A contract of employment is a legally binding agreement between the employer and employee. In order for contractual employment terms to be varied, usually both parties must agree. However, over the past few years, there has been an increased use of dismissal and re-engagement for the purpose of unliterally imposing changes to employment terms.
These so-called ‘fire and rehire’ practices have recently attracted negative public attention. Following P&O’s decision in 2022 to dismiss around 800 employees without consultation, the government pledged to introduce a Code of Practice on the use of fire and rehire by employers (the Code). The consultation paper on the Code was launched recently, and closes on 18 April 2023.
The consultation follows a fire and rehire fact-finding exercise carried out by ACAS in June 2021, and ACAS’ subsequent guidance for employers on seeking to enforce contractual changes to employment terms. The fact-finding exercise shared (among other things) that fire and rehire practices had become increasingly prevalent during the pandemic (with challenging business conditions forcing employers to make difficult decisions), whereas the guidance highlighted some of the risks employers face when trying to unilaterally change contractual employment terms.
In summary, the consultation paper and Code say that the use of fire and rehire by employers is not prohibited. However, it should only be used as a “last resort” and after an employer has taken all reasonable steps to explore alternatives in a meaningful, good faith consultation with employees.
The consultation paper
What are the policy objectives?
The Code provides practical guidance for employers who are considering changing contractual employment terms.
The government seeks to ensure that employers take “all reasonable steps to explore alternatives to dismissal”, and engage “in meaningful consultation” with unions, representatives or individual employees in good faith and with an open mind. The hope is that employers will find an agreed solution with employees and will not use fire and rehire as a negotiation tactic to pressurise employees to accept new contractual terms.
Despite calls for the practice to be banned outright, the government recognises that in some situations, the option to fire and rehire can provide employers with flexibility and save jobs. The Code therefore aims to strike “the right balance between labour market flexibility and worker protections”.
Who will the Code apply to?
The Code does not cover all types of disputes between employers and employees. It specifically applies where an employer:
- wants to make changes to its employees’ contracts of employment; and
- envisages that, if the employees do not agree to new terms, it will consider dismissing them and either offering them re-employment (on those new terms), or engaging new employees to perform the relevant role(s).
The Code will apply regardless of: (a) the number of employees affected; (b) the business reasons for seeking to change employees’ terms; and (c) whether or not employees accept the new terms. It will not apply to genuine redundancy scenarios.
The Code
What does the Code require of employers?
The Code sets out steps that employers should take when proposing contractual changes to employment terms. These include:
- taking into account usual legal obligations (which are not covered by the Code), for example in relation to collective bargaining; and
- providing information to, and consulting with, employees (or their representatives) in relation to the proposed change(s), with the intention of seeking an agreement.
If it becomes clear that terms may need to be unliterally imposed and / or fire and rehire might be necessary, employers should:
- re-examine their business strategy and plans, considering the consequences for employees;
- take into account employee feedback and consider why changes to employment contracts are necessary;
- consider whether the proposed plans might have a discriminatory impact; and
- share as much information as reasonably possible with relevant employees (or representatives); for example: business reasons and rationale, anticipated timings, and the impact on the wider workforce.
If the proposed changes are accepted by employees, employers should:
- provide the changes in writing, setting out the detail of them clearly;
- issue a new statutory written statement (if necessary); and
- provide continuous communications to the affected employees as they transition onto the new terms.
If the proposed changes are not accepted by employees, employers may consider unilaterally imposing the new terms, but should be mindful of the risks associated with this approach (for example, breach of contract, unfair / constructive dismissal and discrimination claims). If an employer nonetheless decides to make the changes, it should provide them in writing and should continue to assess whether a unilateral approach remains necessary.
As a “last resort” employers may also consider dismissal and re-engagement. In this scenario, they should (broadly):
- reassess and consider if the proposed changes are necessary or discriminatory, or whether alterative options are available;
- comply with relevant redundancy obligations (if the facts amount to a redundancy situation);
- give as much notice to employees as possible (and in any event, comply with contractual notice periods);
- consider whether a phased introduction of terms is practicable; and
- re-engage employees as soon as possible to preserve their continuity of service.
What are the sanctions for no-compliance with the Code?
The Code contains practical guidance and does not itself impose legal obligations.
However, the Code will be issued under the Trade Union and Labour Relations (Consolidation) Act 1992, and courts and employment tribunals will be able to take it into account in evidence during relevant proceedings. An employer’s unreasonable failure to comply with the Code could result in an increase to employee’s compensation by up to 25%, whereas an employee’s unreasonable failure could see their compensation decrease by up to 25%.
When will the code come into force?
The government is currently considering feedback on the Code. At the time of writing, there has been no date set for when it will come into effect.
