UK: Restructuring and Redundancy: Changes on the Horizon

As part of our Frontline UK series on the Labour Government’s Employment Rights Bill (the “Bill”), we look today at two Rs: (1) Restructuring; and (2) Redundancy. Both areas have long been emotive subjects for employers and employees alike, and the Bill proposes significant reform. 

In this article, we set out the current legal position, explore the proposed changes, and look at the potential impact on your business. 

Restructuring – the current position on fire and rehire

To support commercial and financial needs, employers can seek to amend the contractual terms on which it employs its staff. While mutual agreement on contractual changes is the ideal, where this is not possible (for example, if negotiations break down), employers may resort to what is referred to as “fire-and-rehire” or “fire-and-replace”. “Fire-and-rehire” describes dismissing an employee, before re-engaging them on (often) less favourable terms; “fire-and-replace” describes dismissing an employee and bringing in their replacement on (often) less favourable terms. 

Despite both practices being the subject of significant media and political attention in recent years [P&O case analysis], and the risks posed from a reputational and ER perspective, they continue to be lawful. Employees’ most common recourse in such situations is to bring a claim of “ordinary” unfair dismissal (if they have two or more years’ service). Employers typically seek to justify such dismissals as for “some other substantial reason”, which the courts have historically accepted can include a "sound, good business reason".  Alternatively, employers may be content to pay the damages for unfair dismissal claims. 

As a mitigation against abuse of these practices, in July 2024 the previous Government introduced the Code of Practice on Dismissal and Re-engagement (the “Code”). It encourages employers to act fairly when proposing contractual changes, emphasising the fair process that employers should take before dismissing and re-engaging. The Code did not introduce any binding legal obligations on employers, but it is admissible in evidence and allows tribunals to increase compensation by up to 25% where there has been a failure to comply with the Code. Labour described the Code as “inadequate” and has promised to reform the law in this area, which we now explore. 

What is planned in the Bill? 

The reforms proposed by the Bill are an effort to curtail the use of these practices in an “unscrupulous” way. It is not an attempt to prohibit the use of “fire-and-rehire” or “fire-and-replace” entirely, but rather to restrict and better regulate their use.

The Bill would introduce two new grounds for “automatically” unfair dismissal:

• Refusal to Agree to Contract Variation: An employee's dismissal will be considered automatically unfair if the principal reason for the dismissal was their refusal to agree to a variation in their employment contract.
  
  
• Dismissal for Re-engagement or Replacement: A dismissal will be automatically unfair if the principal reason was to enable the employer to employ another person or re-engage the dismissed employee under a varied contract for substantially the same duties.

There is a limited exception proposed to the finding of automatic unfair dismissal, if the reason for proposing the contractual variation is to address (meaning to eliminate, prevent, or significantly reduce or mitigate the effect of) significant financial difficulties that affect or would likely affect the employer's ability to continue business operations. It must be shown that in all the circumstances, the employer could not have reasonably avoided the need to make the variation. The circumstances in which an employer may be able to rely on this exception are likely to be limited (e.g. if the employer is on the verge of financial collapse or insolvency) and will require the employer to show that the contractual variation was the only viable option available in the circumstances.  

Even if an employer satisfies this extremely high bar so that a dismissal is not deemed automatically unfair, a tribunal is still entitled to make a finding of ordinary unfair dismissal, with the Bill also specifying what a tribunal must consider when determining fairness in relation to this finding (e.g. whether any consultation was carried out by the employer about varying the contract and whether anything is offered to the employee in return for agreeing to the change). 

What does this mean for employers? 

The proposed changes are significant. They will make it much more difficult and riskier for employers to change contractual terms and conditions without the support of their workforce and will therefore give employees (and their representatives) a significant increase in bargaining power. 

As an unintended consequence, employers may start using pay increases or promotions as a bargaining tool to get changes across the line, instead of making these changes on a semi-regular basis. This may result in an ultimately less beneficial situation for employees.

Employers will no longer be able to freely use “fire-and-rehire” (or “fire-and-replace”) as a last resort to force through changes to terms and conditions. This could, have the (presumably unintended) consequence of increased redundancies, as employers may not be able to mitigate job losses through changes to terms and conditions (such as lower pay or decreased hours).

