Fire & Rehire – A new Statutory Code of Practice

It was recently announced by the Department for Business, Energy, and Industrial Strategy (BEIS) that there will be a new Statutory Code of Practice in relation to “fire and rehire” tactics (“the Code”). This has been highly anticipated since the start of the pandemic when it was common for employers to want to change contracts to compensate for the rapid change in ways of working.

“Fire and Rehire” is formally known as “dismissal and reengagement” and is a tactic used by employers when they want to change the terms of a contract, but face resistance from their employees.

Employers will rehire the same employees but on less favourable terms to cut costs or reorganise business operations. This is often seen as unfair to the employees, as they lose benefits or pay in the rehire process.

Discussions around “fire and rehire” can often be heated, and rightly so.

The recent case of USDAW & others v Tesco Stores Ltd (EWHC) highlighted some of the key issues involving the practice of “fire and rehire”.

In this case, the High Court granted an injunction to stop Tesco withdrawing a contractual benefit through dismissal and reengagement.

In the 1990s, Tesco expanded their distribution network and needed to relocate premises and as a result offered “retained pay” to employees as an alternative to redundancy. The retained pay would remain as long as the staff were employed in their current role and could not be taken away unless by mutual consent or promotion. They used the term “guaranteed for life”.

However, in 2021, Tesco removed retained pay, offering a lump sum of 18 months retained pay for giving up the benefit- if employees chose not to take the deal, they would be dismissed and rehired with new terms, but without the retained pay.

The claimants were granted an injunction preventing Tesco from terminating their contracts. The Court held that there should be an implied term in their affected contracts to stop Tesco terminating contracts with the sole purpose of removing or diminishing the right to retained pay.

Tesco was still free to terminate contracts for a good cause e.g. genuine redundancy or gross misconduct.

The facts and decision of this case suggest that the courts will hold employers to a high standard when it comes to “fire and rehire”. The new Statutory Code appears to follow this sentiment by “clamp[ing] down on controversial tactics used by unscrupulous employers who fail to engage in meaningful consultations with employees”.

The intention behind the Code is to provide employers with a series of practical steps to follow in relation to making changes to terms and conditions of employment.

Whilst the Code does not impose legal obligations, it will be taken into account by Employment Tribunals in relevant cases. If employers have followed the guidance of the Code, they may be looked upon more favourably by the Tribunal.  However, in cases where the employer has been found to have been unreasonably non-compliant with the Code where it is applicable, the Tribunal have the power to apply a 25% uplift to the employee’s compensation.

In terms of what the new Statutory Code of Practice will mean for employers, the short answer is it’s not entirely clear.

It is highly unlikely that “fire and rehire” tactics will be banned completely, as the BEIS suggested that employers could still use it as a tactic where changes to contracts are absolutely essential, and a voluntary agreement cannot be reached, but that it should only be used as a last resort.

The Code is also unlikely to make any major changes to the current standards of practice, but it may well highlight the practice guidelines in ACAS’ guidance from November 2021 on making changes to employee’s contracts.

The current law is already fairly clear on requiring employers to act reasonably when using “fire and rehire”, needing consultations where the changes would affect 20 or more employees.

Hopefully, the Code will simply clarify the employer’s obligations, and emphasise the need for fair and reasonable actions. It may well help small employers to understand their obligations, although it is unlikely to go much further.