On 22 October 2026, the UK government launched a consultation on a new draft Code of Practice on Dismissal and Re-engagement (draft Code), designed to reflect the “fire and rehire” protections introduced by the Employment Rights Act 2025 (the ERA 2025). The consultation closes on 17 December 2026.  The draft Code keeps the broadly chronological structure of the previous Code of Practice that was published in 2024 (2024 Code), but it has been substantially reworked. It now covers automatically unfair dismissal for “restricted variations” to core terms, the new protection against “fire and replace” with non-employees, enhanced protection for non-core changes, and a narrow financial difficulties exemption with separate tests for private sector, public sector and local authority employers. The government also published its response to the earlier consultation on changes to expenses, benefits and shift patterns (Benefits and Shifts Consultation), which was launched to support implementation of the fire and rehire protections. The response confirms which expenses, benefits and shift pattern changes will be treated as restricted variations.

Background and context

Under the current law, an employer may be able to dismiss and re-engage employees on new terms if it can show a sound business reason, such as responding to economic change, changing working practices or harmonising terms, and that it acted reasonably in all the circumstances. The 2024 Code adds practical guidance and aims to ensure that dismissal and re-engagement is used only as a last resort.

The ERA 2025 goes considerably further. It inserts new sections 104I, 104J and 104K into the Employment Rights Act 1996 (ERA 1996). These provisions:

  • make it automatically unfair to dismiss an employee in order to make a “restricted variation” to core terms, unless a narrow financial difficulties exemption applies;
  • make it automatically unfair to dismiss an employee in order to replace them with a non-employee (for example, an agency worker) doing substantially the same work; and
  • apply enhanced ordinary unfair dismissal protection where the dismissal relates to changes to non-core terms.

The government intends to bring these protections into force in March 2027 and to revoke the 2024 Code at the same time. The draft Code is expected to come into force in summer 2027.

Overview of the proposals

The draft Code applies where an employer is considering changes to employees’ contracts and envisages that it may have to consider making those changes unilaterally. It applies however many employees are affected and whatever the employer’s reasons. It does not apply where the only dismissal the employer envisages is a genuine redundancy. The draft Code expressly covers both “fire and rehire” and “fire and replace”.

Restricted variations

The draft Code lists the changes to core terms that amount to “restricted variations”, as:

  • reductions to pay;
  • any change to pension terms;
  • changes to total contracted hours (whether an increase or a reduction);
  • reductions to leave entitlement;
  • changes to shift patterns of a kind to be specified in regulations; and
  • adding a variation clause that would allow the employer to make any of these changes without the employee’s agreement.

The government’s response to the Benefits and Shifts Consultation confirms that certain expenses and benefits will fall within the scope of restricted variations, an approach it considers proportionate.  The types of expenses and benefits within scope will be certain types of travel expenses, accommodation expenses and long-term accommodation provided as a benefit in kind.  Changes to share schemes will not fall within the scope of restricted variations. Importantly, the protection only bites where these expenses and benefits are contractual. If they are provided under a separate, non-contractual expenses policy, or the contract contains a variation clause allowing them to be changed, employers can still make changes without this being a restricted variation. Other expenses and benefits (for example, healthcare or childcare benefits) remain outside the automatic protection, but changes to them will still be subject to the enhanced unfair dismissal rules.

With regard to shift patterns, the government has confirmed its preferred approach of limiting this to the most significant shift pattern changes.  It will be automatically unfair to dismiss an employee in order to change contractual shift patterns so that the employee is required to work: (a) at night (11pm to 6am) where they were not previously required to do so; (b) during the day where they were not previously required to do so; or (c) at weekends or on weekdays (as applicable) where they were not previously required to do so.

Non-restricted variations

Dismissals to change non-core terms, such as location or job role, are not automatically unfair. Instead, they attract enhanced ordinary unfair dismissal protection, subject to the qualifying period. To show the dismissal was fair, the employer should be able to demonstrate that it had a potentially fair reason, shared reasonable information, consulted meaningfully, considered offering something in return, made exhaustive attempts to reach agreement, and found no reasonable alternative.

