Fire and rehire under the ERA 2025: new draft Code of Practice means a change of approach for employers

Just over two years after the current statutory Code of Practice on Dismissal and Re-Engagement came into force, the Government has published a substantially revised draft Code. The new draft Code is currently subject to consultation, which closes on 17 December 2026. It is intended to reflect the changes made by the Employment Rights Act 2025 to the law on “fire and rehire” and “fire and replace”.  These are due to come into force in March 2027. 

In particular, it reflects the concept of “restricted variations”  (changes to certain core contract terms such as pay where, if an employee is dismissed to effect the change, the dismissal will be automatically unfair unless the limited financial difficulties defence applies).  However, this isn't the only update, and the new draft Code firms up employers' consultation duties even where a contractual change isn't a restricted variation. 

Why does the draft Code matter?

The financial consequences of failing to comply with the Code could be severe, as Employment Tribunals can increase any compensation awarded to a successful claimant by up to 25%.  With the unfair dismissal compensation cap being removed with effect from 1 January, this could be an expensive failure. 

When will the draft Code apply?

The current Code applies where an employer proposes contractual changes and envisages that, absent agreement, it might opt for dismissal and re-engagement.   However, the new draft Code has a broader scope - it applies to any unilaterally-imposed change, including where the change may be permitted by an existing variation or flexibility clause.  This means that, if an employer is seeking to rely on a variation clause (or even just impose a change without an express contractual right to do so) and an employee resigns and claims constructive unfair dismissal as a result, a failure by the employer to follow the Code could result in an increase to compensation. 

Key principles

The new draft Code keeps most of the key principles of the existing Code, but strengthens them:

• dismissal and re-engagement should be used only as a last resort; 
• employers are expected to share information, consult meaningfully with employees and their representatives (including recognised trade unions), consider alternatives to dismissal and avoid threatening dismissal prematurely or simply as a negotiating tactic;
• employers should contact Acas before raising the prospect of dismissal and re-engagement. 

The new draft Code strongly emphasises that dismissal and re-engagement should only be contemplated where reasonable alternatives have been exhausted.  

Restricted variations

The new draft Code reflects the distinction being introduced under the ERA between “restricted” and “non-restricted” variations.  If an employee is dismissed in order to effect a restricted variation, the dismissal will be automatically unfair unless the employer can show that the new (and very limited) financial difficulties exception applies. 

"Restricted variations" are, essentially, changes to core contractual terms, including reductions to pay, contractual pension terms, changes to total contractual working hours, reductions in contractual leave entitlement and specified changes to shift patterns.  The definition also includes variation clauses which would allow any of those changes to be made in the future. If an employer proposes a package of changes and even one of them amounts to a restricted variation, the automatic unfair dismissal rules apply.

This is the key change.  Currently, an employer which dismisses and re-engages on new terms may be able to defend a claim for unfair dismissal, provided that it can establish a potentially fair reason, has acted reasonably in treating that reason as sufficient for dismissal and follows a fair procedure. Under the new law and Code, dismissal for a restricted variation will be unfair even where the employer has a strong commercial rationale and follows a reasonable process, unless the financial difficulty exception applies. 

What about changes to other terms?

There will be a little more room for manoeuvre where an employer is seeking to change a non-restricted term, such as an employee's location or job role.   Dismissal and re-engagement in those circumstances will not automatically be unfair, but under the ERA, Employment Tribunals are required to scrutinise the employer's rationale and process carefully.   The new draft Code expands on this, expecting employers to provide reasonable information, undertaking meaningful consultation with employees and any relevant representatives, considering whether something can be offered in return for agreement, making exhaustive attempts to reach agreement and establishing that there is no reasonable alternative to dismissal and re-engagement. 

Information and consultation

The new draft Code also expects employers to share substantial information in order to consult meaningfully.

Under the current Code, employers should provide as much information about their proposals as reasonably possible, including what is changing, who will be affected, the business reasons for the changes, anticipated timing, alternatives which have been considered and the next steps.

The revised Code goes further. It says employers should explain whether proposed changes are restricted or non-restricted and why the variation is important, the organisation's reasons and justifications for the changes, whether financial difficulties are involved, the evidence supporting the proposal, what (if anything) is being offered to employees in return for agreement and what alternatives have been considered. 

The new draft Code also gives useful guidance about the timing of consultation.  It says that consultation should start at a formative stage, when proposals can still be influenced or withdrawn, and that parties should engage openly and in good faith.  However, it warns against raising the prospect of dismissal and re-engagement too early, on the basis that this may damage industrial relations. 

A consultation exercise in which the commercial decision has already been made is likely to be a breach of the Code. Employers will need to ensure that internal documents and management communications don't indicate that the consultation is just a box-ticking exercise rather than genuine engagement. 

Financial difficulties exception

Under the ERA there is an exception to the automatic unfair dismissal protection for restricted contractual changes, but the revised draft Code makes clear that this is deliberately narrow. Different tests apply to private sector employers, public sector employers and local authorities. 

For private sector employers, the financial difficulties must be affecting, or be very likely in the immediate future to affect, the employer's ability to continue as a going concern, where otherwise redundancies or closure would be necessary. The employer must also be able to establish that, in all the circumstances, it could not reasonably have avoided needing to dismiss and re-engage the employee to make the restricted change, or replace the employee with a non-employee.

The draft Code expressly states that financial difficulties are not intended to provide a general justification for changing contractual terms, managing financial pressures or improving competitiveness.   Employers will need very clear evidence of pressing financial need and the alternatives they have considered and rejected.  Importantly, they are expected to share this evidence in the course of consultation.  Although the draft Code notes that employers may reasonably conclude that they can't share highly sensitive or confidential information, they are expected to share as much as possible.  This will pose challenges for employers, particularly where information is price-sensitive. 

“Fire and replace”

The revised Code also addresses the “fire and replace” provisions of the ERA . These provide that, where an employee is dismissed in order to replace them with a non-employee, such as an agency worker, performing substantially the same work, or another employee on varied terms involving a restricted variation, the dismissal is automatically unfair.

This will have major implications for employers considering alternative workforce models as part of a cost-saving or restructuring exercise. The financial difficulties exception will also apply here, and with the same limitations. 

The revised Code makes clear that the new rules do not prevent genuine redundancies where roles are no longer required, but if employees' work continues under a new workforce model, there will be substantial claims risk for employers.

What should employers do now?

Although the revised draft Code is still subject to consultation, we do not envisage substantial changes, as it largely reflects the new rules under the ERA. 

Employers contemplating contractual changes will need to identify at the outset which terms they want to change and whether any are restricted terms, as that will have a major impact on risk profile. Businesses should also expect greater scrutiny of the evidence behind the proposed changes, the information disclosed to employees, the alternatives considered and whether consultation was genuine. Where financial difficulties may be relied upon, the supporting financial evidence will be particularly important.

The Government's consultation on the revised Code remains open until 11.59pm on 17 December 2026, for any businesses wishing to respond.