‘Fire and rehire’: new Statutory Code of Practice

The Government has published a response to its consultation on a draft Code of Practice on dismissal and re-engagement, which closed on 18 April 2023.

Along with the consultation response, the Government has published a revised draft Code, which is now awaiting parliamentary approval. According to the Government’s press release, published on 19 February 2024, the new Code is likely to take effect “later in the summer”. Any further changes to the draft, if any, are likely to be insignificant – so we can probably safely assume that the current draft is what will be introduced later this year.

The Code will apply when an employer is considering making changes to an employee’s contract of employment and it envisages that if they cannot agree some or all of those changes, it might dismiss the employee and offer to re-engage them on a new contract of employment incorporating those changes.

It will apply regardless of the size of the employer, the number of employees affected by the changes or the business reasons for the proposed changes to the contract(s) of employment.

What is the purpose of the Code of Practice?

The purpose of the Code is to “ensure employers take all reasonable steps to explore alternatives to dismissal and re-engagement and engage in meaningful consultation with a view to reaching an agreed outcome in good faith and with an open mind”. The updated Code also aims to stop employers using the threat of dismissal as a negotiating tactic unless this is genuinely the employer’s intention and it is a last resort.

What is the effect of not following the Code of Practice?

The Code of Practice does not ban the practice of firing and rehiring, acknowledging that it may be required in some situations as a last resort. There is no stand-alone claim that may be brought for failing to follow the Code.

If an employee brings one of the employment tribunal claims listed in Schedule A2 to the Trade Union and Labour Relations (Consolidation) Act 1992 (TULRCA) and the claim concerns a matter to which the Code applies, the tribunal can increase or decrease any award by up to 25% for the unreasonable failure to follow the Code by the employer or employee respectively. This will include claims for unfair dismissal pursued by an employee.

The Code of Practice will be admissible in evidence in proceedings against an employer and any provision of the Code relevant to proceedings must be taken into account by the court or tribunal. A failure to follow the Code may render a ‘fire and rehire’ process procedurally unfair.

The Government intends to amend TULRCA by secondary legislation so that the protective award for non-compliance with collective consultation requirements (a remedy of up to 90 days’ gross pay for each employee) will be one of the claims that may be affected by the 25% adjustment for failure to follow the Code. This is already one of the few penal remedies in employment law and one of the largest, so this represents a real financial risk to employers contemplating firing and rehiring 20 or more employees.

The updated Code

As a result of the consultation, the Government has simplified and streamlined the Code, providing points of clarification, and re-structuring the procedure to reflect existing best practices more accurately.

Where the Code applies:

1. All employees affected by proposed changes to terms and conditions should be informed and consulted, either directly or through their representatives (as appropriate).
2. The updated Code now clarifies that whilst the Code won’t apply to genuine redundancies, it will apply where the employer is contemplating both redundancy and dismissal and re-engagement in relation to the same employee(s).
3. Employers should share as much information regarding the proposals to change terms and conditions as reasonably possible including, but not limited to, information about what the proposed changes will look like, who will be affected, the business reasons for the changes, the anticipated timings and any other options considered.
4. The updated Code also now requires employers to consider what information they can provide about their “proposed next steps”. Where an employer reasonably concludes that it cannot provide such information, the employer should explain any refusal to provide it as fully as reasonably possible. The updated Code also now confirms that it is good practice for the employer to provide information to employees in writing.
5. Once the information has been provided, the parties should engage in meaningful consultation with each other openly and in good faith, with genuine consideration of points put forward. The employer should be as clear as possible about its objectives and the nature of the proposals and genuinely consider reasonable alternative proposals, with a view to reaching an agreed outcome. The consultation should continue for as long as reasonably possible; information sharing and consultation are viewed as an ongoing process, not a single event.  
6. The employer should be clear if it intends to opt to dismiss and re-engage if agreement cannot be reached. However, it should not raise this prospect unreasonably early, or use this as a negotiating strategy if it does not envisage dismissal as a means of achieving its objectives. The updated Code clarifies that employers should contact Acas for advice before raising the prospect of dismissal and re-engagement with employees or their representatives. 
7. Once it becomes clear that no agreement will be reached on some or all of the contractual changes and the employer still needs to implement the changes, the employer should re-examine its proposals. The previous draft Code required employers to re-examine its business strategy and plans. This stage has been amended to remove the obligation for employers to re-examine its business strategy and now only requires it to re-examine its plans. This stage has also been moved to take place after the inform and consult stage.
8. During re-examination, factors the employer should consider include: the objectives it is seeking to achieve and whether there are any alternative ways of achieving these and the negative consequences of imposing the changes without agreement (including reputational damage, damage to industrial relations and the risk of legal claims).
9. In the response to the consultation, the Government ruled out requiring employers to conduct an equality impact assessment. The re-examination stage requires employees to consider “whether its proposals could have a greater impact on some employees than others”, which would include consideration of the Equality Act 2010 and the risk of unlawful discrimination flowing from any dismissal and re-engagement.
10. If changes are agreed, employers should communicate these in writing and provide an updated statement of employment particulars within one month of the change taking effect.
11. Where no, or limited, agreement is reached then employers may seek to impose the new terms and conditions unilaterally. The Code warns of the legal limitations of contractual variation clauses and that imposing a change without a contractual right to do so is likely to have damaging effects on industrial relations and carries significant legal risks.
12. Employers may opt for dismissal and re-engagement as a last resort. The Code emphasises the existing legal protections, including the potential for wrongful and unfair dismissal (where applicable). Employers should consider any practical support it might offer employees and should re-engage employees as soon as reasonably practicable.
13. The updated Code no longer obliges employers to phase-in any changes to terms and conditions, but this is still recommended as being best practice. In the event of any changes (even if agreed) or dismissal and re-engagement, the Code emphasises that it is good practice for employers to invite feedback about the changes and consider what might be done to mitigate any negative impacts on employees.

The Birketts view

An employer’s ability to force through contractual changes by firing and rehiring is already curtailed by existing employment laws, and the Code sets out largely accepted best practice for employers when seeking to change terms and conditions. As the Code states, dismissal and re-engagement should only be considered a last resort and even then, it may result in successful claims being brought against an employer.

Employers that choose to dismiss and re-engage have usually done so because they have calculated that the financial and reputational risk is outweighed by the commercial benefits of forcing through the changes to terms and conditions. Whilst the Code does not ban this practice, it will impact this balancing exercise by further tipping the scales against electing to fire and re-hire.

Where agreement on changes to terms and conditions cannot be reached with employees, employers will now need to factor in a more structured, and therefore likely a lengthier, procedure to achieve the desired changes, bearing in mind the risks of a potential increase of up to 25% in any resulting compensation. We would always recommend that employers seek advice before considering adopting this strategy, to minimise the potential risks.