The controversial practice of “firing and rehiring” – dismissing employees and offering to re-engage them on new terms and conditions, typically to push through a negative change to which the employee has refused to agree – is once again hitting the headlines in the UK.

Current law

We previously wrote about the new statutory Code of Practice on fire and rehire that came into effect on July 18, 2024. The Code was first introduced by the previous UK Government in the wake of a British shipping company’s infamous dismissal of 800 employees without consultation. While that was not a true fire and rehire scenario (rather a “fire and replace”), it raised significant concerns about businesses being able to take unilateral action that has a serious detrimental impact on the workforce without prior engagement with employees.

The Code sets clear expectations that fire and rehire should only be used as a last resort, and after genuine consultation with employees (or representatives) with a view to agreeing to any proposed changes and exploring any alternatives to dismissal. It also makes it possible for Tribunals to increase compensation by up to 25% for employees whose employers fail to comply with the Code (although there is no standalone claim for this).

Against this backdrop, the UK Supreme Court’s judgment on Tesco Stores Ltd v USDAW and others caused a stir when it was handed down on September 12, 2024.

• This case concerned a small group of employees who, to incentivise them to redeploy within the company when its distribution centres were restructured, received an unusual contractual entitlement to an enhanced payment term, which had been specifically described as “permanent” within the clause and during negotiations. Some 14 years later, the employer sought to remove this benefit by paying employees a lump sum in exchange for giving it up, or if they refused, dismissing and re-engaging these employees on new terms without the contractual right to the enhanced payment removed.

• At first instance, the High Court granted the union (USDAW) an injunction in the employees’ favour, preventing the company from using fire and rehire to push this change through and remove the benefit of enhanced pay. On appeal, that decision was overturned, and the Court of Appeal judgment noted that the judges were not aware of any circumstances in which a final injunction had been granted to prevent a private sector employer from dismissing an employee for an indefinite period. Ordinarily a court will not order specific performance of a contract for personal service, and the decision to grant the injunction did just that by removing the company’s ability to terminate these employment contracts.

• On a further appeal by the union, the Supreme Court’s decision to restore the injunction – and therefore block the employer from using fire and rehire as a way to achieve this change to the employees’ contracts – has been greeted with surprise and concern. However, this judgment should not be seen as the beginning of a wave of successful employee injunctions seeking to prevent changes to employment contracts through fire and rehire. Instead, it is a timely reminder of the need for clear drafting and well thought out employee communications when negotiating contractual employment terms.

• The specific facts of this case were unusual, and the success of the union in securing the injunction turned on the Court’s interpretation of the specific language used in the contractual term relating to the enhanced payment. The clause stated that the benefit would be “permanent” and that it would continue for as long as employment in the same role continued, unless both employee and employer agreed otherwise. The Court considered that the clause would lose its meaning and value if the company was able to unilaterally bypass it simply by dismissing and re-engaging the employees. The wording of the contractual term was closely considered alongside the communications between the employer, the union and the relevant employees when the term was negotiated. The assessment of the combined language led to a finding that the parties’ clear intention was that this benefit would continue for as long as the employees remained employed by the company in the same role. If the company had wanted to apply a time limit to the benefit, that could have been addressed in negotiations and in the drafting. The Supreme Court therefore concluded it was necessary to imply a term into the employment contracts that restricted the company from dismissing those employees on notice if the purpose of the dismissal was to remove their right to receive that permanent benefit.

In addition to the interpretation of the contractual terms, the Court considered that damages would be an inadequate remedy for the employees in the event that the benefit was unilaterally removed. The enhancement was more than a third of the three affected employees’ pay and they had all given evidence that they had applied for mortgages based on their total pay including the enhancement. It would require difficult and potentially costly speculation as to how long each employee would remain in that role, and it would not be certain that any amount awarded would put the employees in as good a position as if the employment contract had continued on the same terms.

Employers who are seeking to incentivise their workforce with bespoke benefits should think carefully about the terms being offered and ensuring that the drafting of the terms include clear limitations to avoid any unintended consequences. The manner and content of negotiations ahead of agreeing any such terms should also be carefully considered so there is no room for confusion.

Employment Rights Bill and future changes

On October 10, 2024, the UK Government published the draft Employment Rights Bill, which contains major reforms to “fire and rehire” and “fire and replace” practices. It is important to note that the Bill is not yet law, and the changes to fire and rehire / replace will not be effective until consultations have been completed and the new regulations are passed, which the Government has indicated will be no earlier than autumn 2026. Nevertheless, the Bill lays out significant changes, including:

• Amendments to the Employment Rights Act 1996 to provide that a dismissal will be automatically unfair if the reason for the dismissal is either:
  • the employer sought to vary the employee’s contract of employment and the employee did not agree (i.e., a “fire and rehire” scenario); or
  • the employer sought to employ another person, or re-engage the employee, under a varied contract to carry out substantially the same duties (i.e., a “fire and replace” scenario).

• There will be a limited exception for employers who can demonstrate that:
  • the reason for the variation was 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 the employer’s ability to carry on the business as a going concern or otherwise to carry on the activities constituting the business; and
  • in all the circumstances the employer could not reasonably have avoided the need to make the variation.

• If the exception applies, the dismissal will not be automatically unfair, however a Tribunal will still have to assess whether the dismissal was fair in all the circumstances, and in doing so must take into account:
  1. any consultation carried out by the employer with the employee and/or a trade union or any person representing the employee; and
  2. anything offered to the employee in return for agreeing to the variation; and
  3. any matters prescribed in regulations.

• In addition, the Government plans to consult on lifting the cap of the protective award if an employer is found to not have properly followed the collective redundancy process (currently this is 90 days’ gross pay per dismissed employee).

• The Government has also stated its intention to review what role interim relief could play in protecting workers in “fire and rehire” or “fire and replace” situations.

The Plan to Make Work Pay previously set out an intention to replace the existing statutory Code of Practice, which the Government says is “inadequate.” While this was not addressed in the Employment Rights Bill or Next Steps policy paper, we expect further updates in this area. It is not clear whether the code will be replaced to clarify the steps an employer must take to benefit from the new limited exception for using fire and rehire / fire and replace in the Employment Rights Bill, or repealed entirely.

For updates in this area and many other areas changing under the new Employment Rights Bill – please see our “Policy Hub.”