Rewriting the rules on Fire and Re-Hire: What employers need to know

A changing legal landscape 

The practice of "fire and re-hire" (or dismissal and re-engagement) has long been used by employers looking to make contractual changes by terminating an employee's existing contract of employment and offering them re-engagement on new terms.   

The government's proposal to limit this appraoch is a central feature of the Employment Rights Bill. Since its introduction in October 2024, the Bill has attracted significant attention for its potential to reshape how employers manage change. 

In July 2025, the government tabled a new set of amendments to the Bill. These include: 

• Refinements to the Bill’s fire and re-hire framework 
• Additional protections for agency workers under the Bill’s zero hours provisions 
• A ban on NDAs that prevent disclosures relating to harassment or discrimination  
• An extension of statutory bereavement leave to cover pregnancy loss before 24 weeks. 

This article focuses on the updated fire and re-hire provisions. We'll explore other key amendments in further updates. 

What is changing? 

Under the amended Bill, it will be automatically unfair to dismiss an employee for refusing to accept a ‘restricted variation’ of their contract. These include changes such as: 

• a reduction in pay 
• adjustments to the method used to calculate pay (e.g. commission structures) 
• changes to pension entitlements 
• reductions in contractual hours or time off 
• changes to shift patterns (as defined in future regulations) 

Also included is any variation clause that would allow an employer to unilaterally impose one of these changes. The amendment also contains a provision allowing the Secretary of State to expand the list through regulations. 

There is a narrow exception to this rule. Dismissal where there is a restricted variation will not be automatically unfair if an employer can demonstrate that:  

• the proposed variation was needed to eliminate, prevent, significantly reduce or mitigate the effects of financial difficulties that were affecting, or were likely in the immediate future to affect, its ability to continue operating as a going concern or otherwise to carry on its activities.  
• dismissal could not reasonably have been avoided.  

For public sector employers, a different test will apply, with a tailored version for local authorities subject to financial intervention. 

What changes fall outside the new provisions? 

Not all contractual changes will trigger the new rules. If an employee is dismissed for refusing to accept a non-restricted variation - such as changes to duties, reporting lines, or place of work - the dismissal will not be automatically unfair. However, these may still be challenged under the usual unfair dismissal principles. 

The Bill confirms that in such cases, tribunals must have regard to: 

• the reason for the change 
• the extent of consultation 
• any compensation or alternatives offered to the employee 
• any additional factors set out in regulations 

These considerations broadly reflect the existing fair dismissal framework, but employers can expect increased scrutiny where changes to contractual terms are linked to dismissal. 

Can employers still rely on contractual variation clauses?  

We now know that where contractual variation clauses allow an employer to unilaterally impose a change relating to pay, hours, or other protected terms, they will fall within the list of 'restricted variations'. That means dismissal for refusing to accept the change made under such a clause will be automatically unfair unless the strict financial justification test is met. 

It remains unclear, however, whether a variation clause agreed before the legislation takes effect, could still be relied upon to support a change. It may be possible that, where the clause is robust and clearly incorporated into the contract with appropriate safeguards, any subsequent change made under that clause should be treated as a variation made within the parties' original agreement, rather than an imposed change. 

However, the Bill makes no distinction between existing and new clauses, and the government has powers to extend and clarify the regime through secondary legislation. This may make this position harder to sustain over time. There is likely to be litigation on this point, particularly given the practical importance of variation clauses in managing change. 

That said, certain terms, such as reductions in pay or working hours, may be unlikely ever to be viewed by tribunals as sufficiently flexible to fall within the scope of the original agreement. In practice, the more significant the impact on the employee, the less likely it is that a variation will be seen as contractually authorised. 

Despite this uncertainty, it remains sensible for employers to review and strengthen variation clauses in existing contracts now. Doing so may offer the best possible protection under the current legal framework while we await clarity on how tribunals and future regulations will approach these provisions. 

Replacing employees with non-employees 

To close a potential loophole, the latest amendments to the Bill also introduce a new safeguard. Where an employer dismisses an employee in order to replace them with someone who is not an employee, for example, an agency worker or self-employed contractor, the dismissal will be automatically unfair if:  

• the new individual is performing substantially the same activities and 
• there is no genuine redundancy situation.  

Again, the same financial justification test applies in these cases. 

What does this mean in practice? 

While the latest amendments narrow the scope of the fire and re-hire provisions in certain respects, the overall effect remains significant. Employers should not assume that the government has stepped back from its original policy intention. 

The concept of a 'restricted variation' now provides clearer boundaries, but it is still defined broadly. It captures many of the contractual terms most commonly targeted in fire and re-hire scenarios, including reductions in pay, changes to pay calculation methods, adjustments to pensions, and changes to hours or shift patterns. These are the types of changes that typically lie at the heart of cost-saving restructures and harmonisation exercises. 

In addition, the Secretary of State will have the power to extend the definition of restricted variations through secondary legislation. This introduces a degree of uncertainty for employers as over time, the list of restricted variations could broaden in scope and complexity. 

Some potential unintended consequences of the original drafting have been addressed. For example, changes to an employee’s duties or place of work are now explicitly outside the automatic unfair dismissal regime. However, these amendments should not be interpreted as a major rollback. The Bill still aims to discourage dismissal and re-engagement where changes are significantly detrimental to the employee. 

Variation clauses had previously been discussed as a potential tool for navigating the new structure. Whilst the amendments do not prevent employers from including such clauses, they do treat clauses allowing unilateral changes to restricted terms as themselves giving rise to a restricted variation. While this may limit their use, much will depend on how tribunals interpret the legislation and whether further regulations are introduced to clarify or narrow the scope for relying on such clauses.  

What steps can employers take now? 

Although the new fire and re-hire provisions are not yet in force, and may evolve further as the Bill completes its passage through Parliament, employers should start preparing now. According to the government's implementation roadmap, these changes are expected to take effect in October 2026, giving employers time to review existing practices and address any areas of vulnerability in advance. 

Key preparatory steps for employers include: 

• Reviewing past and planned variation exercises 

Reflect on any past exercises involving dismissal and re-engagement, especially those that changed core contractual terms, such as pay, working hours, or shift patterns. Would those changes be lawful under the new rules? Thinking ahead will reduce risk. 

• Auditing variation clauses 

Review template contracts for flexibility or variation clauses, particularly those that relate to pay, hours, pensions or other restricted terms. Even if reliance on these clauses becomes harder, having them in place may still offer some protection if properly used.  

• Understanding the financial difficulty test 

Where dismissal following refusal to accept a restricted variation is being considered, employers will need to show that the proposed change was a necessary response to serious financial pressure. This will require disciplined internal decision-making, supported by financial evidence and a clear record of the rationale for change. Employers should familiarise themselves with the thresholds now to ensure their governance structures are aligned. 

• Reviewing consultation and communication processes 

While not mandatory, consultation will remain central to assessing fairness in most cases. Reviewing how change is communicated to affected staff, documenting consultation outcomes, and exploring alternatives to dismissal will help mitigate risk. 

• Preparing HR and leadership teams  

HR teams and line managers will need to understand when the new rules apply, how to distinguish between restricted and non-restricted variations, and what supporting evidence may be required.  

Taking early steps to prepare for the new framework will allow organisations to maintain flexibility while adapting to a more regulated landscape for contractual change. 

For more information or advice, please contact Joanne Oliver in our Employment team.