The UK Employment Rights Act: contractual change reforms, including “fire and rehire”

The Employment Rights Act (“Act”) received Royal Assent on 18 December 2025 and the government plans a staged implementation over 2026 and 2027.

The Act includes 28 employment reforms and, cumulatively, the scale, breadth and complexity of the changes are significant for employers (read our tracker to keep abreast of developments across the Act and timescales for implementation).

To support employers as they respond to the Act's diverse measures, our more detailed briefings focus on specific topics within the Act and include the latest developments and practical implications. In this briefing, we review provisions which have important repercussions for employers seeking to change employees’ contractual terms, including through dismissal and re-engagement (“fire and rehire”).

For our briefings focusing on the Act’s changes to:

• trade union and collective rights, read our update
• family-friendly rights and SSP, read our update
• collective redundancies, read our update
• enforcement, read our update
• zero and low hours contract workers, read our update
• unfair dismissal, read our update
• employer harassment duties, read our update
• equality and employer harassment duties, read our update

Changing terms, including dismissal and re-engagement

Since July 2024, a new statutory Code of Practice on dismissal and re-engagement has applied where an employer is seeking to change terms and conditions and one of the options, if agreement is not reached, is to terminate and offer new terms. The Code includes a step-by-step information and consultation process. An unreasonable failure to comply with the Code may result in an uplift, of up to 25%, in any tribunal award (this uplift potential includes protective awards from 20 January 2025). For further information on the Code, read our updates here and here.

The government has promised further significant changes and these are contained in the Act. In broad terms, the Act provides that most dismissals for failing to agree to contractual variations of a particular kind (a “restricted” variation) , or to enable the employee to be re-engaged or replaced by another employee under a varied contract, which must include a restricted variation, will be automatically unfair. A “restricted” variation includes reductions in an employee’s pay or time off, and changes to working hours or to certain shifts. An employer will also risk an automatic unfair dismissal in situations where employees are dismissed and the principal reason is to replace them with agency workers or contractors – workers who are not employees. 

What does the Act say?

Restricted variations

The Act provides that a dismissal will be treated as automatically unfair if an employee is dismissed:

• because they did not agree to one or more restricted variations of their contract of employment, or 
• to enable the employer to re-engage them (or replace them with another employee) under a varied contract, which includes one or more restricted variations, to carry out the same duties, or substantially the same duties, as they carried out before being dismissed

The definition of a restricted variation includes: reducing pay or time off; changing how pay is determined – where it is calculated by work done; variations to pensions, working hours, certain changes to shift timing/duration; introducing flexibility clauses on the topic of a restricted variation; and any other variation the government might add by future regulations. Such regulations may provide for certain expenses and payments or benefits in kind to be excluded from the definition. A consultation is underway on further defining a restricted variation, including proposals to largely exclude expenses and benefits in kind and to include only a narrow list of changes to the duration or timing of a shift.

A narrow employer justification provides that it will not be automatically unfair if:

• the reason for the restricted variation was to eliminate, prevent or significantly reduce/mitigate financial difficulties
• those financial difficulties, at the time of the dismissal, were affecting or were likely in the immediate future to affect:
  • the employer’s ability to operate as a going concern or
  • where  the employer is a public sector employer, the financial sustainability of carrying out the employer’s statutory functions or in the case of a local authority employer, a “relevant intervention direction” exists (further conditions apply) and
  • it could not reasonably have avoided the need to make the variation

Even where an employer’s variation falls outside the above definition of a “restricted” variation (potentially, for example, some changes to location or duties), or it is a restricted variation and can be justified on above financial grounds, meaning that the dismissal is not automatically unfair, the question remains whether it is a fair dismissal under “normal” rules. In that respect, the Act also sets out a number of relevant factors to be considered when considering the fairness of the dismissal. These include the nature of any consultation with the employee and workers’ representatives, and any incentives offered to employees to agree the change. Further regulations may be introduced providing additional factors for a tribunal to consider.

It should be noted that the Act doubles the maximum protective award, to 180 day’s pay, should a dismissal and re-engagement trigger collective redundancy consultation and the employer fails to comply. 

Dismissal and replacement with non-employees

The Act has been extended to include, broadly, situations where employees are dismissed and the principal reason is to replace them with agency workers or contractors – workers who are not employees. Such dismissals will be automatically unfair where the replacements are carrying out the same, or substantially the same, activities and the employees’ dismissals are not wholly or mainly due to a reduced need for those activities. Again, the above narrow justification may apply (the dismissal addressed financial difficulties and the employer could not reasonably have avoided the need to replace the employee) and, where it does, some of the same factors for determining whether it is a fair dismissal also apply (principally, a consideration of the nature of any consultation).

Practical implications for employers

Employers should expect that “restricted” contractual change dismissals will only be lawful in a small minority of circumstances. An employer that fails to evidence sufficient financial difficulties and/or acts unreasonably, as assessed under the statutory provisions, risks being subject to significant financial penalties and legal risks. The bar is set very high with repercussions for bargaining power in the workplace.  

As a result, the wording of contracts, the offer of employee incentives, consultation processes, negotiation strategies and any proposals to replace employees with contract labour will all need to be carefully considered.

The wording of employment contracts

The wording of employment contracts will take on a new significance - particularly focused on whether the change is a contractual variation. In the absence of a contractual variation, the Act's protections are not triggered. Case law provides that some changes in working arrangements, such as adaptation to new working methods, may not involve contractual change. For example, where the employee is under a duty to obey reasonable instructions to adapt. However, it is fact dependent and advice should be taken.

Employers should also check whether the change is already provided for in the contract - with a flexibility clause. If the clause is appropriately drafted and implemented, employee consent is not additionally required, potentially taking the employer’s changes outside of the Act’s protections. Employers should review their contracts and, in particular, take advice on the use of flexibility clauses, being mindful that there are limitations on their enforceability and use. In particular, the Act provides that the inclusion of a flexibility clause dealing with a “restricted” variation topic (reduced pay, time off etc) will, itself, be a “restricted” variation. However, it is currently unclear whether this applies solely to a flexibility clause introduced after the Act is finalised or takes effect.

The meaning of “financial difficulties”

For contractual changes that do potentially fall within the scope of the Act’s protections, it is currently unclear how private sector employers will have to evidence sufficient “financial difficulties” to build their justification and avoid an automatically unfair dismissal. For example, the scope, severity and immediacy of the financial difficulties and whether it is limited to, say, a division of a business or the entire employer. In addition, there are concerns that tribunals may not be prepared to interrogate such financial data.

The government has suggested that further regulations and codes of practice will provide detail and guidance on the justification and the matters that a tribunal must consider when determining the fairness of the dismissal. This is expected to include amending the existing Code of Practice on dismissal and re-engagement to expand employer information and consultation obligations. In the meantime, uncertainty remains. 

The risk of redundancies as an alternative?

These changes, with the risk of automatic unfair dismissals, have led employer bodies to suggest that some businesses may decide that they have no option but to make employees redundant instead. However, if such an option is contemplated, any redundancies must be genuine and the principal reason for the dismissals (not because employees failed to agree a variation, for example). Otherwise, there is a risk that the employer might still trigger the Act’s protections. Employers should prepare for disputes over the dividing line between redundancies and the Act’s automatically unfair dismissals protections.

Originally published: December 17, 2025