Fire and rehire reform: what employers must do before January 2027

When P&O Ferries dismissed 800 seafarers and replaced them with agency workers in 2022, the government promised an outright ban on fire and rehire. It has stepped back from that, but the Employment Rights Act 2025 still significantly shifts the balance of power between employers and employees.

Fire and rehire is rare; statistics suggest that fewer than 1% of employers use it, while 63% reach agreement without it. But its availability in the background may itself keep negotiations moving. From 1 January 2027, employers lose that bargaining chip, making reaching agreement on contractual changes potentially harder to reach.

What's changing?

From 1 January 2027, dismissal will be automatically unfair where an employee is dismissed:

• for refusing a contractual change that amounts to a "restricted variation"
• to re-engage them ('fire and rehire'), or to replace them with another employee ('fire and replace'), on substantially the same duties but on terms that include a "restricted variation"
• in certain situations where an employee is replaced with a non-employee

The financial stakes are high. Compensatory awards for automatic unfair dismissal will be uncapped from January 2027. Where collective consultation obligations also apply, employers may face protective awards (which increased in April 2026), and a potential 25% uplift for failing to follow the Statutory Code on Dismissal and Re-engagement. For larger workforces, the aggregate exposure from a single misjudged exercise could be very significant indeed.

What is a restricted variation?

Restricted variations include reductions to pay or holiday, changes to pension schemes or working hours. They do not currently include changes to duties or place of work, although the government can expand the list by regulation. That matters; what sits outside scope today may be brought in tomorrow.

The definition is broad. Payments need not be made by the employer provided they are payable to the employee in connection with their employment. This could bring third-party PHI payments and customer tips within scope. This point hasn't appeared in much commentary on these reforms, but it's one that employers in hospitality, retail and professional services should consider carefully.

The government has also consulted on whether expenses, benefits in kind and certain shift pattern changes should be included. We do not yet have the outcome of this consultation but it's clear that the government's preference is that day-to-night or weekday-to-weekend shift changes will be restricted, and that changes to expenses and benefits in kind will not be.

Where changes to terms are negotiated collectively and backed by a trade union, the cause of action will still apply in respect of any employees who do not individually consent. Collective agreement is not a complete answer.

What about variation clauses?

Adding a unilateral variation clause to an existing contract after 1 January 2027 will itself be a restricted variation. Existing clauses can still be relied upon, but tribunals taken a historically restrictive approach to such clauses, and they must be exercised reasonably. Pushing them too far risks breaching the implied duty of mutual trust and confidence. Employers therefore have a limited window to add meaningful protection.

What is a dismissal?

This is where the legislation bites in ways most employers will not expect.

The ERA 2025 does not define 'dismissal', so tribunals will look to section 95 of the ERA 1996 and existing case law. That potentially includes:

• express termination;
• constructive dismissal where the variation amounts to a repudiatory breach and the employee resigns; and
• 'deemed dismissal,' where an employer unilaterally imposes significantly different terms without formally terminating the contract and the employee carries on working.

Cases such as Hogg v Dover College and Alcan Extrusions v Yates establish that the latter can amount to a dismissal from the original contract. If the change imposed is a restricted variation, the deemed dismissal is likely to be automatically unfair. Employers who assume they are protected because they never issued a dismissal letter need to think again.

It's also unclear whether the time limit for bringing a claim will run from the date of the dismissal, or only from the point of rehire, when the cause of action crystallises. The answer will significantly affect litigation risk and how employees and their advisers approach claims.

Will the 'financial difficulties' exception help?

Probably not in the way employers were hoping.

There is a limited exception where a variation is needed to address financial difficulties affecting the employer's ability to continue as a going concern (or for public sector employers, to carry out the employer's statutory functions). But this sets a very high bar: effectively near-insolvency. Relying on this exception means complex, costly hearings, likely involving financial experts and detailed financial disclosure. It is likely employers may consider redundancy a more viable alternative.

What about changes that are not caught?

Where an employee is dismissed to bring about a change which is not a "restricted variation", or where the 'financial difficulties' exemption applies, the dismissal is not automatically unfair. Instead a tribunal would assess whether the dismissal was ordinarily unfair, applying the usual test, but taking into account additional “fairness factors” (as listed). So falling outside a "restricted variation" provides a narrower safety net that it might appear.

How far do the outsourcing provisions go?

Further than it first appears.

A dismissal can be automatically unfair where the reason (or principal reason) is replacing them with a non-employee performing the same or substantially the same duties, unless it is "wholly or mainly" attributable to a cessation or diminution in the requirement for those activities, or an expected one.

Unlike the provisions applying where the replacement is an employee, these outsourcing provisions do not require the employer to have sought a contractual variation at all, and they apply even where the replacement is engaged on identical or more favourable terms. Crucially, they focus on the requirement for the activities, not the requirement for employees, which is a wider test than the statutory definition of redundancy. A dismissal that would constitute a genuine redundancy under existing law could therefore still be automatically unfair.

How the provisions will operate in practice remains unclear. If 100 employees are dismissed but only 60 agency workers engaged to replace them, will all 100 dismissals be caught, and if so, will compensation be reduced proportionately? Employers should plan for uncertainty whilst case law develops.

The leverage shift: what this really means for your business

Here is what the legalchanges mean on the ground and where the real exposure lies.

What employers should do now – 5 key takeaways

This is not a compliance exercise; it is a strategic one. The employers who will navigate this best are those who rethink their whole approach to workforce relations, rather than simply updating a few contract clauses and hoping for the best.

1. Audit your contractual arrangements. Know exactly what is contractual and what is not, including benefits that may have become binding through custom and practice, such as bonus and commission arrangements. You cannot manage the exposure you have not mapped.

2. Review and strengthen contractual protections. This is your last opportunity to add variation clauses to existing contracts without triggering restricted variation liability. Include them as standard in all new starter contracts going forward. Ensure all your variation clauses are as well-drafted as they can be. Also consider adding 'no oral variations' and 'entire agreement' clauses to help resist arguments that terms have become contractual through practice or informal promise. If you find any errors in your contractual documentation, particularly if they related to "restricted variations", plan to rectify these now.

3. Strengthen union and employee relationships. Trade union access rights arrive on 30 October 2026, and employers will be required to notify staff of their right to join a union from January 2027. Membership will grow. Employers who have invested in those relationships in advance will be far better placed to reach agreement on future changes. Start building a stronger, more transparent level of employee engagement now. If your existing consultation structures are not up to the task, fix that before January 2027.

4. Plan harmonisation early. On any transaction involving a TUPE transfer, factor the new provisions into planning from the outset. Do not leave it until after completion.

5. Don't rush changes through. Allow sufficient time for individual and collective consultation and make sure you are complying with the Statutory Code on Dismissal and Re-engagement throughout. Consider the reputational risk of being seen to push through changes just before the law tightens, particularly if you are a larger or more visible employer.

The TLT view

The real significance of these reforms is not simply what employers can no longer do, but how removing fire and rehire as a backstop will change workplace negotiations. Without that lever employees may have less incentive to compromise, making early engagement and effective consultation increasingly important.

The provisions also reach beyond obvious fire and rehire exercises. Fixed-term renewals, contractual drafting errors, bumping and post-TUPE pooling are all potentially in scope, and all capable of catching an unprepared employer off guard.

Employers should use the period before January 2027 not simply to update contracts, but to rethink how they approach contractual change and workforce relations. That is now the only reliable lever left.

Get in touch with our employment team to discuss what these changes mean for your business.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at October 2026. Specific advice should be sought for specific cases. For more information see our terms & conditions.