The financial difficulties exemption

The exemption is deliberately narrow. The draft Code says it is not a general justification for changing terms, a tool for managing financial pressures or improving competitiveness, or a way to pressure employees. A private sector employer must show three things:

  • the change was needed to eliminate, prevent or significantly reduce or mitigate financial difficulties;
  • those difficulties were affecting, or were very likely in the immediate future to affect, its ability to carry on as a going concern, such that redundancies or closure would otherwise follow; and
  • it could not reasonably have avoided the change.

The public sector test focuses instead on the employer’s ability to carry out its statutory functions, and tribunals will apply judicial review principles. For local authorities, the exemption depends on a relevant intervention direction being in force. Even where the exemption is met, the dismissal must still be fair under ordinary unfair dismissal principles.

As with the 2024 Code, tribunals will be able to increase an award by up to 25% where an employer has unreasonably failed to comply with the draft Code and reduce an award by up to 25% where an employee has unreasonably failed to comply.

What this means for employers

The practical message is that changing core terms through dismissal will, in most cases, no longer be a realistic option. Compared with the 2024 Code, the draft Code makes several significant changes:

  • Restricted and non-restricted changes must be identified at the outset. The draft Code expects employers to tell employees whether each proposed change is a restricted or non-restricted variation, explain why it matters, and say whether financial difficulties are the driver.
  • The information sharing requirements are more detailed. Employers are expected to explain the proposed new terms, who is affected, the reasons and supporting evidence, the timing, anything offered in return, the alternatives considered, and the next steps. Any refusal to disclose information, for example on grounds of commercial sensitivity, should be explained.
  • The draft Code sets express standards of reasonableness for both sides. Predetermined outcomes, consultation treated as a formality, and resorting to dismissal where agreement was achievable are all identified as unreasonable conduct by employers. Employees are also expected to act reasonably when discussing employment changes and should engage in the process in good faith and with a willingness to consider the employer’s case.
  • Collective bargaining comes first. Where a trade union is recognised, collective bargaining should be the primary route. Employers should not make direct offers on matters within the scope of the collective agreement until the agreed procedure has been exhausted.
  • When Acas should be contacted Where an agreed outcome cannot be reached, or, if at any point, the employer intends to opt for dismissal and re-engagement, it should communicate this to individual employees, recognised trade unions, and elected employee representatives without unreasonable delay.  The draft Code also specifies that while Acas may be contacted by any party wherever the draft Code applies, the employer should contact Acas for advice before raising the prospect of dismissal and re-engagement.
  • Outsourcing and redundancy will face closer scrutiny.  The draft Code makes it clear that the ERA 2025 does not prevent employers from carrying out genuine redundancies where roles are no longer required.  However, calling a dismissal a redundancy will not take it outside the protections where substantially the same work is still required. The draft Code warns against using redundancy processes to push through changes that could not be agreed.
  • Evidence of financial difficulty must be substantial. To rely on the exemption, employers will need evidence of how imminent and severe the difficulties are, the organisational level at which they arise, and why alternatives were rejected. Examples of alternatives include non-labour cost reductions, recruitment freezes and agreed workforce adjustments.

Employers should also keep in mind that future shift pattern regulations will define which shift changes count as restricted variations. The draft Code indicates that these regulations will be made in autumn 2026 and come into force on 1 January 2027.

Next steps

Employers should consider taking the following steps

  • Audit current and planned contract change projects (including pay, hours, pensions, leave, shifts and harmonisation exercises) and classify each change as restricted or non-restricted. Consider whether any projects need to be brought forward or redesigned before March 2027.
  • Review contracts for variation and flexibility clauses and assess how far they can be relied on. Note that dismissing an employee to introduce such a clause is itself a restricted variation.
  • Update change management and consultation policies, template letters and manager training to reflect the draft Code’s standards on information sharing, timing, Acas engagement and record-keeping.
  • Consider how to evidence financial difficulties, including the kind of documentation that could support the exemption.
  • Engage with recognised trade unions and employee forums on how proposed changes will be handled under the new framework.