Employment Rights Act: Contract change update and action points

At a glance

• New limits on changing employment terms will commence 1 January 2027.
• Restricted variations include pay, hours, pensions, and time-off with changes triggering automatic unfair dismissal.
• All employers are affected, not just those considering fire and rehire practices.
• Employers are recommended to review and update employment contracts before January 2027 to build in flexibility.

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Following the Employment Rights Act (ERA) receiving royal assent late last year, early 2026 has already seen some further activity in relation to the Act's provisions on contractual change. The Government's revised timetable for ERA implementation has moved commencement of the so-called 'fire and rehire' provisions from October 2026 to 1 January 2027, tying in with the unfair dismissal qualifying period reducing to six months' service and with removal of the cap on unfair dismissal compensation. The government is also consulting on how to incorporate changes to expenses and benefits and changes to shift patterns into the new contract change / 'fire and rehire' regime.

Why this matters to all employers

The restrictions on 'fire and rehire' introduced by the ERA were intended as a counter-measure to some controversial situations where employers had dismissed large sections of their workforce and replaced them with workers on significantly less favourable contract terms. Many employers have would rarely if ever consider using this practice, leading them to assume the ERA's provisions on contract change will have little or no impact on them. This assumption is, in most cases, wrong.

The new rules operate by restricting an employer's ability to change certain core contractual terms, known as 'restricted variations', rather than simply prohibiting dismissal and re-engagement. Any future attempt to change key contractual terms, including by relying on general flexibility clauses or specific variation clauses, risks breaching the restricted variation provisions. Even employers who would never contemplate 'fire and rehire' should therefore be reviewing their employment contracts now to ensure the terms meet business needs and have appropriate flexibility built in before 1 January 2027.

Contract change: how the new rules work

The ERA limits an employer's ability to make changes to employment terms by making a dismissal effected to introduce a 'restricted contract variation' automatically unfair . This applies to actual and constructive dismissals and applies whether the employee leaves employment entirely,  is replaced by someone else on a revised contract, or is 'fired and rehired', i.e. dismissed and re-engaged on a revised contract.

The employer's reason for the variation is largely irrelevant and even a fair and well-reasoned business rationale will not prevent the dismissal from being automatically unfair. The only exception is a very narrow financial difficulties exception, which applies where the employer is facing serious financial distress, effectively on the brink of insolvency. 

As the ERA disapplies the service requirement for this type of dismissal, individuals will be protected against restricted variations from day one of employment.

What are restricted variations?

Restricted contract variations include changes to pay, to measures of work used to calculate pay (e.g. commission targets), to pensions, to the number of working hours or shift timings / duration, and to time-off entitlements.  Changes to introduce contractual flexibility clauses into workers' terms are covered too and the ERA allows for future regulations to bring other types of variation into scope. 

Changes to terms which are not restricted contract variations will not trigger automatic unfair dismissal rights.  However, from January 2027, the ERA will implement requirements that employers must consider (1) when dismissing and reengaging to make 'standard' contract changes, e.g. changes to duties or place of work or (2) when they fall within the scope of the financial difficulties exception and make contractual changes.  Matters ERA requires tribunals to consider when assessing fairness include the reason for the variation,  consultation carried out with the employee /  trade union /  employee representatives, and whether the employee was offered anything in return for agreeing to the variation.  Employers will need to factor these points into contract change exercises, as well as complying with the Statutory Code of Practice on Dismissal and Reengagement which is due to be updated for ERA alignment later in 2026

Consultation on expenses and benefits and shift patterns

The Government is consulting on the detail of two types of restricted variation.

• In relation to the restriction on varying 'a sum payable to an employee in connection with employment', the consultation seeks views on which, if any, expenses, payments in kind, or benefits in kind should be covered. The government's preferred option is to exclude all of these from the definition of a restricted variation, leaving businesses with greater flexibility to make changes to their expenses and benefits arrangements.
• In relation to the restriction on varying the timing or duration of shifts, an option the government is considering is not including any type of shift pattern change within the scope of the definition. Its preferred option, however, is to limit the restriction to cover only shift changes from day to night working (or vice versa) and changes from weekday to weekend working (or vice versa). 

Businesses can respond to the consultation until 1 April 2026.

Actions to prepare for the new rules

As outlined above, ERA's contract variation provisions have implications for all employers, not just those who might contemplate fire and rehire. Employers with contracts that have flexibility built in will be better placed to adapt working practices to meet the developing needs of their business and the wider economic landscape. Updating employment contracts to provide maximum flexibility and to fit business needs is therefore a sensible step for employers to take now, given that changes implemented before 1 January 2027 will not be subject to the new restrictions.

We recommend the following actions:

• Review existing contracts: Conduct a thorough review of current employment contracts to identify terms affected by the new rules. Pay particular attention to clauses relating to pay, hours, pensions, and time off, as well as any existing variation or flexibility clauses. Consider whether contracts and policies are clear about which entitlements are contractual and which are non-contractual, as changes to non-contractual matters are not affected by the new restrictions.
• Prepare revised contract templates: Develop and implement revised contract templates to use for new hires. Consider including specific variation clauses (which must be inserted before 1 January 2027 to avoid being caught by the anti-avoidance provisions) or restructuring certain benefits as non-contractual, discretionary entitlements. Ensure new templates are in use before the deadline.
• Consider amendments for existing employees: Assess whether to amend the contracts of existing employees. Businesses with, for example, outdated pay structures, unsustainable pension arrangements, working hours arrangements requiring realignment, or disparate contract terms requiring harmonisation should act soon to revise their contracts. Businesses should also consider future-proofing contracts by introducing specific variation clauses, even if no essential updates are needed currently. Ideally, any changes to contracts of current staff will be made with employee consent, and tying new contract terms to pay reviews is a useful way to achieve this. Otherwise, the scale of this exercise will vary depending on existing terms, the extent of proposed changes, and any collective consultation requirements.