The government announced last week that it will delay its plans to roll out its fire-and-rehire protections, opting instead to begin consultations on the narrow “financial difficulties” exemption in its Code of Practice on Dismissal and Re-engagement, published on 22 October 2026.
For business owners and managers, the extra time provides an opportunity to review planned contract changes, strengthen consultation with their employees and representatives, and prepare carefully. Existing employment rights continue to apply while businesses get ready.
What is fire and re-hire
In simple terms, fire and rehire means dismissing employees and offering them re-employment on altered, often less favourable terms. The government’s planned reforms aim to significantly restrict this practice.
Employers considering changes to employment contracts should understand both the new protections and the responsibilities that already apply.
Which contractual changes will be protected?
The ERA 2025 identifies “restricted variations”, which are core to the contractual bargain between the employer and employee, such as pay entitlements (basic and performance-related pay), pensions, working hours, shift patterns, and leave, to name a few. Changing terms within this protected category without agreement, dismissing an employee for refusing the changes, or re-engaging the employee or a replacement on those changed terms to perform substantially the same work will generally be automatically unfair, unless the employer can demonstrate the “financial difficulties” exemption.
Changes to contractual terms outside the protected “restricted variations” category still require care, as the employer may find themselves on the other end of an unfair dismissal claim if not handled correctly.
The financial difficulties exception
For business, the exception “financial difficulties” is defined as circumstances that affect, or are likely in the immediate future to affect, its ability to continue as a going concern. The employer must also show that it could not reasonably have avoided the “restricted variation”.
Simply seeking to impose the changes for routine cost savings or to improve profits will not, by itself, establish that test.
Meeting the “financial difficulties” exemption does not, in itself, make a dismissal fair. Ultimately, it is for the employment tribunal to decide, and in doing so it will examine and determine the principal reason for the dismissal.
To mitigate the risk of a complaint from an employee alleging unfair dismissal, it is crucial for a business, if financial difficulties are driving the proposal, to retain contemporaneous financial information, forecasts and evidence of the alternatives considered. The records should explain why the change is necessary, rather than simply showing the savings it would produce.
What meaningful consultation looks like
The current Code of Practice (which came into force on 18 July 2024) promotes genuine information sharing and consultation where dismissal and re-engagement are envisaged.
Consultation should give employees a genuine opportunity to respond to the employer’s proposal before a final decision is made. Announcing a settled decision and then seeking comments would not achieve that purpose.
Employers should:
- Explain the proposed changes, the business reasons, who would be affected and the likely impact on employees.
- Share relevant information early enough for employees and their representatives to consider it properly.
- Allow reasonable time for questions, advice and alternative suggestions.
- Consider feedback with an open mind and explain how it has influenced the proposal.
- Explore reasonable alternatives, including a different approach, a phased change or an agreed compromise.
- Maintain communication throughout the process and explain the reasons for decisions.
The aim should be to reach agreement. Dismissal and re-engagement should be a last resort.
How ERA 2025 and the Code fit together
Legislation establishes statutory protections, while the Code of Practice provides guidance on responsibilities and good practice. The government plans to revoke the existing Code of Practice in March 2027, with the new Code of Practice expected in summer 2027, subject to the government completing its consultation (which closes on 17 December 2026) and to parliamentary approval.
The risks of getting the process wrong
Depending on the circumstances, imposing contractual changes or dismissing employees can lead to unfair dismissal, breach of contract, or other employment-related claims.
An unreasonable failure to comply with the existing Code of Practice can lead to an increase of up to 25% in relevant tribunal compensation, where applicable.
The practical consequences can also be substantial. Damaged trust may affect morale and staff retention, while disputes can harm the business’s reputation. Disagreements with employees or trade unions may escalate, potentially leading to industrial action.
What employers should do now?
- Start by mapping out any planned contractual changes. Assess which changes may fall within the protected category.
- Strengthen Consultation. Document everything: the business rationale, alternatives considered, employee engagement, and your final decisions. A clear record demonstrates you have considered all options.
- Review Your Documentation. Thoroughly review the contracts and HR policies. Ensure they align with current requirements and forthcoming changes. Update them now to avoid last-minute scrambling.
- Evidence Financial Difficulties (If Relevant): If financial difficulties are a driver for change, retain contemporaneous evidence that addresses the applicable legal test. Don’t just record savings; demonstrate a genuine and compelling case.
- Train Your Team. Equip your HR staff and managers with the knowledge they need. Training should cover contract changes, consultation procedures, and the risks of dismissal and re-engagement.
Keep clear records of:
- The business rationale and supporting evidence.
- Financial difficulties, where relevant.
- Alternatives considered and reasons for rejecting them.
- Employee feedback and how it was addressed.
- Changes to the proposal and reasons for the final decision.
Record keeping should support a genuine consultation process.
Obtain legal advice before making a dismissal or issuing notices or attempting dismissal and re-engagement. Check the law in force at the proposed dismissal date and use the additional preparation time to pursue workable changes through agreement wherever possible.
PJS is the trading name of PJS Business & Advisory Ltd, which is not a firm of solicitors and is not regulated by the Solicitors Regulation Authority. This article provides general information about fire and rehire and should not be relied on as legal advice. For support with proposed changes to employment contracts or dismissal and re-engagement, contact PJS.
