UK Employment Rights Act 2025 Puts Restrictions on Changing Contract Terms by ‘Fire and Rehire’

Important changes in employment law will take effect on Jan. 1, 2027, that will significantly limit employers’ ability in Great Britain (England, Wales and Scotland, not Northern Ireland) to impose changes to employees’ terms of employment. One option that will become more difficult for employers to use is the practice of dismissing then re-engaging employees on new terms. Employers should take measures now in anticipation of these changes.

Changing Employment Terms — Current Legal Position

In Great Britain, an employer can only change an employment contract in accordance with ordinary contract law principles, i.e., with the employee’s agreement.

An employer imposing a change without the employee’s express or implied agreement commits a breach of contract, exposing it to claims including for damages, unlawful deductions from wages and constructive dismissal.

Unless the contract contains a sufficiently clear and specific term allowing the employer to make the change, an employer has three options:

1. obtain the employee’s express agreement to the new terms with adequate consideration;
2. unilaterally impose the change and rely on the employee’s implied agreement by continued work, which is risky, since the employee may work under protest and bring a claim or resign and claim constructive dismissal; or
3. dismissal followed by an offer of immediate re-engagement on new terms (known as “fire and rehire”) — a practice long regarded as an effective last resort when an agreement cannot be reached.

Under the current pre-reform law, fire and rehire is not unlawful in itself but is subject to the law of unfair dismissal.

An employee with two years’ qualifying service (reduced to six months from Jan. 1, 2027) can claim unfair dismissal if the employer’s reason for dismissal is not a “potentially fair reason” under the legislation (e.g., misconduct, poor performance or redundancy) and the employer does not act reasonably in dismissing (i.e., the decision was not fair on the facts and/or the employer failed to follow a fair process before dismissing).

In fire and rehire cases, employers typically rely on a genuine business need to change terms as the potentially fair reason — falling into a category known as “some other substantial reason” (SOSR) for dismissal.

A key advantage of fire and rehire over unilateral imposition is that it definitively ends the old contract, limiting the employee’s remedy to an unfair dismissal claim (subject to a statutory compensation cap) rather than an ongoing claim for the difference between old and new terms. Employees typically accept re-engagement on the new terms rather than risk the uncertainty and delay of litigation and job-hunting, and a claim rarely materializes once they accept re-engagement, especially when the pay difference is modest.

What Is Changing?

From Jan. 1, 2027, the Employment Rights Act 2025 (ERA 2025) will significantly restrict employers’ ability to use fire and rehire to force through unagreed changes amounting to “restricted variations” — broadly, changes to pay, hours, pensions, shift patterns or time off.

Under the new law, a dismissal will be deemed “automatically unfair” if the reason for dismissal is one of the following:

1. the employee’s refusal to agree to a restricted variation to the contract of employment;
2. to enable the employer to re-engage the dismissed employee under the varied contract to carry out substantially the same role as before; or
3. to enable the employer to replace the dismissed employee with another person (an employee, agency worker, consultant or self-employed contractor) under the varied contract to carry out substantially the same role as the dismissed employee.

An automatically unfair dismissal means the employer can no longer rely on SOSR or other potentially fair reason. Once the dismissal falls within one of the three categories above, the employee will prevail. There is also no qualifying service requirement, so employees are protected from day one.

The ERA 2025 provides only a narrow exception, applying where fire and rehire was necessary because the employer’s business faced severe financial difficulty threatening its viability as a going concern.

What Are Restricted Variations?

Restricted variations are changes to the contract relating to:

1. a reduction or removal of an entitlement to pay or payment in kind (or, when pay is linked to a work output or performance measure such as targets, a variation of that measure);
2. the number of working hours;
3. a variation of a term or condition relating to pension;
4. shift times (changes to shift patterns will only be a restricted variation if they meet conditions to be specified in regulations); and
5. a reduction in rights to time off.

After Jan. 1, 2027, unilaterally inserting a clause authorizing future restricted variations will be a restricted variation, though existing agreed clauses of this kind will not be affected.

‘Financial Difficulty’ Exception to Automatic Unfair Dismissal Rule

A dismissal for refusing to accept a restricted variation will not be automatically unfair if an employer can show that two conditions are satisfied:

1. the restricted variation was intended to eliminate, prevent, or significantly reduce or mitigate financial difficulties that, at the time of dismissal, were affecting (or were likely soon to affect) the employer’s ability to carry on the business as a going concern; and
2. in all of the circumstances, the employer could not reasonably have avoided imposing the restricted variation.

In other words, the employer must show it was necessary to make the restricted variation to eliminate or substantially reduce a current or imminent threat to the business’s survival (for example, cutting pay to avoid imminent insolvency).

This exception is likely to apply only in narrow circumstances. Employers must show not only that the business’s survival was at risk, and the variation would help secure its viability, but also that the restricted variation was unavoidable to achieve this. This places a heavy onus on financially distressed employers to present evidence of the fact and extent of their financial difficulties, consider alternatives and record their reasons for concluding the change was necessary.

When the Employment Tribunal finds that the financial difficulties exception applies, it will assess the fairness of the dismissal under ordinary unfair dismissal law, including the requirement to consider the additional factors described below.

Fairness of Fire and Rehire When Changes Are Not Restricted Variations

Nonrestricted variations would currently include changes to an employee’s place of work, job title or duties, and the addition of or changes to post-termination restrictive covenants.

Changes that are not restricted variations fall outside the automatic unfair dismissal regime described above. Instead, the Employment Tribunal, a specialist employment court, assesses fairness under ordinary unfair dismissal law. However, the ERA 2025 requires the tribunal to consider several factors when assessing fairness in relation to a nonrestricted variation (and when the financial difficulties exception applies):

1. the reason for the variation (in financial difficulties cases, this will be the reason);
2. any consultation the employer carried out with the employee or, when applicable, the employee’s trade union or other employee representatives;
3. anything offered to the employee in return for agreeing to the variation; and
4. any other matters that may be set out in future regulations.

Steps for Employers to Consider

Like many ERA 2025 changes, the fire and rehire reforms are employee-friendly and add risk and complexity for employers, especially alongside the broader unfair dismissal reforms, which will increase the number and value of such claims.

Employers should consider taking several steps now, before the new law takes effect on Jan. 1, 2027, including:

1. Review current employees’ contracts and begin making necessary changes as soon as possible, including considering flexibility and variation clauses giving employers the right to make future changes to specific terms. Fire and rehire remains a last resort for such changes today, but after Jan. 1, 2027, it will be materially harder to use, even as a last resort.
2. Review contract templates and proposed terms for future hires. From Jan. 1, 2027, the automatic unfair dismissal regime for fire and rehire applies as a “day one right,” making it harder to change recent recruits’ contracts.
3. Amend or introduce policies setting out clear decision-making, record-keeping and consultation requirements for contractual changes, aligned with the ERA 2025 fairness factors for nonrestricted variations.

For advice on fire and rehire practices or on managing dismissals generally, contact the authors or a member of the Employment Litigation and Labor-Management Relations Practice Groups.