Where a business wishes to change employment contracts, the first port of call is to obtain agreement from employees. However, where changes are detrimental or undesirable, agreement can be difficult to obtain. A business in this scenario is, therefore, broadly left to either: (1) ‘force’ the changes through (which is an employee relations disaster, leaves open uncertainty as to whether and at what point changes are deemed to be accepted, and leaves open the possibility of a raft of claims); or (2) undertake a process to terminate the employment of the employees and offer them re-engagement on new terms. The latter option has often been considered the ‘better’ route (depending on the specific circumstances) but in recent years has attracted heavy criticism, particularly from trade unions.

In response, the previous government introduced the Code of Practice on Dismissal and Re-engagement [1] (the Code). The Code gives practical guidance where an employer:

• is considering making changes to one or more of its employees’ contracts of employment; and
• envisages that, if the employees do not agree to some or all of the changes, it might opt to dismiss them and offer them re-engagement on the new terms.

The aim is to ensure that proper consultation regarding proposed changes takes place prior to businesses triggering dismissals – and that those dismissals are used as a ‘last resort’. The Code applies regardless of the number of employees affected (or potentially affected) and regardless of the reasons for needing to change terms and conditions.

An Employment Tribunal must take the Code into account in relevant proceedings and unreasonable failure by an employer to follow the Code could lead to an uplift on any award the Tribunal makes to an employee of up to 25%.[2]

The Code was drawn up under the previous Conservative government and, although it has now been implemented, the Labour government labelled it inadequate and has pledged to introduce stronger regulation in this area.

Labour’s Employment Rights Bill, published on 10 October 2024, proposes to make dismissal and re-engagement automatically unfair. This means that there’s no possibility of arguing there was a ‘fair reason and fair process’ in circumstances where an employer has dismissed an employee for not agreeing to a contract variation, or to employ another person in their place in order to effect the changes – it will be automatically unfair. There is a very narrow exception to this, broadly:

• the reason for the variation goes a significant way towards combating 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.

The level of consultation and anything offered to the employee in return for agreeing the variation are also relevant to whether the employer can avail themselves of this exception.

We are already seeing heavy union activity in the area of fire and re-hire, with unions relying on the proposed upcoming changes to put pressure on employers to stop using the practice now, despite the Bill’s proposal not yet being in force (and, indeed, still subject to the parliamentary review process).

It is therefore likely to become increasingly difficult for employers to make contract changes. This may result in businesses resorting to alternatives, such as redundancies and restructures. As always, good dialogue with employees and representative bodies will remain key to try to get employee and union buy in and avoid such measures.

[1] https://www.gov.uk/government/publications/dismissal-and-re-engagement-code-of-practice/code-of-practice-on-dismissal-and-re-engagement-issued-by-the-secretary-of-state-under-section-203-of-the-trade-union-and-labour-relations-consolidat

[2] Uplifts can be awarded on a list of claims including unfair dismissal and statutory redundancy pay. The original list did not include the ‘protective award’ (which awards up to 90 days’ gross pay per employee in the event that an employer fails to undertake collective consultation). However, that has been rectified such that, from 20 January 2025, the uplift will also apply to protective awards.