20th July 2026 ❘ Legal News and Commentary

Employment Rights Act 2025: Why “Fire and Rehire” Is No Longer a Viable Option for Most Employers

For many years, where negotiations over changes to employment contracts reached a deadlock, employers were often advised to consider dismissing employees and offering re-engagement on new contractual terms.

This practice, often referred to as “fire and rehire”, has always carried legal risk. However, the Employment Rights Act 2025 will significantly change the legal landscape, meaning this approach is expected to become an option of last resort for only the most exceptional circumstances.

What is changing?

The Government has already strengthened protections around dismissal and re-engagement through the statutory Acas Code of Practice, which makes clear that employers should only consider dismissal and re-engagement after all reasonable alternatives have been exhausted.

The Employment Rights Act 2025 goes further.

From January 2027, the Act is expected to make it automatically unfair to dismiss an employee, or replace them, in order to impose certain restricted variations to core contractual terms, unless the employer can satisfy a very limited statutory exception.

The exception applies only where the employer can demonstrate that the contractual variation was necessary to eliminate, prevent or significantly reduce financial difficulties affecting the organisation’s ability to continue as a going concern.

A desire to reduce costs, improve efficiency or introduce new working practices alone is unlikely to meet this threshold.

The financial risks are increasing

The potential consequences of getting this wrong are also expected to change.

From January 2027, compensation for automatically unfair dismissal in these circumstances is expected to become uncapped.

For employers considering contractual changes affecting multiple employees, the financial exposure could therefore be substantial. Rather than facing claims subject to the ordinary statutory compensation limits, employers may instead face multiple automatically unfair dismissal claims with uncapped compensation.

Employers should also remember that, under the current Acas Code of Practice on dismissal and re-engagement, employment tribunals may increase compensation by up to 25% where an employer has unreasonably failed to comply with the Code.

Achieving contractual change lawfully

This does not mean contractual change is impossible.

Employers can still make changes to employment contracts where they follow a fair, lawful and well-planned process. In many cases, this will involve:

meaningful consultation with affected employees
genuine negotiation
clearly explaining the reasons for the proposed changes
carefully documenting the process
obtaining employees’ agreement wherever possible, including through appropriate incentives where appropriate

Taking this approach requires planning and early legal advice, but it can help employers achieve necessary contractual changes while significantly reducing legal risk.

Planning ahead

If your business is considering a restructuring, changes to pay arrangements, amendments to working patterns or other contractual changes, now is a good time to review your proposed approach.

While many of the Employment Rights Act 2025 reforms are being introduced in stages, employers should begin planning well in advance of the expected January 2027 changes.

Understanding the new legal framework now can help businesses avoid costly mistakes later and ensure any contractual changes are managed fairly, lawfully and with confidence.

Our Employment team advises employers on contractual change, business restructures and the practical implications of the Employment Rights Act 2025. If you are planning changes to your workforce, we can help you understand your options and guide you through the process – just get in touch and we’ll be happy to advise you.

You might also find out Employment Rights Act Health Check useful – you can complete this here.