucial rather than becoming less important under the new regime.

What about changes to other contractual terms?

Not every variation will fall within the restricted category.

The Government's current guidance indicates that changes to matters such as work location or job role may be non-restricted variations. Using dismissal and re-engagement to achieve those changes will not automatically make the dismissal unfair under the new fire and rehire provisions but the usual unfair dismissal tests will still apply, along with ensuring consideration of the specific requirements set out above. 

Consequently, HR teams should avoid assuming that a change falling outside of the restricted list presents no risk. The nature of the proposed change, the reason for it and the process followed will all continue to matter.

Watch this space!

There is an important element of unfinished business.

The Department for Business and Trade consulted between 4 February and 1 April 2026 on how the protections should apply specifically to expenses, benefits and shift patterns. At present, the Government is analysing the responses, and secondary legislation will still be required to implement the resulting proposals.

HR teams should, therefore, keep the position under review as the commencement date approaches, particularly before changing benefits, expenses arrangements or contractual shift patterns.

WARNING: the impact on workforce restructuring goes much wider!

One of the most important issues for HR teams is that the reforms are not just about changing terms and conditions.

They potentially affect much wider restructuring and workforce planning decisions.

For example, organisations considering replacing an existing senior position with a less costly junior role will now need to carefully consider how this situation interacts with the new protections and whether they can still approach this as a redundancy exercise.

Similarly, although transfers of employment covered by TUPE and dismissals wholly or mainly attributable to a reduction in work are not covered by the new rules, outsourcing and TUPE exercises could still involve redundancies, changes to roles or attempts to alter contractual terms, which might fall foul of the new legislation and lead to uncapped unfair dismissal claims regardless of length of service in 2027.

For example, if there is a relevant transfer for the purposes of TUPE but some employees are not "in scope" to transfer, if they are subsequently dismissed due to the change in their role, they might seek to argue that they fall within the new protection as their dismissal arose from part of their role being carried out by another person. Equally, if any proposed change to terms and conditions on a TUPE transfer are "restricted variations", dismissals will be automatically unfair without the need for service (albeit only six months from 1 January 2027).

As a result, restructures, outsourcing arrangements and TUPE exercises will require careful legal analysis rather than an assumption that labelling a proposal as "redundancy" takes it outside the new rules. As a more general point, the changes to unfair dismissal laws taking effect on 1 January 2027 (the reduction of the qualifying period of service and removal of the compensation cap) will impact on all of these types of changes in terms of risk analysis and potential financial exposure and will need to be carefully considered from the outset.

What should HR teams do now?

With the reforms approaching, HR leaders have an opportunity to prepare for the changes, rather than waiting until a future restructuring creates an urgent need for contractual flexibility:

• Audit employment contracts

Review existing contractual terms before 1 January 2027, particularly flexibility and variation clauses. Identify areas in which the organisation may wish to make operational adjustments and build this into existing and new contracts.

A flexibility clause can permit changes in certain circumstances under the current law, although its wording and the way it is exercised remain important.

• Identify contractual changes already on the horizon

Consider whether the organisation has planned changes to pay structures, hours, holidays, pensions, benefits or working arrangements.

Where genuine changes are already required, employers should consider whether there is a sound business case for addressing them before the new regime takes effect. That does not mean rushing through fire and rehire exercises. Consultation, agreement and compliance with the existing statutory Code remain essential.

• Make agreement the central strategy

Once the restrictions apply, obtaining genuine employee agreement will become increasingly important for changes to protected contractual terms.

HR teams should develop strategies for achieving voluntary agreement. Depending on the circumstances, this could include negotiated packages or contractual "buy-outs", where employees receive something of value in return for agreeing to new terms.

• Review restructuring and outsourcing procedures

Fire and rehire should no longer be treated solely as an employee-relations issue. HR, legal and operational teams should build the new rules into the early stages of:

• restructures;
• cost-saving exercises;
• role redesign;
• outsourcing;
• TUPE projects; and
• contractual harmonisation exercises.

That allows legal risk to be identified before the proposed organisational structure has effectively become irreversible.

• Invest in consultation

Good consultation will become even more important. The Government's guidance confirms that consultation with employees and their representatives will be even more relevant to the tribunal's assessment in cases falling outside of the new statutory regime.

Early engagement with employees and recognised unions may also make consensual solutions significantly easier to achieve.

The practical message for HR

The reforms mark a significant change in approach. A legitimate commercial reason for changing terms will no longer, by itself, provide employers with the degree of protection it once did.

HR leaders should therefore regard restructuring and workforce change as an increasingly strategic issue. Reviewing contracts and planned organisational changes ahead of implementation, improving consultation processes and developing alternatives to compulsory contractual change should all be priorities. The strongest position for an employer will increasingly be to secure agreement rather than rely on dismissal as the mechanism for implementing change.