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From 1 January 2027, ending someone’s contract and re-hiring them on different terms that they didn’t agree to will be classed as automatically unfair dismissal, in most cases. And that carries some of the most serious consequences in employment law.
It’s an approach many smaller business owners take. They finish someone’s contract so that they can re-employ them but with different terms (often less favourable for the employee).
Often, employers don’t know that they’re “firing and rehiring” from a legal point of view. It’s usually just framed as “we need to make some changes” followed by a new contract.
But with the new law coming in January, employers must tread really carefully around this type of practice.
What is fire and rehire?
Fire and rehire is when you dismiss an employee and re-engage them on new, usually worse, terms. It’s been used by employers of all sizes to push through changes when employees won’t agree to them voluntarily.
Until now, it’s been legally risky but available. Employees with enough service could challenge it as unfair dismissal and tribunals would look at whether you acted reasonably.
That changes in January.
What the new rule will mean
From January 2027, fire and rehire is being added to the list of automatically unfair reasons for dismissal. That puts it in the same category as dismissing someone for whistleblowing, raising health and safety concerns or for pregnancy-related reasons.
Automatically unfair dismissal carries no qualifying service requirement. It means that an employee who’s worked for you for one day could bring a claim.
From January, there will also no longer be a statutory cap on compensatory awards for unfair dismissal, including automatically unfair dismissal claims.
What’s covered
The new law applies to changes in a contract that the employee didn’t agree to, that the law calls “restricted variations”.
In plain terms, this means any changes to:
- Pay or how pay is calculated
- Pensions
- Working hours
- Holiday entitlement
- Shift patterns (with conditions still being finalised)
- Adding a contractual term allowing the employer to make one of these changes without agreement
So, if you dismiss someone and bring them back on a contract with any of those terms changed, that will be classed as automatic unfair dismissal.
There’s a nuance worth noting here. Changes to other things like job duties, location or job title aren’t covered by the automatic unfair dismissal rules. Those can still be changed through dismissal and re-engagement, but they’ll need to meet the ordinary unfair dismissal test, which from January also comes with a lower, 6-month qualifying period and no compensation cap.
There will be extra scrutiny in these cases too. A tribunal will have to consider why you needed to make the change, whether you properly consulted with the employee and whether you offered them anything in return for agreeing to it. So, dismissal and re-engagement over these terms won’t automatically be unfair, but you’ll still need to show that you handled it reasonably.
The financial difficulties exception
There is a narrow exception. If your business is in genuine severe financial difficulty that threatens its survival as a going concern, and there’s no reasonable alternative to making the change, you may be able to rely on this defence.
This is intended for serious financial difficulties affecting the viability of the business, where the employer can’t reasonably avoid making the changes. Simply wanting to reduce costs or improve profitability won’t be enough.
What you should do now
If you’ve used fire and rehire in the past, or you’re thinking about making changes to pay, hours or benefits that employees might not agree to, now is the time to think carefully about your approach.
Review your contracts. If there are contractual changes you need to make, the safest route is to consult properly with employees and seek genuine agreement. Don’t assume that dismissing and re-engaging someone will remain an available fallback if they say no.
From January, if an employee says no to a change that’s on the restricted variations list and you dismiss them to force it through, you’re potentially looking at an automatically unfair dismissal claim where the compensatory award is no longer subject to a statutory cap.
Get professional advice
It’s an HR consultant’s job to help business owners to work through these kinds of law changes properly.
We can review your current processes and advise you on how best to handle things while staying compliant and inside the law.
If you’re at all concerned about the new fire and rehire rules, reach out for a confidential free chat. We’ll be happy to help.