Insights into the new Employment Rights Bill: Impact on contractual change and redundancy exercises

29 October 2024 5 min read

By Sarah Hellewell

At a glance

The Employment Rights Bill progresses the Labour government's promise to address the practice of 'fire and rehire'.
Dismissal for failing to agree new terms or dismissal and reengagement on new terms will become an automatically unfair dismissal.
A very narrow exception will apply where a business is facing financial difficulties threatening its viability and the need to change contract terms is unavoidable.
Changes to collective redundancy consultation obligations will require consultation whenever 20 or more redundancies are proposed across the business rather than at one 'establishment'.

The dynamic nature of business means that employers and their workforces must sometimes go through evolutionary changes to keep pace with, for example, economic shifts, technological developments, market trends, or legal / regulatory requirements.

Current UK employment legislation permits evolution of this type, albeit with certain protections for employees built in. Redundancy dismissals are possible provided that a proper individual, and sometimes collective, consultation process has taken place. Changes to employment terms can be made using a fair consultation process which either leads to agreement or, where agreement cannot be reached and the employer has a sound business justification for the change, by dismissal for 'some other substantial reason' and reengagement on the new employment terms.

As was widely trailed in 'Labour's Plan to Make Work Pay', the Employment Rights Bill (ERB) addresses the practice of 'fire and rehire' (as dismissal and reengagement has become known widely following the 2022 P&O controversy). It also provides for changes to collective redundancy consultation. The ramifications of these provisions of the ERB are potentially significant for employers.

Changing contract terms

'Make Work Pay' committed to 'ending fire and rehire' and, although the ERB does not impose an outright ban, the circumstances in which the Bill permits contract changes to be made through dismissal and reengagement are extremely limited.

The ERB will amend the law on unfair dismissal so that where an employee is (1) dismissed for failing to agree to a change in their contract of employment; or (2) dismissed and then reengaged on varied contract terms or replaced with someone on varied terms, the dismissal will be treated as automatically unfair.

As an exception, an employer can avoid a finding of automatically unfair dismissal if it shows:

evidence of financial difficulties affecting the employer's ability to carry on the business as a going concern;
the changes were to eliminate, prevent, or significantly reduce or mitigate the effects of the financial difficulties; and
the need to make the change in contractual terms was unavoidable.

Even where the business's situation fits within this strict exception, the employment tribunal will still assess if dismissal was fair in the circumstances. Relevant factors will be whether the business consulted with the employee, trade union or other employee representatives, and whether the employee was offered anything in return for agreeing to the variation.

The provisions of the ERB mean that businesses will no longer be able to change contract terms simply based on having a sound business reason for doing so. The legislative wording requires significant financial difficulty and the government's consultation paper on remedies for fire and rehire confirms this when it comments that the revised law, 'will ensure that employers can only use the practice of fire and rehire if they can demonstrate that they were facing financial difficulties that threatened their viability …. e.g. it was the only way to prevent insolvency'.

Contract changes are often not necessitated by circumstances as severe as insolvency. So, if the provisions of the ERB are enacted as drafted, businesses are likely to have to find other routes to implement revised employment terms where the need arises.

Options to consider will be the gold standard of negotiating agreed changes, perhaps with a sweetener offered to smooth the way, or, less satisfactorily, relying either on implied consent or on contractual flexibility terms which permit changes to be made. Given the legal uncertainty with these latter options, it seems likely that this aspect of the ERB will leave employers more exposed to the risk of challenge in future when seeking to effect contractual change.

Also important to note is that for contract variation (and redundancy) dismissals, the new probationary period to be implemented by the ERB will not apply. So protection against unfair dismissal in these circumstances will be a 'day one' right.

Collective redundancy consultation

Another commitment made in 'Make Work Pay' is to strengthen redundancy consultation rights and this is also addressed in the ERB.

Statutory collective consultation duties apply where an employer is proposing to make 20 or more employees redundant within a period of 90 days or less. As the legislation stands, the 20 employee threshold is based on the number of proposed redundancies at one establishment. The establishment is the unit or entity the potentially redundant workers are assigned to, rather than the whole of the business.

The provisions of the ERB will change this, requiring an employer to consult collectively whenever 20 or more redundancies are proposed across the business. There will no longer be a requirement that the redundancies are all at one establishment.

The government has also said that, in 2025, it will review the duration of statutory consultation periods and will consider increasing the period from 45 to 90 days' when an employer is proposing to dismiss 100 or more employees.

Although redundancy dismissals will continue to be possible, these changes will make managing the associated consultation process more cumbersome and potentially lengthier. In particular, to be able to identify when their statutory obligations are triggered, multi-site or multi-entity employers will require a constant overview of the aggregate numbers of redundancies across their business. This is likely to be a challenge for many organisations.

Next steps

Since publication of the ERB, the government has released a consultation paper on 'strengthening remedies against abuse of rules on collective redundancy and fire and rehire'. Where there is a failure to fulfil collective consultation duties, views are sought on increasing the maximum protective award either to 180 days' pay or by removing the award cap entirely. Views are also requested on whether interim relief should be available to employees who bring claims for a protective award and who claim unfair dismissal in the context of fire and rehire.

The consultation period ends on 2 December 2024.

Please don’t hesitate to reach out to our Employment Group and / or your usual DLA Piper contact if you wish to discuss this, or any other aspect of the Employment Rights Bill reforms – and look out for our next article in this series!

Click below to read our earlier articles: