21 Jul 2022

There has been much discussion recently about whether it is legitimate for employers to introduce changes to employment terms (usually to the employee’s detriment) by giving notice to terminate their existing employment contract and offering immediate re-engagement on the proposed new terms.

This is often known as “fire and re-hire”. It is a loaded (and, in my view, unfortunate) term which reflects the heated debate that has surrounded it in recent years.  It suggests that employers can act with impunity in pressurising employees to accept pay cuts and less favourable conditions.  They are threatened with being “fired” if they do not bend to the employer’s will voluntarily, on the assumption that being “re-hired” on less favourable terms is ultimately better than no job at all.

This is far from accurate, in my experience.  Dismissing and re-engaging (as many employment lawyers prefer to call it) is a long-established method of introducing business critical changes as a last resort, where previous attempts to agree them with employees or unions have failed. It is subject to important protections for employees, including unfair dismissal rights and the requirement for collective consultation in larger-scale exercises.  It is usually not, as is sometimes portrayed, a nefarious practice which exploits the vulnerability of employees.

In this article, I explain how the law works, examine some high-profile cases which have stoked the controversy and reflect on some proposals for reform.

What does the law say?

Generally, any proposed variation to an employment contract requires an employee’s agreement.  There are some limited circumstances in which an employer can rely on a contractual right to make unilateral changes (for example, a mobility clause which permits them to change the place of work within a reasonable radius), but these are construed narrowly.

In most cases, employers will seek express consent to any changes, by explaining why they are needed and asking employees to sign a variation letter.  Essentially, it is an exercise in persuasion, which recognises the importance of employee buy-in.  The tone of the initial messaging and the strength of the underlying business rationale are often crucial to its success.

Although there is no strict legal requirement to consult with employees individually at this stage, it is generally good practice.  Prompt and meaningful engagement is likely to assist an employer in demonstrating a fair process, should they ultimately have to dismiss and offer re-engagement.  If a union is recognised for collective bargaining purposes, they will likely get involved early on, to negotiate on behalf of employees.

Where an agreement cannot be reached, the employer has three options.

First, it can jettison the proposals altogether and maintain the existing terms.

Secondly, it can seek to force the change through unilaterally, by simply relying on employees remaining in post as an indication of implied consent.  However, that is a high-risk strategy which is rarely contemplated.  Quite apart from causing significant damage to employee relations, it is still open to an employee to “work under protest” whilst preserving their right to bring a claim in the future.

Alternatively, if it still considers that the changes are necessary, it can give notice to terminate the old contract and offer re-engagement on the proposed new terms.

Any such termination will be a “dismissal”.  It is usually not undertaken lightly, as it gives rise to the potential risk of unfair dismissal claims from employees with at least two years’ continuous service.  A fair dismissal requires the employer to demonstrate a fair reason for dismissal (typically, it will need good business reasons for the proposed changes, although it does not need to go so far as to show that there was an economic necessity).  Coupled with this, there must also be a fair process (which is largely determined by the quality of any consultation process).

If the dismissal is unfair, an employee may be awarded compensation for lost earnings (plus a basic award, based on age and length of service).  A Tribunal may make an order for reinstatement to their existing role or re-engagement in a different role, but this is rare in practice.

In addition, where the employer proposes 20 or more dismissals at one location within a 90-day period, this will trigger minimum collective consultation requirements and an obligation to notify the Secretary of State.  Failure to engage in collective consultation can result in a protective award of up to 90 days’ pay per employee.  Failure to notify the Secretary of State is a criminal offence.

Why is it such a controversial topic?

During and following the pandemic, many employers sought to amend pay structures and other terms to reduce costs, given the very difficult trading circumstances caused by a series of lockdowns.  Even with state financial support and the flexible furlough scheme, some employers simply needed less work from their staff or could not afford to maintain their existing pay and benefits in straightened times.

British Airways and Centrica were among several larger employers who were criticised for contemplating “fire and re-hire” tactics to push through contractual changes.  Such cases attracted significant publicity and led to calls from various political parties for legislative reform, to enhance protection for employees.  Although some attempts were made to do this by introducing Private Members’ Bills in the Houses of Commons, they came to nothing.

