Employment Rights Bill Series: Dismissal and Re-engagement - Tying the Hands of employers?

The Employment Rights Bill (ERB) has provided a few talking points, with the focus principally landing on the removal of the qualification period for unfair dismissal and flexible working arrangement changes (think the right to guaranteed hours for zero/low hours workers and ‘default’ flexible working).

However, for employers there is a real restriction coming down the line.

Section 22: Dismissal for failing to agree to variation of contract

In light of Labour’s mantra around addressing ‘unscrupulous fire and re-hire tactics’, (Watch our recent webinar recording for guidance on this) the reform of dismissal and re-engagement was expected. However, since the ERB’s publication, not a great deal has so far been made of the implications of the draft legislation on the point.

The headline is that dismissal for failure to agree a proposed contractual change (“the employer sought to vary the employee’s contract of employment, and the employee did not agree the variation” to quote the draft statutory language) will become an automatically unfair dismissal unless an exception applies.

As a reminder, an automatically unfair dismissal differs from ‘ordinary’ unfair dismissal in that, once that reason for dismissal is established, an employment tribunal must find the dismissal unfair, and the ‘reasonableness’ of the decision to dismiss will be irrelevant.

The only ‘exception’ to this new category of automatically unfair dismissal under the ERB however, is if the employer can show that the proposed variation was to address financial difficulties affecting its ability to carry on as a going concern at the time of the proposal or in the immediate future. The employer will also need to show that they could not reasonably have avoided the need to make the variation. Whilst that last part is not expanded upon, the consultation document provides some insight, suggesting, for example, that this threshold might be met if the variation was ‘the only way to prevent insolvency’.

The implications

Currently, (whilst there is some nuance to this) if employers wish to amend the contractual terms of their employees for a business reason and cannot get agreement, they have the option of consulting on the changes, trying to find a resolution and, if that is not possible, dismissing and re-engaging on the new terms.

That is a potentially fair dismissal under the ‘some other substantial reason’ limb, subject to the ‘ordinary’ unfair dismissal test, including an assessment of the ‘reasonableness’ of the employer’s actions in all the circumstances.

Should the ERB proceed as currently drafted, this option will go away unless the financial viability exception above is established.

The problem is that dismissal and re-engagement isn’t commonly used to address immediate financial peril but more to modernise contracts and safeguard the future (i.e. the potential peril is not ‘now’, which the exception above requires, but sometime in the future). This will not be possible under the ERB, as drafted. Issues such as pension buyouts will be severely undermined with the Trade Unions/employee representatives simply being able to say no when such changes are proposed by an employer.

In addition, the financial viability exception does not appear to be available for seeking to make changes to save any failing parts of a business. Unless the employer’s viability as a whole is undermined, dismissal and reengagement will not be an option. That would leave businesses in the unwelcome position of being unable to force through required contractual changes to turn round that part of the business.

In any of these situations, the proposed changes may mean that an employer has no option but to make redundancies (more on this below)

Isn’t the government consulting on this?

Yes, and no. But mostly no. If you consider the consultation document on this particular issue, it relates to the proposed availability of interim relief for this type of unfair dismissal claim. There is nothing on this fairly draconian restriction on an employers’ ability to adapt their workforce arrangements to address technological developments or respond to market forces.

However, the ERB will be scrutinised and possibly amended on its passage through Parliament, and we anticipate that there will be some push-back by parliamentary committees and business lobbyists particularly on the narrowness of the ‘financial viability’ exception. The ERB is currently being considered by the Public Bill Committee, which is hearing evidence from stakeholders and is due to report in January 2025.

So what will be the options for employers?

As alluded to above, without financial peril on the very near horizon for the organisation as a whole, employers will need to consider other options.

Conducting a redundancy consultation exercise, offering the amended terms as a alternative to redundancy, may potentially be possible, but only in very specific situations where the proposed change in contractual terms accompanies a genuine structural reorganisation that meets statutory redundancy criteria. Given that one of Labour’s stated aims with the ERB is to increase employee security, there is some irony in this.

Some commentators have suggested that the ERB should be amended to allow employers to use dismissal and reengagement for an ‘economic, technical or organisational (ETO) reason involving changes in the workforce, to mirror the law on making contractual changes following a TUPE transfer. However, even if this change was made, employers would still lose the ability to make changes in a very wide range of scenarios where no such workforce changes are envisaged.

If employers wish to utilise their current ability to make contractual changes via dismissal and reengagement, it is important to get the process moving as promptly as possible in anticipation of these proposed changes.

Employers can also prepare for the new law by reviewing key contractual and non-contractual terms, to identify any risk areas where future change might be needed. Introducing a ‘variation clause’ to allow employers more flexibility to make changes may also be an option to mitigate the impact of reforms.

See our previous ERB Insights in this series

• Overview: ERB What’s In, What’s Out, What’s Next? (11 October 2024)
• ERB: Flexible Working: Further Flexion (21 October 2024)
• ERB: Day 1 right to claim unfair dismissal (25 October 2024)
• ERB: The Pendulum Swings on Industrial Relations (8 November 2024)
• ERB: The Fair Work Agency (15 November 2024)