Fire and rehire: what employers should know before 1 January 2027

What is fire and rehire?

Where an employee has not agreed to proposed contractual changes, “fire and rehire” describes the practice of terminating an employee’s contract by giving notice and then re-engaging them on new, generally less favourable contractual terms. It is used by employers as a way of bringing about contractual changes where consultation has not resulted in agreement to the changes. Although the practice can be used to bring about contractual change, it is still a dismissal in law and may lead to an unfair dismissal claim, even if the employee accepts the new terms.

At present, dismissal and re-engagement should only be considered as a last resort, after reasonable attempts to reach agreement through consultation.

What is changing?

From January 2027 “fire and rehire” dismissals will generally become automatically unfair where the employer imposes “restricted variations” to contracts of employment. A narrow exception may apply where the employer can show it is experiencing significant financial difficulties and, in all the circumstances, it could not reasonably have avoided making the restricted variation. There are specific provisions for public sector and local authority employers.

The categories of “restricted variations” are expected to cover the following contractual terms:

• reductions in pay;
• variations to hours of work;
• reductions in time off entitlements; and
• changes to pensions.

The definition also includes an insertion in a contract of employment of a term enabling the employer to make any variation with regard to any of the above without the employee’s consent.

The final scope of these categories will be confirmed in regulations, so employers should keep this under review.

The changes will not be a total ban on using dismissal and re-engagement in respect of “restricted variations”, but the financial difficulty exception is likely to be a high bar. Dismissal and re-engagement used to impose changes outside the restricted variation categories will not be automatically unfair for this reason, but employers will still need to follow a fair process and be able to justify the dismissal under ordinary unfair dismissal principles. There will normally be no breach of contract if contractual notice is served.

The statutory Code of Practice on Dismissal and Re-engagement currently remains in force. An unreasonable failure to follow the Code can lead to an award of compensation being increased by up to 25%. The government has said the Code will be updated in 2027 to reflect the changes due to take effect on 1 January 2027. Employers should also factor in the wider risk landscape, including the increase in the protective award (from 90 days to 180 days’ pay) for failure to collectively consult which came into effect in April 2026 and the removal of the cap on unfair dismissal compensation from 1 January 2027.

It appears that variation and flexibility clauses in place before 1 January 2027 will still be valid after that date but from 1 January 2027 an employer is prevented from adding new clauses that allow restricted variations to be made without employee agreement.

Practical steps

Employers should consider the following practical steps:

• Identify proposed contractual changes early and assess whether any could be a restricted variation.
• Review contractual variation/flexibility clauses and whether they are likely to be effective prior to and after 1 January 2027.
• Plan consultation carefully, allowing time to explain the business reasons, consider objections and explore alternatives.
• Where contractual changes are already anticipated, consider whether they should be progressed before January 2027.
• Think creatively about incentives, alternative arrangements and phased changes that could help secure agreement to changes from employees.
• Consider specialised training for HR and senior managers so they are aware of the restricted variations, alongside the risks involved for non-compliance and take them through what a full consultation process looks like to mitigate against potential claims.

How Greenwoods Can Help

If you are planning changes to employment terms or would like to understand how the new rules may affect your organisation, please get in touch.