Employment Law Update: Unreasonable Failure and Fire and Rehire Penalties
Today, on 20 January 2025, the first of the 2025 employment law reforms are coming into force. Penalties have been tightened for fire and rehire where there has been an unreasonable failure to follow the statutory Code of Practice on Dismissal and Re-Engagement.
What is fire-and-rehire?
Most commonly, fire-and-rehire is where employers serve notice on staff to terminate their current contracts, then re-hire them immediately on new terms and conditions. Employers may need to use fire and rehire when making changes to the employment contract. They may try to agree a change to the contract with the employee first and the employee refuses. The employer would then use fire and rehire as a last resort to secure the changes made without having the employee’s agreement to vary the contract. It is a unilateral variation of employment contract. Notice is necessary for dismissal. Some employers treat fire-and-rehire as giving notice of the changes to the employment. However, unless there is an explicitly clear clause permitting fire and rehire, then the re-engagement under the new contract may create issues.
The main issue is potential unfair dismissal claims. The employee may refuse to be re-engaged on the new terms. Alternatively, the employee may accept re-engagement but claim unfair dismissal from their old contract, even if they are re-employed by the same employer – Hogg v Dover College [1990] ICR 39.
Other issues arise where 20 or more employees are involved in changes to their employment contracts without the employer consulting with trade unions or elected worker representatives. The employer will be in breach of s.188 TULRCA 1992 – GMB v Man Truck & Bus (UK) Ltd [2000] IRLR 636. A failure to comply with s.188 may require employers to make a protected award of 90 days’ pay to employees.
Implied terms that employers will not use fire-and-rehire may be found, depending on the facts of the case – USDAW v Tesco Stores Ltd [2024] UKSC 28. The implied term in USDAW v Tesco was that Tesco could not dismiss employees for the purpose of removing the right to retained pay. Retained pay was ‘an individual contractual entitlement’, agreed to be ‘permanent’, ‘for life’ and ‘guaranteed’. An injunction restrained Tesco from dismissing any Affected Employee for reasons related to the removal or diminution of retained pay, directly or indirectly. This was a significant consequence for Tesco, albeit on a specific set of circumstances.
What is the Code of Practice on Dismissal and Re-engagement?
It is a formal code which will be considered by the Tribunal, often in unfair dismissal claims. A breach of the code will be admissible in evidence and shall be considered by the Tribunal where it is relevant (S.207 TULRCA 1992, effect of failure to comply with Code).
The code has 2 main provisions on fire and rehire:
- The tactic should only be used as a last resort
- The procedural pre-requisites must be followed by employers first before using it.
Employers should not threaten dismissal if that is not their intention, nor if they seek to coerce employees to sign new terms and conditions.
The necessary procedural requirements are to:
- Consult for as long as reasonably possible
- Contact ACAS at an early stage before raising a matter with employees
- If employees don’t agree, consider feedback
- Review changes to assess if necessary.
The code can be found here: https://www.gov.uk/government/publications/dismissal-and-re-engagement-code-of-practice.
What are the new changes to the Code?
The Code came into force in July 2024, as a proposal from the former Conservative government. The new Labour government intend to outlaw fire-and-rehire.
The changes have been incited by The Trade Union and Labour Relations (Consolidation) Act 1992 (Amendment of Schedule A2) Order 2024.
Article 2 of the Order includes section 189 (failure to follow consultation requirements) to the list of tribunal jurisdictions to which section 207A applies.
The new provisions do not outlaw the tactic but have made penalties harsher with a 25% uplift on protective awards where s.188 applies. The intention is to encourage dialogue between employers and employees to explore options before unilateral dismissal and re-hiring on new terms.
Penalties will be issued for unreasonable failure to follow the statutory Code of Practice on Dismissal and Re-Engagement.
What is unreasonable failure?
The code is engaged as soon as the prospect of dismissal and re-engagement is raised. There is no distinct definition within the code, but it is likely to include the following actions:
- Not engaging in open dialogue with employees or representatives
- Not doing so in ample time
- Not doing so in a transparent way
- Not exploring alternatives before fire-and-rehire
- Failure to follow collective consultation requirements under s.189 TULR(C)A 1992
- No consideration to the number of employees concerned to determine collective redundancy obligations apply when seeking to change terms and conditions
The Tribunal will assess ‘reasonableness’ by balancing the employee’s interests against the actions of the employer. It will likely be assessed in context.
However, it is not entirely clear what will constitute an unreasonable failure and it may cause potential problems for employees or employers attempting to prove a failure to comply with the code.
What are the penalties?
For an employer, the employment tribunal may increase any award it makes to the employee by no more than 25% where:
- Section 207A of TULRCA applies
- There is a relevant code of practice that applies
- The employer has unreasonably failed to comply with it
When only firing and rehiring one person, employees will only get the 25% increase. However, where more than 20 people are affected and the employer does not consult properly, the 90-day protective award may be ordered.
Employers may be ordered to pay the employee a protective award of up to 90 days’ gross pay and up to 25% of the same per affected employee where:
- Section 188 of TULRCA applies
- There is a relevant code of practice that applies
- The employer has unreasonably failed to comply with it
The tribunal has discretion to increase the protective award.
For an employee, their award will be reduced by up to 25% if the employee or their representatives have unreasonably failed to follow the Code of Practice.
Example:
Employee’s gross daily rate of pay is £100.
Employer breaches Code of Practice and s.188 applies, so the employee’s compensation will be £9000 (£100 x 90 days), as well as 25% of that £9000.
Outlook
While the lack of clarification brings a degree of uncertainty, this is the first change in employment law in 2025. The changes mark a turning point – employees are receiving greater protection.
This Order has a significant interplay with other government changes. The Employment Rights Bill proposes to bring more redundancy situations within the ambit of collective consultation by removing the concept of ‘establishment’. The proposed number of redundancies must be calculated on business wide level and not site-by-site if more than 20 redundancies are proposed. The protective awards may also be increased from 90 to 180 days, or higher.
Therefore, with this being the first of the 2025 employment law reforms from the Labour government, employers should take caution in their actions, check they are done in accordance with legislation, statutory codes of conducts and regulations and note the change of direction that legislation appears to be taking to protect employees’ interests.
