Removing historic employee benefits without fire and rehire

It is set to become much more difficult for employers to make changes to contracts of employment. This articles considers a recent scenario where we advised a food packaging business client about removing historic employee benefits and their options for implementing these changes in light of the changing needs of the business. We then consider why this is set to become more difficult with the forthcoming prohibition on “fire and rehire”.

The client had a number of employees who had generous and unsustainable contractual terms and benefit arrangements. This had come about for various reasons, including generous benefits and terms granted to longstanding employees in the past by previous owners of the business in more profitable times.  They had has come about through acquiring some employees under the TUPE regulations in the past where the client had won customer contracts and had had to take on the outgoing provider’s employees on their existing terms of employment.

The types of benefits concerned included the provision of fully expensed company cars for packhouse supervisors, very long notice periods, car allowances, generous shift allowances and premium overtime rates.

Taken together these benefits were becoming unsustainable for the business in more straightened times.

Keeping these benefits in place created a two tier workforce as more recently directly recruited employees were not offered such benefits, yet they were working alongside colleagues with far more generous benefit arrangements. The client sought out advice on its options for removing or phasing out these benefits.

Like any other legal contract, the starting point is that an employment contract cannot be unilaterally varied by one party.  In an ideal world an agreement would be reached with the employees concerned about reducing the costs of benefits to the company, although their incentive for agreeing was largely non-existent.

We advised that an employer in this situation has the following options:

1. Incentivise the employees to agree to the changes. This though makes the exercise of reducing costs more expensive
2. Unilaterally vary the terms of the contracts. Our client’s employment contracts contained a variation clause which, on the face of it, allows the employer to make unilaterally changes to the terms of the contract providing it gives one month’s notice to the employee. The difficulty with this is that Employment Tribunals place significant limitations on the employer’s ability to use such widely worded clauses. Unilaterally imposing changes risk claims for breach of contract or constructive dismissal. It also risks well advised employees ‘working under protest’, meaning that although they continue to provide their labour, they are reserving their right to challenge the variation. There is no set time limit for such a challenge to be made and so this can lead to uncertainty for a number of months, if not years, as to whether the contract has been validly changed and whether an employee can challenge it and seek a declaration that the previous terms still apply
3. Dismissal and re-engagement, or as it is more commonly known these days, ‘fire and rehire’. Fire and rehire is the act of giving employees notice of termination of their current contract coupled with an offer to re-employ them on revised and less favourable terms immediately after. This can be very challenging from an employee relations point of view. From a legal prospective, as long as the client can show that it has a ‘sound business reason’ for making the changes and followed a fair process before dismissal, including genuine consultation, then the legal risks of any unfair dismissal claims can be significantly mitigated.

Employment Rights Bill’s impact on ‘fire and rehire’

However, the Government’s draft Employment Rights Bill will significantly reduce the ability of employers to use fire and rehire in these types of situations.

The proposed new law states that a dismissal will be deemed to be automatically unfair if the principle reason for dismissal is that the employer sought to vary the employee’s contract of employment and the employee did not agree to the variation.

There is a very limited exception for a financial distress scenario, but this will require the employer to show that the need for the variation was to significantly reduce or prevent an immediate threat to its ability to carry on the business as a going concern. So a very high threshold to meet and would not cover a typical costs saving exercise with a view to the long term labour costs of the business.

In our client’s situation, if they are implementing this change in the future, they would be left with just options 1 and 2 above, both of which have significant disadvantages.

In the food and drink sector, we often see that there are small pockets of employees in the business that have terms that are more favourable than would ideally be granted if they were joining the organisation today, often through historic arrangements with longstanding employees or where employees have previously joined the business following a TUPE transfer.

The ban on fire and rehire is expected to come into effect some time in 2026.  In the meantime then we recommend that employers review employment contracts and benefit arrangements for any historic or expensive benefit arrangements to assess what options they would have for changing those arrangements now and after the ban comes into place.

If you have any questions about the topic raised in this article, please get in touch.