Employment Rights Act 2025

Under the Employment Rights Act 2025, an employer’s ability to use ‘fire and rehire’ to change terms and conditions will be significantly restricted. The Act will make it an automatic unfair dismissal where an employee is dismissed or replaced in order to make changes to core terms in their employment contract – known as ‘restricted variations’.

Under the ERA25 it will be automatically unfair for an employer to dismiss someone:

• if the reason for the dismissal is that the employee did not agree to a ‘restricted variation’, or
• if the employer wishes to re-engage them (or replace them with another employee doing the same role) but on terms that reflect a restricted variation

Restricted variations relate to:

• reductions to pay
• where pay is linked to measures of work done (such as targets), changes to those measures/targets
• changes to pensions
• changes to total hours
• reduction to leave entitlement
• changes to shift patterns which are specified in regulations

Also included is any variation clause that would allow an employer unilaterally to impose one of these changes. 

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, or
• dismissal could not reasonably have been avoided

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 Act gives the government the power to make regulations specifying certain restricted variations, over and above those laid down in the Act. A consultation regarding this (closing on 1 April 2026) focuses on two areas: employment expenses and benefits in kind, and shift patterns.

Employment expenses and benefits in kind

The ERA25 defines a restricted variation as a ‘reduction of, or removal of an entitlement to, any sum payable to an employee in connection with the employment’. The government has the power to exclude certain expenses and benefits in kind from this definition.

The consultation highlights that while core contractual pay should generally not be reduced via fire and rehire, employers need flexibility to adjust expenses and benefits. Two options are proposed in the consultation:

• Option 1 (the government’s preferred approach) – excluding certain (or all) expenses incurred by an employee
• Option 2 – excluding all expenses and benefits or payments in kind except for certain types of share schemes, travel expenses and accommodation.

The government is ‘minded to’ proceed with Option 1, which means that changes to these items would not give rise to an automatic unfair dismissal claim. Instead, such dismissals would fall under the enhanced ordinary unfair dismissal protections under the Act (which require the tribunal to consider the reason for the variation, any consultation carried out by the employer, and anything offered to the employee in return for agreeing to the variation).

Shift patterns

The ERA25 also allows the government to specify which variations to ‘the timing or duration of a shift’ will be considered a restricted variation. The consultation acknowledges the significant variability in shift patterns and the need for businesses to adapt to changing circumstances. However, profound shift changes can severely impact employees, particularly those with caring responsibilities.

Two options are considered:

• Option 1 (the government’s preferred approach) – only including shift changes from day to night working (or vice versa) and weekday to weekend working (or vice versa) as restricted variations
• Option 2 – not including any shift pattern changes in scope of the restricted variation definition

The government is ‘minded to’ proceed with Option 1. This means that only changes to those specific, most impactful shift patterns would lead to automatic unfair dismissal if an employee is dismissed for refusing them.

When these changes come into force – scheduled for January 2027 – the current statutory code of practice on dismissal and re-engagement will need to be replaced. The code prescribes the process to be followed by employers before dismissing and offering to re-engage in any circumstances. A breach of that process does not give rise to a legal claim in itself but may lead to an uplift of 25% to any compensation awarded in related claims.