Employment Rights Act 2025: changes to the law on fire and rehire

Updated as of 18 December 2025

‘Fire and rehire’ is the term often used for dismissing an employee and offering them re-engagement on different, generally less favourable, terms. This practice, commonly known as fire and rehire, has become increasingly controversial due to concerns about its fairness and the imbalance of power between employers and employees. The former government issued a statutory Code of Practice aimed at deterring employers from using the tactic without exploring alternatives (for more information, see: Updated draft code on “fire and rehire” published).

Ultimately however, the practice was not banned and remained the ultimate trump card employers sometimes seek to fall back on as a last resort when negotiating alterations to terms and conditions.

As part of its manifesto, the Labour Party promised to end fire and rehire, so it is of no surprise that it features prominently as a part of the Employment Rights Act 2025 (ERA 2025). While the provisions have been watered down since the Government’s initial proposal, the circumstances in which fire and rehire will be able to be used will be severely limited.

What is changing?

Automatic unfair dismissal

An employee will be automatically unfairly dismissed where the employee is dismissed and the reason, or principal reason, is either:

• an employer sought to make a 'restricted variation' and the employee did not agree to that restricted variation; or
• to enable the employer to employ another person, or re-engage the employee, under a varied contract of employment to carry on the same duties and one of the variations for the contract is a 'restricted variation'.

A 'restricted variation' will mean a change to any of the following terms:

• Pay – this includes a reduction or removal of a “sum paid in connection with employment”; where work is payable by reference to the amount of work done (ie hourly), a variation of that amount; or a variation relating to pensions;
• Working time – a variation in the number of hours required to work; variation on the timing or duration of a shift; or a reduction in annual leave; and
• Variation clauses – any attempt by the employer to introduce a 'variation' clause, that would allow an employer to unilaterally alter terms and conditions.

The ERA 2025 reserves the right for the Secretary of State to make regulations to add to this list.

As a reminder, if the Tribunal finds that a dismissal was for an automatically unfair reason, an employer has no opportunity to defend its actions or show the dismissal was reasonable. If a Tribunal finds that an employee was dismissed in the above circumstances, an employer’s only chance to escape liability will be to rely on the exception.

Exception – employer in financial difficulties

An employee’s dismissal will not be automatically unfair if an employer can show both that:

1. The reason for the restricted variation was to eliminate, prevent or significantly reduce or significantly mitigate any financial difficulties which at the time of the dismissal, were affecting, or were likely in the immediate future to affect:
   1. The employer’s ability to carry on business as a going concern; or
   2. If the employer is in the public sector, the financial sustainability of carrying out the employer’s statutory functions.
2. In all the circumstances, the employer could not have reasonably avoided the need to make a variation.

Note, this is an exception not a full defence. If successfully argued, the employer will still need to show that dismissal was fair in all the circumstances, which will include the consultation carried out and anything offered to the employee in return.

This is a very high bar for employers to prove – it is not sufficient to make changes to increase operational or financial efficiency or to harmonise terms.

Replacement with non-employees

The ERA 2025 also contains restrictions to dismissing an employee and replacing them with someone who is not an employee (for example, an agency worker or independent contractor) to do substantially the same activities (as in the P&O Ferries example).

Variations that are not restricted

Where an employer dismisses an employee for refusing to accept a contractual variation that is not a 'restricted variation', the dismissal will not be automatically unfair. However, the dismissal may still be found to be ordinarily unfair if a tribunal concludes that the employer did not act reasonably in all the circumstances, taking into account factors listed in the ERA 2025, including the extent of any consultation and what incentives were offered to employees.

Next steps

The Government initially intended to consult on changes to fire and rehire in Autumn 2025. This has been delayed and is now expected in early 2026. Implementation is anticipated in October 2026

The bar for a lawful dismissal and re-engagement is already a high one and employers already need to think very carefully before going ahead with it under the current law. However, it is about to get even higher. On the face of it, there would need to be a pretty existential threat to the business in order to meet the exemption set out above.

The Government’s implementation timeline gives employers (at time of publication) a little over one year to prepare for the changes. Organisations that are contemplating significant changes to terms and conditions would be well advised to try and make those changes before the new law takes effect. Bearing in mind the need to allow sufficient time for consultation, that would mean starting the process relatively soon in most cases.

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

© Farrer & Co LLP, September 2025