The issue has now resurfaced, due to recent cases involving P&O Ferries and Tesco.

P&O Ferries

In March 2022, P&O Ferries decided to dismiss nearly 800 seafaring employees who worked on board its ships and replace them with agency workers. The case attracted widespread media coverage in the UK and was debated in Parliament.

I share the widely held views of others that P&O Ferries acted egregiously in the manner in which it implemented its change in resourcing model.   The optics of telling several hundred employees that they were being dismissed on the spot, via a short recorded video message, were terrible.  It was brutal, insensitive and rightly attracted opprobrium for the lack of human empathy for existing staff, many of whom were long-serving.

The most controversial aspect was the absence of prior consultation or any meaningful dialogue about saving jobs.  The company’s CEO admitted that in failing to engage with the relevant unions, P&O Ferries had acted unlawfully.  It sought to bypass the consultation process by offering employees enhanced redundancy packages to dissuade them from bringing claims.  A commercial calculation was made that employees would prefer to take the certainty of a lump-sum payment now over the stress, delay and uncertainty of litigation.

P&O Ferries also exploited a loophole in the legislation which meant that it was not required to inform the Secretary of State about proposed collective redundancies, because the relevant vessels were registered overseas.  Therefore, it argued, there was no criminality in its approach.

However, it was wrongly labelled by many as another example of “fire and re-hire” tactics.  In reality, there was little re-hiring involved.  The affected employees were made redundant and replaced with cheaper labour sourced through agencies.  This is very different to an employer seeking to retain employees on different terms as an alternative to making redundancies, which is a typical feature of most “dismiss and re-engage” processes.

Tesco

In another recent case, Tesco sought to dismiss and re-engage employees at some of its distribution centres, by buying out their contractual right to additional retained pay (on top of basic salary).  This had been agreed many years ago as an incentive to move job locations.  In a highly unusual step, the High Court granted an injunction to prevent Tesco from terminating employment for the purpose of offering less favourable terms.

Last week, this was overturned by the Court of Appeal.  Even though retained pay had been expressed as “permanent” and “guaranteed for life”, this did not prevent Tesco from exercising its own contractual right to give notice of termination (for whatever reason).  Further, there was no reason to imply a contractual term to protect the “permanence” of retained pay.

This was undoubtedly the right decision.  Although there have been cases in the past where an employer has been injuncted from dismissing an employee, they have been on a time-limited basis (for example, to allow a contractual disciplinary process to be followed properly).  It is quite a different proposition to stop an employer from exercising its contractual right to terminate employment indefinitely, for certain proscribed reasons.

Conclusion

When used properly, the option of dismissal and re-engagement is a legitimate and appropriate tool to enable employers to manage changing business circumstances.

In my experience, it is used quite sparingly by employers who have previously gone to extensive efforts to achieve a mutually agreed solution.  Without it, they may be compelled to consider compulsory redundancies more readily, rather than striving to preserve jobs and retain valuable staff.

If they get the process wrong or their business case does not stack up, unfair dismissal and other legal protections are available in the normal way for those who qualify.  Obtaining a remedy in the employment tribunal can be a lengthy and daunting process for employees, but that is the fault of the system, not employers.

There have been various suggestions to change the law, which range from banning the practice altogether to making unfair dismissal protection in “fire and re-hire” cases a “Day 1 right” (rather than requiring two years’ service).   I can see the attraction of this latter option in removing a two-tier system where changes are applied across the workforce, but there are no immediate plans to change the overarching legal framework.

Instead, the Government has announced that a new statutory code of practice will be introduced, to strengthen the scrutiny on employers.  We await the detail but it will set out “how businesses must hold fair, transparent and meaningful consultations on proposed changes to employment terms”.  A court or Employment Tribunal will be required to take the code into account and have the power to uplift compensation by up to 25% for non-compliance.  This mirrors the existing rules on disciplinary and grievance procedures.

To the extent it is needed, this will no doubt focus the minds of employers who are contemplating potential changes to terms.  Strong business reasons and a collaborative approach to seeking consent remain the best ingredients for success.

If you have any questions about changes to employment terms or contracts, please speak to our Employment and HR team.