Dismissal and Re-engagement - "Fire and Rehire" key changes expected under the Employment Rights Act

What is fire and rehire?

Fire and rehire is when an employer terminates employees’ contracts and then offers to rehire them on new, often less favourable terms, such as lower wages, reduced hours, or fewer benefits. Fire and replace is another practice where employees are dismissed and replaced with new employees on different (reduced) terms.

These practices have been used by companies looking to cut costs or restructure, but it raises significant ethical, legal and social questions, with critics arguing that it leaves workers with little choice but to accept diminished conditions rather than lose their job.

What is the current law on fire and rehire?

Under current UK law, fire and rehire is technically permissible, although it remains a controversial practice that generates public condemnation. 

One of the most high-profile examples was when P&O Ferries dismissed 800 employees in 2022 and replaced them with cheaper agency workers, sparking widespread disapproval. Despite the backlash, P&O faced no legal consequences, as this was not prohibited. 

However, in response, the UK government introduced a Code of Practice, and this came into force in July 2024 (the Statutory Code of Practice on Dismissal and Reengagement (“the Code”)) to encourage employers to only use fire and rehire as a last resort, after all other attempts to reach an agreement have been exhausted. It applies when an employer is considering making changes to employees’ contracts where, if they cannot be agreed, dismissal and re-engagement may be implemented.

Although the Code is not legally binding, employment tribunals must take it into account when considering relevant cases. This requirement adds significant scrutiny to the process and is reinforced by the tribunal’s discretion to increase compensation by up to 25% where an employer fails to follow the code.

Key provisions of the 2024 Code of Practice on Dismissal and Re-engagement

• Consultation Requirements: Employers must ensure the appropriate parties are consulted, and provide as much relevant information as possible, as early as possible, to allow workers to assess the proposed changes, understand the reasons behind them, and submit counterproposals

• Engagement in Good Faith: Employers must engage in genuine consultation with affected employees in an effort to reach a mutually agreeable outcome. They are required to consider all reasonable alternatives and take into account any feedback or proposals from employees

• Prohibition on Using Dismissal as Leverage: Employers are prohibited from using the threat of termination as a negotiation tactic unless dismissal is genuinely part of the process. They also cannot raise the possibility of dismissal and re-engagement prematurely; these measures should only be considered as a last resort

• Re-evaluation of Proposed Changes: If it becomes clear that the proposed changes will not be accepted by employees, employers must reconsider their approach. They should assess the potential negative impact on employees and explore other options that could meet business objectives without causing disproportionate harm to staff

• ACAS Notification: Whilst ACAS may be contacted by either party, the employer is encouraged to contact ACAS for advice before raising the prospect of dismissal and re-engagement

What are the legal Implications?

• No Direct Legal Claim for Non-Compliance: While there is no specific legal claim for failing to follow the Code, importantly tribunals can increase compensation by up to 25% for employers who unreasonably fail to adhere to the Code in cases such as unfair dismissal

What does this mean going forward?

The Employment Rights Act, which has now passed through Parliament as of December 2025, has generated significant interest due to its potential to address the gaps in UK employment law, such as fire and rehire practices.

The Act would make it automatically unfair to dismiss an employee for refusing to accept specified (“restricted”) changes to their terms and conditions of employment, or if an employer dismisses an employee with the intention of hiring someone else to perform the same role but on different terms, as seen in the P&O case. There is a “financial difficulties” exception – for more about this see below. This change would curb fire and rehire by closing the loophole that lets employers dismiss workers and offer new contracts with lower pay or benefits under the threat of job loss.

The Act forces employers to either act fast before the changes come in or once they are in, find other ways of negotiating changes, such as through genuine consultation and agreement rather than coercive tactics.

What key changes are expected under the new Employment Rights Act?

• Automatic Unfair Dismissal: The Act marks a significant shift by making dismissals for refusing restricted contractual changes automatically unfair. These restricted changes include pay, pensions, working time, time off, and the addition of variation clauses without employee consent, with scope for further categories to be set by regulation

• Financial Justification for Dismissal: The Act includes a provision that permits dismissals in very limited cases where an employer can prove they are struggling to stay financially viable at the time or in the immediate future. The reason for the proposed variation of a restricted area of the contract needs to prevent, significantly reduce or mitigate the effect of any financial difficulties. If the test is met, then the dismissal is not automatically unfair but “ordinary” unfairness needs to be considered. This will include what consultation was undertaken and what was offered to the employee to agree the variation

• Protective Award Increase: There is already a protective award under UK law if an employer fails to carry out proper collective consultation when proposing to dismiss 20 or more employees by reason of redundancy within 90 days at one establishment. Note that “by reason of redundancy” includes dismissals that do not relate to an individual employee and therefore will extend to changes to terms and conditions. This award compensates affected employees for the lack of consultation. This maximum protective award is set to increase from 90 days’ pay to 180 days’ pay per affected employee

The Code will be updated to reflect the new fire and rehire regime. Therefore, in relation to the protective award increase, if the protective award is 180 days’ pay, the 25% uplift for an unreasonable failure to comply with the Code could be worth an additional 45 days’ pay per employee (which is currently 22.5 days’ pay).

It is clear that the Act is going to make it more difficult for employers to alter employee contracts without gaining consent or having consent already. Employers may seek to build flexibility into employment terms from the outset, prior to the introduction of the Employments Rights Act which may assist. Variation clauses, which are provisions allowing businesses to make changes to contractual terms, will likely become increasingly important. These clauses are already common in employment contracts and existing flexibility clauses should remain unaffected under the Act. They have their limitations, however.

How our Employment team can help you

Whether you're an employee or employer, our specialist employment solicitors have the know-how to handle any dispute or other legal problem you encounter. Covering Bromley, London, Kent, West Wickham and Sevenoaks, our employment solicitors do more than provide authoritative advice - they also ensure legal advice is delivered in way that is simple for clients to understand.  If you have any questions about the Employment Rights Act and what it might mean for you, please contact one of our employment team on 020 8290 0440.