Employment Law Guide 2026: Changing employment terms: dismissal and re-engagement

Changes being made by the ERA 2025 will make it much more difficult for employers to change certain employment terms without the agreement of the employee concerned.

Currently, where an employer wishes to change contractual terms and the employee does not agree to the changes, the employer may seek to achieve the changes by terminating the employee’s contract (on notice) and offering them continued employment on new terms. Sometimes they decide instead to dismiss and hire new employees on the new terms. These practices are often referred to as ‘dismissal and reengagement’ or ‘fire and rehire’. Dismissed employees may be able to claim unfair dismissal if the employer does not have a fair reason for dismissal, does not follow a fair procedure dismissal or if dismissal was not reasonable in the circumstances. Employers must also comply with the Acas Code of Practice on Dismissal and Reengagement introduced in July 2024. An employment tribunal may increase compensation by up to 25% in relevant claims (including for unfair dismissal and protective awards) where the employer has unreasonably failed to follow the Code.

There are additional statutory collective consultation obligations where an employer is proposing to dismiss 20 or more employees at one establishment within a period of 90 days or less in order to bring about contractual changes. Failure to comply with these obligations can result in an employment tribunal awarding a “Protective Award” of up to 90 days’ full pay per affected employee. These obligations will apply in wider circumstances and with the potential for increased compensation as a result of changes to collective consultation laws in the ERA 2025 (see Collective Consultation above).

From October 2026, other than in cases financial difficulty on the part of the employer (see below), an employee’s dismissal will be automatically unfair if the reason, or principal reason, is that they refused to agree to a “restricted variation”, or is to enable the employer to employ them or another employee to carry out the same or substantially the same duties under a varied contract containing a restricted variation. Although the Government originally planned that dismissal restrictions should apply to all contractual variations, this is now limited to specifically defined “restricted variations” which are those concerning reductions in pay or time off, changes to pension terms, working hours, shift times and lengths, and the inclusion of a contractual provision entitling the employer to vary any of these terms. The Secretary of State is also given power to add to this list.

The only circumstances where an employee’s dismissal in these circumstances will not be automatically unfair is where the employer is able to meet a stringent “financial difficulties” tests. It will have to show that:

• The reason for the restricted variation is to eliminate, prevent or significantly reduce, or significantly mitigate the effect of, any financial difficulties which, at the time of the dismissal, were affecting, or were likely in the immediate future to affect:
  • its ability to carry on the business as a going concern; or
  • where the employer is a public sector employer (other than a local authority), the financial sustainability of carrying out its statutory functions
• In all the circumstances, the employer could not reasonably have avoided the need to make the variation.

Essentially this means that dismissals will not be automatically unfair if the change is needed to ensure the viability of the employer’s business and cannot reasonably be avoided. However, a dismissal in such circumstances may still be unfair and in addition to usual requirements for a fair dismissal, the Act requires that an employment tribunal assessing the fairness of the dismissal will need to take the following matters into account:

• Any consultation with the employee about varying the employee's contract of employment
• Any consultation with any trade union recognised by the employer or, if a trade union is not recognised, any consultation with any other appropriate employee representative
• Anything offered to the employee by the employer in return for agreeing to the variation
• Any other matters specified for these purposes in regulations.

Similarly, where an employer is seeking to make a change that is not a “restricted variation”, although any dismissal will not be automatically unfair, an employment tribunal assessing the fairness of the dismissal will need to take the above factors into account.

Implications/Action points

• Review contract terms now
• Implement changes for current employees before it becomes more difficult
• Ensure there are complaint variation clauses which cover restricted variations
• Link changes to pay reviews where possible as employees will be more likely to agree changes