The Employment Rights Bill prohibits fire and rehire but in doing so it restricts an employer’s ability to make routine changes to terms and conditions.  The alternative strategies employers may be compelled to adopt, may prove more damaging for employees.

Ban on fire and rehire – a key manifesto commitment

Banning the practice of fire and rehire to prevent "unscrupulous tactics" is one of the government’s flagship worker rights policies.  The commitment first appeared in the Plan to Make Work Pay and is one of the major reforms to be introduced by the Employment Rights Bill.  

The policy was adopted in response to the perceived unfairness of an employer’s ability to terminate an employee’s employment contract and re-engage them on new, less favourable, terms to perform the same role.  It was a measure implemented by a number of high-profile employers during the COVID-19 pandemic to downgrade wages and which attracted criticism in Parliament.

On the face of it, ending fire and rehire is a laudable aim, designed to protect employees and ensure better treatment.  However, in practice, the issue is much more complicated than that.  

Termination and re-engagement under the current regime

Under the current regime, an employer who terminates a contract by giving the employee the requisite contractual notice, and who is able to demonstrate a valid business reason for the termination, will be able to limit their liability against dismissal claims when proposing re-engagement on new terms. 

While the ability to change contractual terms in this way, may suggest an imbalance of power between employer and employee, there is limited logic in placing an employer who wishes to retain an employee, albeit on different terms, in a worse position than one who is seeking to end the relationship.  

Imposing restrictions on the right to terminate, in circumstances where an employer is seeking to continue a relationship but on varied terms, locks the employer into the contract and impacts its ability to respond to changing circumstances.  This creates a perverse incentive for the employer to end the employment relationship, rather than seek to re-negotiate or continue it on altered terms.

What change is made by the Bill?

The Employment Rights Bill addresses fire and rehire by making it automatically unfair to dismiss an employee in order to replace them or re-engage them on varied terms.  But the proposed rules go even further - the protection would also extend to circumstances in which an employer seeks to vary a term of the employee’s contract and the employee does not agree to the variation.  A termination arising from those circumstances will also be automatically unfair.

Reasonableness is not a consideration

The significance of an automatic, rather than an ordinary, unfair dismissal is that the reason for dismissal is inadmissible and, as a result, no consideration is given to the reasons why the employer was seeking to change terms or the reasonableness of the employer’s conduct in doing so.  

Factors, such as the employer having undertaken a collective consultation exercise, or that the new terms were beneficial to the majority of employees or designed to correct unfairness, will simply not be considered by the tribunal, meaning that the default position is an unfair dismissal finding, with compensation payable.  Employers with compelling business reasons, who may have followed thorough consultation procedures, are in no better position than those without.

An exception for genuinely distressed businesses?

That said, the Bill does provide an exception which, if proven, would allow a tribunal to consider the reasonableness of the employer’s actions.  However, the exception is so narrow that it gives employers little practical assistance.  

To fall within the exception, an employer must demonstrate that it was facing financial difficulties which were affecting, or likely in the immediate future to affect, its ability to continue operating as a going concern.  It is also required to show that there was no reasonable way of avoiding the change to terms.  This is a very high bar.  In most cases of such serious financial distress, it is likely that an employer would already have begun a redundancy process, having passed the point at which downgrading contractual terms was a viable solution.

Casting the net widely

The provisions are not targeted solely at fire and rehire scenarios.  There will also be an automatic unfair dismissal if an employer seeks to make a variation to any contract term, to which the employee does not agree, and this results in termination of employment.  

This protection may be proportionate where the contractual variation is a remuneration change which would result in the employee receiving less pay for performing the same duties.  However, it will also apply in more common scenarios, such as a change to the structure of a pay allowance or to the terms of a benefit or bonus scheme.  The effect of the contractual change on the employee could be minimal but if the employer does not have the employee’s agreement it cannot proceed without being at risk of automatic unfair dismissal claims. 

Operational changes are also in scope

What’s more, the provisions do not just capture terms linked to remuneration.  They also apply where an employer is looking to make an operational change, such as a new shift pattern to accommodate a client request for revised operating hours, or a relocation of the workplace following the expiry of a lease.  

The changes may be driven by circumstances outside an employer’s control and there may be no way of avoiding them.  But employers will be unable to limit their liability for automatic unfair dismissal, unless they obtain consent to the change from every employee.

Changing terms by agreement

The government expects that reasonable contractual changes can be achieved by agreement. But is this realistic?  

One possible route to changing terms is to offer an incentive, such as a pay rise or bonus payment, to encourage employees to agree.  However, this approach requires careful management and timing and may not be financially viable.

Where employers have no leverage to offer to obtain consent, they may be at risk of creating a two-tier workforce, with those employees who have accepted the change engaged on different terms to those who have refused.  This may create a discrimination risk.

In some situations, such as a change in the place of work, an employee’s failure to agree to new terms will necessarily result in dismissals.  Employers will need to weigh up whether it is strategically more effective to approach the need to change terms as a redundancy exercise, bearing in mind their potential liability if they are unable to secure the agreement of the workforce as a whole.

A major, unintended consequence of the provisions is that redundancy may become a less risky and more pragmatic approach for employers, than seeking changes to terms and conditions.  Rather than preserving jobs, it seems possible that the ban on fire and rehire will lead to increased job losses.

A new approach to contracts

In the longer term, approaches to drafting contracts may evolve in order to mitigate the impact of the reforms.  Contract terms may be limited to those which it is essential to include, to facilitate the ability to make changes without the need for consent.  In addition, flexibility clauses, which give employers a unilateral right to make changes, may be included as standard to give employers the best possible arguments that they are entitled to make changes without seeking agreement.  These developments would be unlikely to represent a positive change for employees.

Next steps

In their current form, the reforms to fire and rehire raise real difficulties for employers, impinging on their ability to make changes to terms and conditions in response to evolving business needs and pressures.  The ban makes restructuring an option of last resort, with redundancy likely to represent a lower risk option for employers.  This is an unhappy outcome for both employers and employees.

However, the Bill, which has now progressed to the House of Lords, continues to be subject to scrutiny and debate and there is still time for the government to make changes to avoid the unintended consequences of these provisions.

We are continuing to track the progress of the Employment Rights Bill in our UK Employment Law Reforms Tracker.