If you want to alter employees’ hours, duties, workplace location, shift patterns, pay and benefits or other elements on their contract, you’ll need them to agree to the contractual change. This isn’t always straightforward. If they don’t agree, dismissing and re-engaging (known as firing and rehiring) is the only option to introduce the change.

Now, with the rules on fire and rehire changing, employers will face more barriers to changing contractual terms.

What are the new fire and rehire rules from 2027?

Currently, an employer can dismiss and offer re-engagement on new terms where it:

• Has a sound business reason.
• Has consulted properly (and done so collectively if legally required).
• Can show that it acted reasonably in all the circumstances before making the decision to dismiss.

From 1 January 2027, employers must either be able to prove there is a statutory exemption for the change or the change is not included within a list of restricted changes. If it can’t, the dismissal will be automatically unfair, exposing the employer to employment tribunal claims. The liability for claims will also become unlimited from 1 January 2027.

It’s important to bear in mind that on 18 July 2024, the government introduced a statutory code of practice on dismissal and re-engagement, which will continue to apply after the rules change. Employers must follow the code, otherwise they will face an increase of up to 25% of any compensation awarded to an employee.

What are the exceptions?

To avoid liability, employers will need to show:

• They are facing financial difficulties that are affecting, or likely in the immediate future to affect, its viability.
• The proposed changes intended to eliminate, prevent, significantly reduce or significantly mitigate those difficulties.
• It could not reasonably have avoided the need to make the changes.

That is a high threshold to meet. It is unlikely to help employers making changes mainly for consistency, administrative simplicity, market alignment or general cost control.

What are the restricted changes?

This refers to core employment terms that, if changed during rehire, will make the dismissal automatically unfair. They include the likes of pay, total hours of work, pension entitlement, time off/leave entitlement and certain shift-patterns. Expenses and benefits might also be included in the list of restricted changes, but we are waiting on the outcome of the government’s consultation on including these within the list.

Location changes or a change in job role will not automatically be considered a restricted variation, unless they are made together with a restricted variation. However, the ordinary redundancy and unfair dismissal principles will still need to be considered in those cases.

What should employers be doing now?

Firstly, if your business is envisaging any contractual changes in the next 18 months, you should consider bringing these forward so that fire and rehire may still be an option if needed.

Before any changes are made, you should run an audit to determine whether they are contractual. They may find there is the flexibility to make the change under the existing contractual terms, meaning there is no need to get agreement from impacted employees. However, you should take legal advice at this point to be confident the change is not contractual.

Next, you will need to identify who is affected, whether they would be better or worse off, when the change needs to take effect, and whether impacted employees recognise a trade union. Businesses have a legal obligation to collectively consult with employees or their representatives if they dismiss and re-engage more than 20 employees. If you don’t run this consultation, your business would be exposed to financial penalties of 180 days gross pay per affected employee.

If the change is contractual in nature, you should explore ways to get agreement with the impacted employees. For example, could the changes be phased in over time or could an incentive be offered for those who accept the change? If agreement still can’t be reached, you could explore the fire and rehire option, but only if an exemption applies or the change is not a restricted one. An option at this stage could include revisiting the change to bring it out of the restricted list, while still achieving the same business objective.

How will the new rules affect contractual change projects?

Employers will need to plan each proposed change carefully from the outset, exploring:

• What is the proposed change and why is it needed?
• Is it contractual in nature?
• When is the change needed by?
• Who will it impact?
• Is it likely to be a restricted variation?
• Could any other change be tolerated to achieve the business objectives?

Without answering these questions early in the process, employers are likely to find that the change programme stalls or exposes the business to tribunal claims and disruption from industrial action and collective grievances.

If you’re planning contractual changes ahead of the January 2027 deadline, get in touch with Charlie Barnes to discuss how these rules could affect your business.

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