Should you ‘fire and rehire’ in order to change the terms of the employment contract?
27th May, 2022
What is ‘firing and rehiring’?
‘Firing and rehiring’ is the process more formally known as dismissal and re-engagement. It is a method used by employers who wish to change the terms of an employment contract for one or several employees in cases where they do not have the express contractual right to make changes and/or have been unable to obtain the employees express consent to do so. In such situations, dismissing an employee (with notice) on their current contract and offering to re-engage them on a new contract incorporating the terms that they wish to apply is the employer’s best option.
If employees accept the new contract, their employment will be continuous, and they are bound by the new terms.
The process of dismissal and re-engagement is not without legal risk. Terminating the existing contract amounts to a dismissal and can result in claims for unfair dismissal for employees with more than 2 years’ service. This even applies if an employee accepts the changes, albeit the value of any claim is likely to be substantially less in such circumstances.
The Covid-19 pandemic has highlighted the controversial use of dismissal and re-engagement. However, in October 2021 the government blocked legislation that would have made it unlawful for employers to dismiss and re-engage on less favourable terms. Instead, ACAS provided further guidance for employers at the end of 2021 on ways employers can avoid the need to dismiss and re-engage employees.
Do employers need to follow any process?
Yes, there is still a need to inform and consult with staff regarding any proposed changes to their terms and conditions of employment with the aim of seeking staff agreement or the agreement of their staff/union representatives where appropriate. If the changes involve 20 or more employees, then collective consultation will be required.
Why might employers ‘fire and rehire’ an employee?
There are various reasons why an employer may consider firing and rehiring their employees on new terms, for example:
• When insolvency is a risk, through increased costs and where redundancy is not an option, as there is not a reduction in workload.
• When there is an urgent and pressing need to reduce salary or benefit costs for business survival, in conjunction with other business wide cost-cutting measures being implemented.
• Where an employer has traditionally operated a customer service operation Monday to Friday, 9am–5pm but through a new business contract, requires the service to also cover Saturday working. Therefore, change in working hours cover to be rostered for five days over a six-day operation is required.
The business needs and risks will vary from each business and the risks will not be “one size fits all”. Alternative options should always be considered prior to dismissal and re-engagement.
What are the potential risks with ‘firing and rehiring’?
The main issue with firing and rehiring an employee is that it means dismissing an employee which can lead to unfair dismissal claims, but other claims may include (by way of example):
• wrongful dismissal;
• unfair dismissal (including constructive unfair dismissal);
• breach of contract;
• protective awards for failure to inform and consult;
• discrimination claims where changes may be discriminatory; and
• protection of their terms determined by a collective agreement.
If a fair consultation and dismissal process is not followed, then an employer is at risk of having a claim brought against them. Even if fair processes are followed, the process is not without risk.
If dismissing and re-engaging over 20 or 100 people, then the consultation period is a minimum of 30 or 90 days respectively before the first dismissal takes place. If the business is already struggling financially, the company may not have this sort of time to dedicate to the process.
Indeed, the government itself is against the use of fire and rehire, stating: “the government has always stood firm against businesses seeking to use fire and rehire practices, which should only ever be considered as an absolute last resort if changes to employment contracts are critical and voluntary agreement is not possible.” It also specified that, once the new Code on the matter (discussed below) is in place, the Courts will have the capacity to apply a 25% uplift on any award that goes against it.
‘Fire and rehire’ case study – USDAW v Tesco
The most recent case to come from this is that of USDAW v Tesco, the judgment of which came out earlier this year.
In this case, Tesco was reorganising its distribution centres, and instead of making a redundancy lump sum payment, the employees were offered ‘retained pay’ to stay in their current roles. Tesco made clear that this would not go away, that it could not be negotiated away, and that it would increase in line with their annual pay rise.
However, in January 2021, in order to get rid of this retained pay, Tesco attempted to fire and rehire its staff, removing the retained pay as part of their contract. The Claimants applied to the High Court for an injunction to prevent Tesco from doing this, which was granted. As the employees had not been dismissed the court placed an injunction on Tesco preventing them from removing the retained pay clause unless a contract had an express clause that allowed for this.
Employers should therefore take a cautious approach to the practice of firing and rehiring.
Alternative options to ‘firing and rehiring’
Employers should consider alternative options, such as:
• An express clause allowing certain changes.
• Seeking voluntary agreement to the change.
• Consultation and re-engagement following a fair and proper consultation process (using collective consultation, where appropriate).
It is expected a new Code will be introduced on 29 May 2022, which may allow a legal and fair way of making the necessary changes (further updates will be provided).
In summary, the key to making fair changes to contracts and mitigating the potential for claims to be brought is to clearly communicate with your employees, try to reach voluntary agreement and /or follow a proper consultation process regarding any changes.
We strongly recommend taking legal advice before proceeding with a fire and re-hire route which should only be used as a last resort.