The Employment Rights Act 2025 (the Act) introduces measures making it harder to fire employees and rehire them on different terms with altered pension entitlements.

Published: 22 April 2026
Authors: Rhiannon Barnsley-Bloomfield

What is the process?

Known in the industry as ‘fire and rehire’, the process involves an employer dismissing an employee on notice in order to bring their old contract to an end and rehiring them on a new contract with different terms. It has been used to change pension scheme entitlements (such as entitlement to participate in a certain scheme) where agreement to the change cannot be reached with the affected employees. It is usually a last resort when harmonising pension benefits.

The practice has been controversial and can create legal and reputational risks for the employer as well as damaging employer and employee relationships. The previous government issued a code of practice in 2024 on the use of the method “to ensure that an employer takes all reasonable steps to explore alternatives to dismissal”. Failure to comply with the code can lead to the employment tribunal applying a 25% uplift to compensation in unfair dismissal claims.

What is changing?

The Act aims to prevent “unscrupulous fire and rehire practices”. From 1 January 2027, if an employer attempts to make a change classed as a ‘restricted variation’ without employee agreement and the employee is subsequently dismissed, such dismissal will be automatically unfair. A restricted variation will include, among other things, “a variation of any term or condition relating to pensions or pension schemes”.

The affected employee(s) may bring a claim to the employment tribunal, and the tribunal may order the employer to pay compensation for the automatic unfair dismissal. There is no service requirement to bring an automatic unfair dismissal claim and there is no cap on the amount of compensatory award that can be made.

Dismissal will not be an automatic unfair dismissal if the reason for the restricted variation was to eliminate, prevent or significantly reduce or mitigate financial difficulties and the employer could not reasonably have avoided the need to make the changes. Such exception will only apply in very limited circumstances. Even if the exception does apply, an employer will still need to demonstrate that the dismissal was fair in all the circumstances to avoid a finding of ordinary unfair dismissal. This will also be the case if the contractual change being made is not a restricted variation.

What impact will this have for pension schemes?

Firing employees and rehiring them on new terms has most often been used to close a pension scheme to future accrual where the scheme has a restrictive amendment power or ongoing participation in the scheme is part of the employee’s terms and conditions and the affected employees do not agree to the change. Although a significant proportion of schemes are already closed to future accrual, open schemes will have one less option available if employees do not agree to proposed changes. It is not just these schemes that are impacted, as any employer with pension entitlements written into employee terms and conditions will find it more difficult to make changes to pension benefits (such as changing pension scheme providers or contribution rates) from 1 January 2027.

The impact is not limited to pensions. Restricted variations will include changes to pay, hours and holidays and will also cover the inclusion of a variation clause permitting an employer to make changes to pay, hours and holidays.

Key takeaways

Employers and trustees should consider their scheme amendment power and the wording in their employee terms and conditions. When issuing employment contracts to new employees, it is advisable to build flexibility into pension entitlements so that contribution rates or membership of specific schemes does not become contractual because of the difficulties arising when altering such terms in the future.

In particular, those schemes open to future accrual may want to consider their options ahead of 1 January 2027, especially if there are any immediate plans to close the scheme to accrual and challenge is expected in getting employees to agree to the changes.