FIRE AND REHIRE

The problem under the existing legislative framework is that it is all too easy for a profitable entity to undertake a fire and rehire exercise relying on the potentially fair reason of “some other substantial reason” for the dismissals that it makes. As a consequence of the range of reasonable responses test that is applied to judge the fairness of those dismissals, employment tribunals are left with very limited ability to challenge the underlying rationale for the alleged need to make savings.

The practice, therefore, has become increasingly popular as a tactic for unscrupulous employers to adopt to erode the terms and conditions of their workforce. In its Plan to Make Work Pay, Labour committed to end “the scourges of ‘fire and rehire’ and ‘fire and replace’. It promised it would reform the law to provide effective remedies against abuse. The Bill does restrict an employer’s ability to use fire and rehire to change terms and conditions although the clause has been amended to give an employer more flexibility in this area than was originally proposed.

Clause 28 of the Employment Rights Bill as it now stands creates a new right to claim automatic unfair dismissal when:

• an employee is dismissed by their employer for not agreeing to vary certain prescribed terms of their contract; or
• the employer dismisses the employee and replaces them with other workers (including agency workers and self-employed contractors) to undertake substantially the same role but with at least one prescribed term varied.

The prescribed “restricted variations” now introduced include variations to pay, pensions, hours, shift duration, and time off. Employers are also restricted from using fire and rehire to introduce unilateral variation clauses into employment contracts and the Secretary of State has reserved a power to introduce further restricted variations.

The clause addresses both a conventional fire and rehire exercise and the sort of dismissal tactics deployed by P&O in 2021 when they dismissed their existing workforce and engaged an entirely new workforce via an agency on less favourable terms and conditions.

The employer can avoid a claim for automatic unfair dismissal if it can show:

a) that the reason for the variation “was to eliminate, prevent, significantly reduce or significantly mitigate the effects of financial difficulties which, at the time of the dismissal, were affecting the employer’s ability to carry on the business as a going concern”; and

b) the employer could not reasonably avoid making the variation

There is a parallel test specifically for public-sector employers whereby they have to show the reason for the variation “was to eliminate, prevent, significantly reduce or significantly mitigate the effects of financial difficulties which, at the time of the dismissal, were affecting or likely in the immediate future to affect the financial stability of carrying out the employer’s statutory functions”.  

There is also a further carve out for local authorities that are subject to “relevant intervention directions”. A relevant intervention direction is a statutory intervention by the Secretary of State (or appropriate minister in devolved authorities) to take measures where a local authority is failing in its statutory duty to provide best value (in England under the Local Government Act 1999). Where a relevant intervention direction is in place, a restricted variation will not amount to an automatically unfair dismissal if the authority can show that (1) the reason for the restricted variation was to eliminate or significantly reduce, or significantly mitigate the effect of any of the financial difficulties referred to in the relevant intervention direction and (2) in all the circumstances, the authority could not reasonably have avoided the need to make the restricted variation.  

If an employment tribunal finds that the employer satisfies the final difficulties test or the parallel test for public sector employers the above conditions or the variation is not a “restricted variation” (e.g. a change to workplace), it will still have to determine if the dismissal was fair in all the circumstances. Whether the dismissal is fair will depend on factors such as whether there has been consultation with the appropriate representatives and whether the employer offered anything to the employees concerned in return for agreeing to the variation.  

The Employment Rights Bill falls short of banning fire and rehire outright, which is what Labour had originally committed to do in opposition. Whilst the circumstances in which fire and rehire exercises can be lawfully undertaken will be narrowed, the practice will still be potentially permissible where an employer can establish an economic justification that threatens its existence (or meet the parallel public sector test if applicable) or the reason for the change is not a “restricted variation”. However it is clear the circumstances in which a fire and rehire exercise can be lawfully undertaken will be significantly narrowed.  

The Employment Rights Bill also does not address remedy with respect to fire and rehire dismissals. A key part of UK employment law is that in the main it punishes those who act in breach of it the law but does not stop them from doing so. Therefore, as an example, P&O chose to ignore all its obligations under the then-existing legislation and make the crass calculation that it would be in its economic interests to make dismissals without engaging in any consultation or due process.

Even under strengthened legislation, an unscrupulous employer may still act in the same way as this and ignore its obligations, deferring any worries about any requirement to pay out compensation for another day or otherwise calculating that it is more economically efficient to breach the law and pay any penalty. To address this, the Employment Rights Bill would need to have provided a mechanism in which employees could seek interim relief through the employment tribunal to ensure the contract of employment would continue to subsist through any judicial process where it is clear the newly introduced obligations had not been met. It does not do so and the Government has declined to introduce such a provision despite it being raised during the consultation process.  

However, the Bill does increase the cap on the Protective Award for redundancies from 90 days’ pay to 180 days. Whilst this does not entirely prevent companies from committing efficient breaches if they conclude it is in their economic interest to fire employees without consultation, doubling the penalty will make such an option less attractive.

The Employment Rights Bill is an important step forward to address fire and rehire tactics. It will not eradicate the practice altogether, but it will limit the circumstances in which it can be lawfully undertaken. The Government intends to hold a further consultation in relation to fire and rehire in autumn 2025 and to implement the new legislation on 1 October 2026.