UK Employment Flash – Fire and Rehire Reforms

Executive Summary

• What’s new: The Employment Rights Act 2025 reforms “fire and rehire” practices, with effect from March 2027, making it automatically unfair to dismiss an employee because they do not agree to certain changes to their terms and conditions of employment.
• Why it matters: This represents a substantial shift for UK employers, who must now meet a high bar to justify changes to certain contractual terms such as pay, working hours or leave entitlements.
• What to do next: To prepare for the upcoming changes, employers may want to review their template employment agreements and variation clauses.

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As the implementation of the UK’s Employment Rights Act 2025 continues, UK employers should be aware of significant reforms to the practice commonly known as “fire and rehire.”

“Fire and rehire” is the dismissal, or threat of dismissal, of employees who refuse to agree to changes to their terms and conditions of employment, with a plan to reengage those employees or a replacement employee on varied terms. It is typically used in cases where employees have generous legacy benefits that the employer no longer wishes or is able to maintain.

The new legislation is expected to come into force in March 2027 (previously January 2027) and amends the Employment Rights Act 1996 to make it automatically unfair to dismiss an employee where the reason, or principal reason, for the dismissal is that the employer sought to vary the employee’s contract and the employee did not agree to the variation. As with whistleblowing and discrimination protection, there is no qualifying period of service, meaning that employees are protected from day one of employment.

The upcoming changes represent a substantial shift from the current position where (i) employees who have less than two years’ service are not protected from being dismissed and reengaged on new terms and (ii) for employees who have more than two years’ service, such dismissals may potentially be fair, provided a fair process is followed and the employer can demonstrate some other substantial reason for the dismissal (which is generally a good business reason for the dismissal, such as organisational changes requiring the business to amend terms and conditions).

Restricted and Unrestricted Variations

The Employment Rights Act 2025 introduces a two-tier framework, dependent on whether the proposed variation is a “restricted” or “unrestricted” variation.

Restricted Variations

Restricted variations cover changes to core contractual terms, including:

• Any sum payable to the employee in connection with their employment.
• Total hours.
• Leave entitlement.
• Pension.
• Specified shift patterns.
• The insertion of a variation clause allowing the employees to make amendments to the terms set out above.

Where a dismissal relates to a restricted variation, the employer must demonstrate that:

• the reason for the restricted variation was to eliminate, prevent, significantly reduce or significantly mitigate the effects of any financial difficulties which, at the time of the dismissal, were affecting or likely in the immediate future to affect the employer’s ability to carry on the business as a going concern; and
• in all the circumstances, the employer could not reasonably have avoided the need to make the restricted variation.

To demonstrate this, the UK Employment Tribunal (ET) is likely to expect employers to produce audit reports and financial statements for the relevant period. Notably, the term “sum payable to the employee” is broadly drawn and is not limited to an employee’s basic salary or even to payments from their employer. In a consultation response published on 23 October 2026, the UK government confirmed that the expenses and benefits that will be in scope of the restricted variations are certain types of travel expenses (including mileage), accommodation expenses and accommodation as a benefit in kind. The consultation response also clarified that changes to share schemes would not be treated as restricted variations. This is a welcome clarification for employers who operate employee share schemes.

If an employer can demonstrate that it had a valid reason for making a restricted variation, the employer also has the burden of proof to demonstrate that the variation could not reasonably have been avoided. The effect of this very high bar is to limit the permissible use of fire-and-rehire practices in relation to certain fundamental terms of employment to cases in which there is genuinely no alternative open to the employer, such as genuine and immediate financial distress or insolvency. Therefore, in practice, the defence will be of limited value to most employers.

If an employer terminates an employee’s employment in connection with a restricted variation and cannot demonstrate that the above circumstances apply, the dismissal will be automatically unfair. In addition, the new legislation provides that where an employee is dismissed, or a fixed-term contract is not renewed, and another individual is subsequently hired to perform the same work for lower pay, the dismissal is automatically unfair.

Where an employer can satisfy the requirements for the defence, the ET will then decide whether the dismissal was fair or unfair in practice. The ET must consider a non-exhaustive list of factors, including (i) whether any consultation was carried out with the employee or their trade union or representative, and (ii) anything offered to the employee in return for agreeing to the restricted variation.

Unrestricted Variations

All other changes to contractual terms and conditions of employment are known as “unrestricted variations.”

Where a dismissal relates to an unrestricted variation, the dismissal will not be automatically unfair. However, the ET will still evaluate its fairness, in accordance with the usual principles, if the employee is dismissed:

• because they refuse to agree to an unrestricted variation; or
• to enable the employer to engage another individual, or rehire that employee, to carry out substantially the same work, on varied terms.

In determining the fairness of the dismissal, the ET must take into account the same list of nonexhaustive factors that apply to restricted variations. In addition, the ET will evaluate the reason for the variation, though the employer does not explicitly have to demonstrate that the variation could not reasonably have been avoided.

Implications for Employers

These reforms will require employers to take a fundamentally different approach to the renegotiation of employment terms. Unilateral changes imposed through the threat of dismissal will carry significantly greater legal risk, particularly when combined with other changes to the unfair dismissal regime in the UK. See our 15 July 2026 client alert “UK Employment Flash – Unfair Dismissal Reforms.”

With effect from 1 January 2027, the potential compensation that employees can claim in ordinary unfair dismissal claims will become uncapped. This significantly increases the potential financial exposure of dismissing an employee unfairly, whether because of a variation to terms and conditions of employment or otherwise.

In addition, in the context of transactions, the changes will make harmonising contractual terms following a business acquisition more difficult. To the extent the business does wish to harmonise terms, the most effective approach will be to obtain the employees’ consent to the variation by offering them an incentive to agree to new terms. The new approach will also need to be considered in the context of existing protections for terms and conditions of employment on a transfer under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE).

Practical Steps

To prepare for March 2027 and upcoming changes, employers may want to:

• Identify which terms and conditions of employment in existing templates are likely to constitute restricted variations and update or remove clauses that are no longer fit for purpose, such as narrowly drawn shift-pattern provisions or broad contractual bonus/incentive entitlements.
• Review unilateral variation clauses in template employment agreements to ensure that they are clear and unambiguous. Employers should be aware that, from March 2027, adding a variation clause to an existing employment agreement is a restricted variation in itself if the clause would enable changes to restricted terms.
• Issue new contracts in connection with, and as a condition to, any year-end bonuses, salary increases or promotion rounds, where issues are identified in the employment agreements of existing employees.
• For regulated businesses, confirm that bonus and incentive provisions in employment agreements are sufficiently flexible to ensure the business complies (and can continue to comply) with its regulatory obligations.
• Maintain robust documentation when seeking to vary terms, including records of the business reason for the proposed variation, discussions with the employee and steps taken/incentives offered to reach agreement.
• Where contemplating changes in the context of financial difficulties, ensure that clear and contemporaneous evidence is available and supports the necessity of the proposed variation and the inability of the business to continue as a going concern without the change.
• Consider how employee consent may be achieved if an employer needs to change any terms and conditions, particularly restricted variations, for example, by offering a different benefit or a one-off bonus. Dismissal and reengagement should be considered only as a last resort where the applicable legal criteria are met.
• Review plans to vary terms and conditions of employment with external counsel to explore potential options. 

This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.