Changing employment terms: Revised fire and rehire rules under the Employment Rights Bill

At a glance

• From October 2026, dismissals linked to changes in pay, pensions, hours, shifts, or time off will be automatically unfair unless necessitated by severe financial difficulties.
• There will also be limits placed on an employer's ability to rely on contractual flexibility provisions.
• Employers are advised that reviewing / refreshing contract terms is an important part of preparing for the new rules and are recommended to start this process soon. 

The Employment Rights Bill (ERB) has almost completed the legislative process with the final report stage in the House of Lords scheduled for 3 September 2025. The ERB is likely to receive Royal Assent in the autumn and then there will be consultation about the content of secondary legislation and work will begin on supporting Codes of Practice and Guidance.

As promised in Labour’s May 2024 Plan to Make Work Pay, the new law aims to end 'fire and rehire' and 'fire and replace'. These practices involve making changes to contractual terms by terminating existing contracts and issuing staff with revised terms or hiring new staff on revised terms. To date, provided certain requirements are met, this has been a legitimate and lawful way to change contracts without being liable for unfair dismissal.

As explained further below, the ERB provisions on fire and rehire have evolved since the bill was first published. However, there are still significant limits on an employer’s ability to make changes to employment terms and the use of contractual flexibility clauses is addressed by the incoming legislation, meaning that advance planning is important.

Original ERB fire and rehire provisions

When first published, the ERB addressed fire and rehire by making a dismissal automatically unfair where the reason for dismissing was (1) that the employee did not agree to a contract variation proposed by their employer; or (2) so that the employer could employ another person or re-engage the employee to carry out the same duties but on a varied employment contract.

These dismissals would not be automatically unfair if the employer fell within a narrow exception allowing contractual changes necessitated by 'financial difficulties' affecting the business’s ability to continue as a going concern. To avoid liability entirely, the dismissal would also have to be fair under general unfair dismissal principles.

In its original form, the ERB covered changes to any contractual term and, as such, came close to banning the practice of fire and rehire entirely. The narrow scope of the financial difficulties exception makes it relevant only for a business on the verge of insolvency. Also, no allowance was made for changes for technical or organisational reasons which are often the grounds on which employers want to update employment terms.

Restricted variations

In July 2025, amendments to the ERB were published, including watered down fire and rehire provisions. Now, a dismissal will be automatically unfair only where the reason for dismissal relates to an employer making a 'restricted variation'. The list of restricted variations includes changes to contract terms covering pay, pensions, working hours, shift patterns, or time off. Changes to other contract terms, including duties or place of work, are not restricted variations.

The financial difficulties exception will apply to restricted variations, providing some scope for an employer to make legitimate changes where the business is in extreme financial difficulty. For employers that fall within this exception or who dismiss and rehire to change contract terms that are not restricted, fairness is assessed under ordinary unfair dismissal laws. However, the ERB lists factors affecting fairness which include the reason for the variation, consultation with the employee or representatives, and incentives or compensation offered to agree to the variation.

Contractual flexibility provisions

In the employment context, contractual flexibility clauses can provide a business with leeway to make changes to employment terms including to, for example, duties, hours, or place of work, without needing to resort to dismissal and re-engagement. Although these provisions are only legitimate where their scope is limited and they are exercised in good faith, they are nonetheless common in many employment contracts.

Once in force, the ERB means that employers will be restricted from varying terms to include a contractual flexibility provision that allows changes to pay, pensions, working hours, shift patterns, or time off without employee agreement. As drafted, the legislation will not, however, affect existing contractual flexibility clauses, nor flexibility clauses included in a contract agreed at the start of employment.

Timing and preparation

The government has published an indicative timetable for implementation of the ERB. According to this, there will be consultation on fire and rehire in autumn 2025 with the legislative measures scheduled to take effect on 1 October 2026.

This gives employers just over a year to review the alignment of their current employment terms and business practices. More detail and guidance is likely as the government progresses through its implementation timetable. However, reviewing and refreshing contract terms, including assessing what flexibility they permit, is an important part of business preparations for the new rules under the ERB and our recommendation is to start this process sooner rather than later.

Updates to contracts will also be needed for other changes under the ERB, for example to take account of the new statutory probation period. Insufficient detail is currently available for these updates to be made now, but employers should not miss the window for making changes to contract variation clauses by waiting for these other provisions to be finalised. Doing so could significantly impact an employer’s ability to react to changing economic and business circumstances in future.