Labour will also need to account for how these new provisions interact with the current redundancy regime, as the current position is contradictory. In order to conduct a fair redundancy process, employers are currently encouraged (and in the case of collective redundancies, obliged) to explore alternatives to avoid redundancies, which often includes considering changes to terms and conditions. As currently drafted, the Bill’s provisions would suggest that in a redundancy situation where such changes are proposed but not agreed to, an employee who is then dismissed for redundancy could bring a claim for automatic unfair dismissal. 

Collective Redundancies – the current position

Separately, the Bill proposes changes to strengthen collective redundancy rights. 

Currently, employers must go through a collective redundancy consultation process if they propose to dismiss 20 or more employees at one establishment within 90 days. The employer must inform and consult with the affected employees’ appropriate representatives, and failure to comply with these requirements can result in claims for a “protective award” of up to 90 days’ uncapped pay to each affected employee. In addition, employers must notify the Secretary of State of the proposed redundancies and a failure to do so is a criminal offence, punishable by an unlimited fine. 

What is planned in the Bill? 

The Bill proposes to remove the "at one establishment" reference, meaning the thresholds for consultation and notification in collective redundancies will be determined by aggregating redundancies across the entire employer and all parts of its business, instead of determining the trigger from site to site. 

This change will bring more redundancies within the scope of the collective consultation regime and means that employers need to survey their entire business when deciding whether the threshold has been met for both the collective consultation trigger and the HR1 form trigger.

In addition, the Labour Government plans to consult on further strengthening the collective redundancy framework in 2025, including whether it would be desirable to double the minimum consultation period for dismissals of 100 or more employees from 45 to 90 days. 

What does this mean for employers? 

The changes will broaden the scope of mandatory collective consultation obligations, posing new challenges for multi-location employers. They will need to track and count redundancies across all sites when calculating the number of proposed redundancies and whether they meet the 20 or more threshold, therefore increasing the likelihood of triggering collective consultation. This could lead to more administrative work to accurately track and monitor if thresholds are met, longer timelines and more burdensome consultation processes, and higher costs. 

There is a potential benefit here for employers within group companies, where employees are employed across different operating entities. For such businesses, it will remain the position that redundancies are not aggregated across a group of companies involving multiple employer entities, meaning that the threshold will not change for these companies.

Employers will need to implement tracking systems to manage compliance, especially for small, unconnected redundancies across multiple sites. This, in combination with the Marclean judgment [here] which established that employers must look forward and back when counting the number of redundancies over a 90-day period, means that it is imperative that employers keep a very close eye on redundancy numbers and timing to determine when they have reached the trigger of 20 redundancies within a 90-day period.

There is also an increased financial impact. The Government is considering raising the maximum compensation cap for the protective award from 90 to 180 days' pay per affected employee or removing the cap entirely. It recently consulted on this at the end of last year, and the outcome to that consultation which closed in December 2024 is awaited. 

Interim Relief

As an additional point, the Government also consulted last year [here] on whether interim relief should be available in “fire-and-rehire” and collective consultation cases. Interim relief is a temporary measure, involving an accelerated tribunal claims procedure, that preserves an employee’s employment (and therefore their pay) until an unfair dismissal complaint is resolved. Currently, the right to interim relief is only available in limited circumstances, in certain types of unfair dismissal claim (including whistleblowing and trade union membership and activities).

For “fire-and-rehire”, the consultation proposed to make interim relief available to employees bringing a claim for unfair dismissal in this context. Interim relief, if granted, would keep employees engaged on their previous terms pending a full hearing of the claim. The consultation notes the consequential financial strain on employers, as maintaining the old terms until a hearing could be prohibitive and increase insolvency risks, particularly given the current delays in the employment tribunal system, where claims can take as long as two years to reach a final hearing. The consultation sought views on adjusting interim relief applications in these cases. 

The consultation also looked at whether interim relief should be available for employees claiming a protective award, which would have the effect of allowing these employees to remain employed (or at least paid) until a hearing.  Similarly, this may be an overly punitive and disproportionate suggestion and it remains to be seen whether it makes it onto the statute book.

Conclusion

The proposals discussed above in the Bill represent a significant shift in the legal landscape on these two issues. The consultations are an important step for Labour’s proposals to be tempered by business opinion and exigency, but nonetheless, as we have noted before, the general direction of travel in the Bill is clear. 

It is not yet known when the changes proposed will come into effect, and it may not be until 2026.  In the meantime, we recommend that employers begin to review policies and contracts of employment, consider internal processes for redundancies and contractual changes and speak to their usual Bird & Bird contact when planning redundancies or other forms of restructuring, given the higher bar that is likely to come into play in due course.