Fire and Rehire From January 2027: What It Could Cost Your Business
Guidance from an HR consultant in St Albans, supporting businesses across London, on how the January 2027 fire and rehire changes will affect your business and what to do about them now.
Have you ever ended someone's contract and offered them a new one on different terms? If so, you have used what is known as fire and rehire.
Plenty of business owners have done it without knowing the name for it. To them it was simply updating someone's contract.
From January 2027, it will carry some of the heaviest penalties in employment law. An employee will be able to bring a claim from their very first day, and a tribunal will have no limit on the compensation it can award.
As an HR consultant based in St Albans and working with employers across London, here is what you need to understand and how to prepare.
What fire and rehire looks like in practice
The pattern is simple. You want to change an employee's terms and they do not agree, so you end their current contract and offer a replacement containing the new conditions.
In smaller businesses it is often informal. A chat about changing hours or adjusting pay turns into a new contract landing on someone's desk, and the employee signs because they feel they have no alternative.
Until now this route has been open to employers. An employee with enough service could argue unfair dismissal, and a tribunal would ask whether you had acted reasonably. That is the framework that is about to shift.
What changes in January 2027
Fire and rehire is being added to the list of automatically unfair reasons for dismissal. That list already includes dismissing someone for raising health and safety concerns or for reasons linked to pregnancy.
Two consequences follow from that.
No qualifying service. Someone who started yesterday has exactly the same right to challenge a fire and rehire dismissal as someone with ten years behind them.
No compensation cap. The statutory limit on unfair dismissal compensation is being removed from January for all unfair dismissal claims, automatically unfair ones included. Your financial exposure becomes open-ended.
Which contract changes are caught
The legislation talks about "restricted variations". In plain English, these are particular kinds of change that an employee has not agreed to. They cover:
Pay, including the way it is calculated
Pension arrangements
Working hours
Holiday entitlement
Shift patterns (the exact conditions are still being finalised)
A further provision applies if you insert a new clause into a contract that would let you make any of those changes unilaterally in future.
If you dismiss someone and re-engage them with any of these terms altered, the dismissal will be treated as automatically unfair.
Changes that sit outside the automatic rules
Job duties, work location and job title are not on the restricted list. You can still use dismissal and re-engagement to change them, but a tribunal would judge it under the ordinary unfair dismissal test.
From January, the qualifying period for those ordinary claims falls to six months, and the compensation cap goes too. For more on that shift, see my guide to the new 6-month dismissal rules.
A tribunal will want to know why the change was necessary, whether you consulted the individual properly, and whether you offered anything in return for their agreement. You will need to show that you acted reasonably at every stage.
Preparing employers for exactly this kind of situation is a regular part of my HR consultancy work in St Albans and London. The wider picture is covered in my article on how the Employment Rights Act has changed tribunal risk for small businesses.
Is there any exception?
There is one, and it is narrow.
If your business is in genuine and severe financial difficulty that threatens its ability to keep trading, and you can show there was no reasonable alternative to the contract change, you may be able to rely on a defence.
The bar is set deliberately high. Cutting costs or improving margins will not qualify. It is aimed at cases where the survival of the business is truly at stake.
Steps to take now
If you have used fire and rehire before, or you are thinking about changing pay, hours or benefits in a way your team might resist, rethink your approach before January.
Review your contracts. Identify any terms you may want to change and check whether they fall within the restricted variations.
Consult genuinely. Hold open conversations, explain the commercial reasons for any proposal, and work towards agreement.
Give people time. Treat employees with respect and allow them space to consider what you are asking.
Do not rely on dismissal as a fallback. Forcing through a restricted variation by terminating and re-hiring could expose you to an uncapped claim.
Consultation is always the safest route, and from January it is the only sensible one.
Questions to ask yourself
Do any of your current contracts contain terms you plan to change in the next twelve months?
Have you used dismissal and re-engagement in the past without fully understanding the legal implications?
Do your managers know what counts as a restricted variation?
If you had to cut costs, do you have a documented process for consulting employees before changing their terms?
Honest answers will show you where your risks sit.
Support from a St Albans HR consultant covering London
A change in the law like this is where professional guidance pays for itself. I can review your contracts, assess how you currently handle change, and help you build an approach that keeps you compliant while still letting you run the business.
Based in St Albans and supporting employers across London, I work with business owners to think these issues through before they turn into problems.
If you are worried about how the new fire and rehire rules could affect you, get in touch to book a free discovery call and we can talk through your situation in confidence.
This article is general guidance based on the position at the time of writing and is not legal advice. Details may change as the rules are finalised.
