Navigating fire and rehire reforms: a practical guide to variations in employment contracts
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Amidst the sweeping reforms ushered in by the Employment Rights Act 2025 (ERA 2025), the rules governing dismissal and re engagement, commonly known as 'fire and rehire', are set to be significantly restricted. The result is that all employers, even those who have never considered or engaged in the practice, will need to exercise considerable caution when approaching contractual variations.
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A controversial practice under the spotlight
'Fire and rehire' has been criticised due to the inherent power imbalance in the employment relationship. While fire and rehire will not be abolished outright, its use will be heavily curtailed from 1 January 2027 due to the changes brought in by the ERA 2025.
Under the new regime, an employee’s dismissal will be automatically unfair where the reason relates to their refusal to accept a 'restricted variation', or where the employer seeks to re-engage them (or replace them) on altered terms involving such a variation, save in very limited circumstances. Restricted variations are defined very broadly and include:
- Changes to pay or pensions.
- Changes to working hours, holiday and shift patterns.
- The introduction of a variation clause into an existing contract that would allow an employer to unilaterally alter terms and conditions
See our detailed analysis of changes to the law on fire and rehire.
Beyond fire and rehire: considerations for employers when varying their employment contracts
At some stage, every employer will need to revisit and update their employment contracts: whether to reflect changing business needs, respond to economic pressures or to implement organisation-wide upgrades.
The difficulty is, under the new regime, if any proposed change amounts to a restricted variation, the employer faces the risk of an automatic unfair dismissal claim. That risk is amplified because, from 1 January 2027, employees will only need six months of service to bring an unfair dismissal claim, meaning a much larger proportion of the workforce will be able to do so, and the cap on unfair dismissal compensation will be lifted, meaning potential exposure could be far higher than it is currently.
With contractual changes soon becoming harder to implement, employers should review how their variation mechanisms work to ensure they remain effective under the new regime.
When can employers change the terms of employment?
A contract of employment can, like any other contract, be amended at any time:
- with the agreement of the parties; or
- in accordance with the terms of the contract itself.
Of course, an employee may not agree to vary the contract where the new terms would be less favourable, save where those terms are accompanied by an incentive for the employee eg a pay rise. However, an employer might be able to make changes to the contract without their consent if the contract includes an appropriate variation clause:
- Specific flexibility clauses: give employers the right to change designated contractual terms.
- General flexibility clauses: aim to give employers a general power to vary all terms of the contract.
A targeted approach: the law on specific flexibility clauses
Employers often use specific flexibility clauses in relation to where employees work (known as 'mobility clauses'), their hours and their duties. However, the courts have developed a cautious approach to interpreting them:
1. Narrow construction – any uncertainty about what the clause means, or how far it extends will generally be resolved in favour of the employee
2. High thresholds – the greater the detriment to the employee, the harder it will be for the employer to rely on the clause.
3. Limited implication – courts will be slow to imply a flexibility clause in the absence of an express one. A rare example is a limited implied mobility term, allowing an employer to change the employee's place of work on reasonable notice where it is within a reasonable distance.
4. Interaction with implied terms – even an express term can be restricted by overarching implied terms. For example, an employer may be limited in how they can apply a mobility clause if doing so would breach the implied term of mutual trust and confidence (which is common to all employment contracts).
General flexibility: the 'carte blanche' strategy
Courts are also wary of general flexibility clauses that seek to give employers sweeping powers to vary any contractual term unilaterally, effectively sidestepping the principle that contractual changes require mutual agreement.
Clear wording is required and courts are unlikely to uphold variation clauses which would allow an employer to make changes that are detrimental to employees without their agreement. Clauses must be exercised reasonably and in accordance with the implied term of mutual trust and confidence.
The general flexibility clauses that are most likely to be enforceable relate to the employer being able to make minor administrative adjustments that have little substantive impact, for example, switching to a different healthcare provider where the benefit offered is identical.
How can employers prepare?
1. Review existing contracts – are there any clauses that may cause difficulty once restrictions tighten? Remember that terms can also arise from policies, handbooks, oral agreements and established practice. In particular:
a. Clarify contractual status – which terms are genuinely contractual and which are non‑contractual? Pay attention to remuneration schemes (eg bonus/commission) that are either expressed as contractual or could have become contractual via custom and practice. Non‑contractual terms fall outside the scope of the forthcoming restrictions.
b. Review contracts for potential restricted variations – identify any clauses in template employment contracts that may amount to restricted variations, such as those affecting pay or time off. Do any such clauses need amending before the changes take effect? Other variations are not caught by the new regime, but employers should remain aware of standard unfair dismissal claims and the law generally regarding variation clauses (as summarised above).
2. Build in appropriate flexibility now, before the changes take effect – this may involve adding general flexibility clauses into contracts where none exist (albeit being aware of the limitations described above) or increasing the scope of employer discretion in contracts.
3. Plan ahead – although the new fire and rehire rules will not take effect until 1 January 2027, employers should begin any programme of contractual change well in advance to avoid slippage beyond that date.
4. Be prepared for greater scrutiny and resistance when seeking contractual change – employers may need to take a more negotiation-based approach, offering incentives, linking promotions or pay increases to acceptance of updated terms, and engaging more actively with representatives.
5. Strengthen consultation and training – although variation clauses are helpful, the most effective route to contract variation remains agreement. Fire and rehire changes will make meaningful consultation increasingly important, and fostering a culture of constructive consultation should assist with the smooth implementation of variations and reduce the legal risk. Consider taking steps now to strengthen employee representation groups and train decision‑makers to engage with them effectively and to understand the limits of flexibility clauses. Finally, if contractual changes are proposed, adopt clearer communication channels to support consultation.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, April 2026
