ERA reforms in depth: Fire and rehire – changes to varying terms of employment

These reforms are likely to come into effect in October 2026.

Current position

When changing terms and conditions of employment, an employer may dismiss an employee and re-engage them on the new terms and conditions of employment if the employee does not agree to the variation. In these circumstances, the employee is entitled to bring a claim for ordinary unfair dismissal, but the employer can defend the claim by showing that the change to terms and conditions was for a ‘sound business reason’.

The employer must also follow a fair process – if an employer unreasonably fails to comply with the Code of Practice on dismissal and re-engagement it risks an uplift in compensation of up to 25%.

What is changing?

The original draft of the Bill effectively introduced a ban on the practice of ‘fire and rehire’ where the employer sought to make any change to an employee’s terms and conditions without their consent. After concerns were raised about the potential for this to provide employees with a power of veto over all changes to terms, significant amendments to the ‘fire and rehire’ reforms were made by the government in July 2025 and were subsequently incorporated into the Act prior to Royal Assent.

The reforms as amended now distinguish between ‘restricted variations’ and other variations, as we explain below.

Restricted variations

Dismissal will be automatically unfair if the reason for the dismissal was either:

1. that the employee did not agree to a ‘restricted variation’ of their contract of employment; or
2. was to enable the employer to re-engage the employee (‘fire and rehire’) or employ someone else (‘fire and replace’) under a varied contract of employment (including at least one ‘restricted variation’) to carry out substantially the same duties.

The definition of a ’restricted variation’ is a variation which relates to a list of specified contractual terms, as set out in the Act, and includes:

• a reduction, or removal of an entitlement to, ‘any sum payable’ to the employee, although importantly there is provision for further regulations to specify expenses, payments or benefits in kind which may be excluded from constituting a ‘restricted variation’
• a variation to sums payable to the employee by reference to the amount of work done by the employee or results achieved by the employee – for example, commission
• a variation to any term or condition relating to pensions or pension schemes
• a variation to the number of hours which an employee is required to work
• a variation to the timing and duration of shifts which meets conditions to be set out in subsequent regulations
• a reduction in the amount of time off to which an employee is entitled
• any other variation specified in subsequent regulations
• the inclusion in the contract of a variation clause to allow the employer to vary any of the restricted terms without the employee’s agreement although it would appear that variation clauses in the contracts of new hires and existing variation clauses already incorporated into contracts of employment will still be permitted.

There is a very tightly drawn exemption to the above automatic unfair dismissal provisions. In broad terms, the exemption would apply where the reason for the ‘restricted variation’ was to eliminate, prevent or significantly reduce financial difficulties which are affecting the employer’s ability to carry on the business as a going concern (or, for a public sector employer, the financial sustainability of its statutory functions). If the employer can show it falls within this exemption, the tribunal would still go on to consider whether the dismissal was fair in all the circumstances, taking into account a range of factors listed in the Act.

Other variations

Whilst the focus of the ‘fire and rehire’ reforms is now on ‘restricted variations’, the Act also introduces a new bolstered ordinary unfair dismissal test that would apply to dismissals involving non-restricted variations. The Act sets out a list of factors (including the reason for the variation, the consultation carried out by the employer and any incentives offered to the employee in return for agreeing to the variation) that a tribunal would have to assess when considering whether a dismissal involving a non-restricted variation was unfair in an ordinary unfair dismissal claim.

It is not entirely clear at this stage how different the tribunal’s assessment of the bolstered ordinary unfair dismissal provisions will be from the existing unfair dismissal assessment that tribunals currently carry out when faced with a dismissal and re-engagement case regarding changes to terms and conditions.

Before these reforms come into force, the government intends to update the Code of Practice on dismissal and re-engagement to reflect the updated legal position.

The Act also sets out anti-avoidance provisions preventing an employer from seeking to avoid the liabilities outlined above by replacing employees with individuals who are not on employment contracts, such as agency workers or self-employed contractors. This could have significant implications for those employers who might want to change their business model from one of direct employment to wider use of agency workers or self-employed contractors.

In Labour’s Plan to Make Work Pay, the party outlined plans to provide more effective remedies against abuse of ‘fire and rehire’ and to strengthen the Code of Practice. The Act goes much further than this and will significantly restrict an employer’s ability to make ‘restricted variations’. Dismissal and re-engagement relating to restricted variations will only be available as a potential option in the most extreme of cases (i.e. where a failure to change terms would affect the business’ survival or viability).

Given the need to adapt to new ways of working, employers will need to look for ways to build in flexibility through their contracts of employment – for example, we may see a greater reliance on contractual variation clauses which can provide some opportunity to vary terms and conditions without needing to obtain the consent of employees. It is worth noting that these clauses are not a panacea, however, and there are restrictions on the employer’s abilities to rely on such clauses. Employers should review contracts now to ensure that they contain well-drafted flexibility and variation clauses, particularly as, once these reforms are in force, any attempt to include a new variation clause to allow the employer to vary any of the restricted terms without the employee’s agreement will itself be a ‘restricted variation’.

Restricting the automatic unfair dismissal provisions to apply only to restricted variations (which are, up to a point, limited to those terms which employers look to change least often), does offer employers some flexibility to make changes to unrestricted terms, absent employee agreement. Indeed, it will be welcome news to employers that place of work and job duties are not on the list of restricted variations given these are two of the most common scenarios where an employer may want to make changes, without being in major financial distress.