The UK Employment Rights Act: new restrictions on fire and rehire

Why should I read this?

From March 2027, the Employment Rights Act will significantly restrict the use of dismissal and re-engagement to change employees’ contractual terms. This briefing explains which changes are protected, the limited exceptions to the new regime and the practical implications for employers.

What does the Act say?

The Act will make it automatically unfair to dismiss an employee because they will not agree to certain changes to their terms of employment, or in order to impose those changes through dismissal and re-engagement / fire and rehire. The changes covered by these new protections are known as “restricted variations”.

Restricted variations

 The concept of a restricted variation is central to the new regime. 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 reductions in pay, which is defined broadly, although certain expenses and benefits are excluded; reductions in time off; certain changes to how pay is determined (where it is calculated by work done); changes to pensions and working hours; specified changes to shift patterns; and the introduction of contractual flexibility in relation to a restricted variation. The government also has the power to specify additional restricted variations through regulations.

Following a 2026 consultation, the government has clarified which expenses, benefits in kind and shift pattern changes will be protected. These will include certain contractual travel and accommodation expenses and accommodation benefits, but not share schemes. In relation to shift patterns, only changes between day and night working (night working being any hours between 11pm and 6am) and between weekday and weekend working will be protected.

Even where an employer’s variation is not a “restricted” variation (potentially, for example, some changes to location or duties), the question remains whether it is a fair dismissal under “normal” rules. 

The financial difficulties exception

There is a narrow exception where the employer is facing financial difficulties and the statutory conditions are satisfied. This should not be regarded as a general business justification for contractual change. The employer’s financial position, the effect of the difficulties on its ability to carry on the business and whether the need for the variation could reasonably have been avoided will be important.

Even where the exception applies, the dismissal is not automatically fair. The employer may still need to establish fairness under ordinary unfair dismissal principles, including by reference to the nature and extent of consultation with employees.

Dismissal and replacement with non-employees

The Act also covers, 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 narrow justification outlined above 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).

Code of Practice on Dismissal and Re-engagement

Since 2024, a statutory Code of Practice has applied to dismissal and re-engagement, setting out expectations for information-sharing and consultation, with an uplift of up to 25% in relevant tribunal awards for unreasonable non-compliance. A revised Code is being developed for the new regime, including greater transparency over restricted variations and requirements to explain and evidence financial difficulties where the exception is relied on. The revised Code is expected to take effect in summer 2027, subject to consultation and Parliamentary approval.

Practical implications

With the new regime expected to apply from March 2027, employers considering contractual changes should assess at an early stage whether their proposals involve restricted variations and how those changes could be achieved without dismissal.

Employers should expect dismissals to implement restricted contractual changes to be lawful only in limited circumstances. An employer that cannot satisfy the financial difficulties exception and demonstrate that dismissal was reasonable, risks automatic unfair dismissal claims and potentially significant compensation, alongside employee relations and reputational risks. The high threshold will also materially affect employers’ bargaining position when seeking agreement to contractual changes.

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.

It should be noted that in separate provisions the Act also:

• doubles the maximum protective award, to 180 days’ pay, should a dismissal and re-engagement trigger collective redundancy consultation and the employer fails to comply, from April 2026, and
• reduces the qualifying period for ordinary unfair dismissal to six months and removes the limit on compensatory awards for unfair dismissal, for dismissals from 1 January 2027

These changes further increase the legal and financial significance of contractual change and dismissal processes.

The wording of employment contracts will become increasingly important. Where a change does not amount to a contractual variation, or can legitimately be made under an existing flexibility clause, the new protections may not be engaged, although the scope and enforceability of such clauses will require careful consideration.

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 must be 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.

Key actions for employers

To ensure they are ready for the changes, employers should:

• reeview employment contracts, including provisions governing pay, hours and contractual flexibility, ahead of implementation in March 2027
• identify whether planned contractual changes may involve a restricted variation under the new regime
• review contractual change processes, which should not assume that dismissal and re-engagement will remain available as a last resort where agreement cannot be reached
• review outsourcing and workforce model changes involving agency workers, contractors or other non-employees, to identify whether the new regime may be triggered
• keep the final regulations and revised Code of Practice under review

Further reading

The Employment Rights Act (“Act”) received Royal Assent on 18 December 2025 and the government is pursuing 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 trackerto keep abreast of developments across the Act and timescales for implementation). See 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
• equality and employer harassment duties, read our update

How we can help

These reforms are prompting many employers to re-evaluate how they approach contractual change and workforce restructuring. The issues extend beyond employment law, with implications for employee relations, workforce planning, commercial arrangements and litigation risk. Our multidisciplinary team can help employers assess the strategic implications, identify solutions that align with their workforce objectives and risk profile, and implement change in a practical and commercially effective way. We are advising clients on both immediate preparations and longer-term workforce planning in response to the reforms.