Government consultation on Draft Code of Practice on Dismissal and Re-engagement

On 24 January 2023, the Department for Business, Energy & Industrial Strategy published its Draft Code of Practice on Dismissal and Re-engagement (“the Code”) and launched a consultation in respect of the same.

The Government believes the Code will “crack down on unscrupulous employers that use controversial dismissal tactics”. Former Business Secretary Grant Shapps said: “Our new code will crack down on firms mistreating employees and set out how they should behave when changing an employee’s contract”.

The consultation closes at 23.45 on 18 April 2023 and you can respond here.

Is fire and rehire no more? No, the Code does not ban the concept of dismissal and re-engagement – it remains a lawful strategy when seeking to change terms and conditions of employment – but it certainly sets clear expectations for employers, as well as potential consequences in the event these are not followed.

The background

Dismissal and re-engagement, otherwise known as “fire and rehire”, is a practice whereby an employer facilitates a change in contractual terms of employment by dismissing an employee and offering re-engagement on the new terms. It is usually seen as a “last resort” where an employer considers a contractual change needs to be made but it is not agreed by the affected employees, often because the new term or terms are less favourable to them.   

The practice has been under fire (no pun intended) in recent years. In June 2021, Acas published a report on the use of dismissal and re-engagement; in response the Government instructed Acas to publish guidance on the use of the practice (for more on that process please see my previous blog here). In late 2021, a private member Bill was (unsuccessfully) proposed which would have banned the practice.

Most infamously, firing without consultation (or without offer of re-engagement, as was the case here) was the approach adopted by P&O Ferries in March 2022, for which it attracted significant criticism (as we reported here). Whilst the Government acknowledges the unique circumstances of that case, it is against that backdrop and the apparent increased use of the practice during the pandemic, that the Code has been drafted.

When does the draft Code apply?

The Code will apply to any situation where an employer:

• considers that it wants to make changes to its employees’ contracts of employment, and
• “envisages” that, if the employees do not agree, the employer may dismiss them and either offer them re-engagement on new terms or hire other employees to perform the relevant roles on the new terms.

Importantly the Code:

• Applies irrespective of the number of employees affected or potentially affected.
• Does not apply where the reason an employer envisages dismissing an employee is redundancy (under the Employment Rights Act 1996).

If you would like a reminder of ten pitfalls to avoid when handling a redundancy exercise, please see our previous blog here.

What does the Code recommend?

1. Consultation, negotiation and information

• Employers should consult and negotiate with a relevant body (trade union, employee representatives (existing or elected), or individual employees) for as long as possible in good faith in order to try and seek resolution, even if they think the employee or their representatives are unlikely to accept the changes.
• Consultation and negotiation should be approached in good faith, with both sides attempting to understand the position of the other. Consultation and the provision of information is not a single event but should be viewed as an ongoing process.
• The consultation and negotiation process should be “meaningful” and an employer should “genuinely consider” points made by employees, including considering alternative proposals. An employer should be open and honest about the need to take unilateral action if negotiations fail.
• To facilitate this, employers should provide employees or their representatives, as early as possible, with as much information as is reasonably possible so employees can understand the need for changes, ask questions and make counter proposals. This should include the nature of the proposals, who would be impacted, why there is a need for the proposed changes, the timeframe for any changes and information on any alternatives that have been considered. Further, they should explain the potential benefits of the changes and the possible impact on the employer if the changes do not take place.
• A “meaningful process” should be followed with a view to reaching an agreement and avoiding the need for dismissals.

2. Reconsideration

• If it is clear that there is unlikely to be an agreement without further negotiations, an employer should re-examine its business strategy and whether changes to contracts are needed in light of the potentially serious consequences for employees. The employer should take into account the feedback from the consultation; the objectives it is seeking to achieve; the negative consequences of acting unilaterally; any potential discriminatory impacts; and alternative ways of reaching the same objectives.
• The employer should continually reassess its position in light of new information which might come to light and in response to the consultation and negotiations.

3. Making unilateral changes

• The Code is clear that imposing a unilateral variation of contract, without a clause permitting it, will usually be a breach of contract and “should not therefore be considered unless the employer is satisfied that all reasonable alternatives which might result in agreement have been fully explored first”.
• The Code clearly sets out the legal risks to employers if they adopt this approach.

4. Dismissal and re-engagement

• Before making the decision to dismiss, employers should take time to reassess its analysis and consider again if it is truly necessary to impose the new terms on employees in order to achieve its objectives. This should be done in the context of the alternatives proposed and any further information that’s come to the fore as part of the consultation. I would suggest an employer should be prepared to evidence this, documenting its reconsiderations and matters discussed as part of the consultation.
• If an employer decides to dismiss and offer new terms, it should give as much notice as possible of dismissal, treating the contractual notice period as a minimum, and re-engage employees as soon as possible to preserve continuity of service. If an employer needs to make multiple changes to terms, they should consider making them over a phased period. Employers should also consider what support can be offered to affected employees.
• Following any changes, the Code states it is still “good practice” for the employer to continue to review the requirement for the imposed change(s). It goes on to say that it might find that, due to a change in circumstances, it is able to discuss a return to the previous terms, or at least consider alternative proposals which it was not able to accommodate previously. This could be quite significant – employers should be prepared to face potential challenges from employees even post changes.

What happens if an employer or employee fails to follow the Code?

The Code itself imposes no legal obligations on employers, and a failure to observe it does not, by itself, render anyone liable to proceedings.

However (and significantly), an unreasonable failure to follow the Code by an employer or employee will grant an Employment Tribunal the power to uplift or decrease (respectively) any compensation awarded in a successful claim at a Tribunal. This will apply to claims brought in Schedule A2 of the Trade Union and Labour Relations (Consolidation) Act 1992.

Future developments

It is fair to say that very little of the draft Code will cause much of a shock to employers, particularly given that it builds upon the approach already taken in the Acas guidance. As such, the Code sets out guidance which many employers already adopt as best practice, aligned with the intention of the legislation surrounding it and the maintenance of good employee relations. What is significant, though, is the Employment Tribunal powers if there has been an unreasonable failure to follow the Code, of which both employers and employees should take heed.  

It is highly unlikely that the Code, even after any revisions following consultation, will be the last word on fire and rehire. Angela Rayner, Deputy Leader of the Labour Party, has stated Labour will ban the practice if they win the next general election, though one wonders quite how that would work in circumstances where there are often quite reasonable commercial reasons justifying the proposed changes. Stay tuned!

With many thanks to Alex Evans, a current paralegal in our employment team, for his help in preparing this blog.

If you require further information about anything covered in this briefing, please contact Rachel Nolloth or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, February 2023