Employment Rights Act: Changing key contract terms will be harder from January 2027

The Employment Rights Act 2025 (“ERA 2025”) introduces a new regime that restricts how employers can change certain core contractual terms, with the key provisions now expected to commence on 1 January 2027.

Historically, if an employer decided to implement contractual changes for its workforce and employees did not agree to the change, the option was available to dismiss the objecting employees and offer them, or a new employee, new contracts on the updated terms.  The ERA 2025 will make such dismissals automatically unfair, where dismissal is used to impose what the ERA 2025 defines as “restricted variations”, unless the employer meets a limited financial difficulties exemption.

Although the Government and Trade Union communication has focused on these changes preventing “fire and rehire”, the practical effect is broader: whether or not an employer envisages utilising fire and rehire as a strategy, it will be significantly restricted in its ability to change key contractual terms where employee agreement cannot be secured, even with a sound business rationale.

At a glance:

• New restrictions are expected to commence on 1 January 2027.
• Dismissal used to impose a restricted variation will be treated as automatically unfair, unless a narrow financial difficulties exemption applies.
• Restricted variations include changes to pay, working hours, pensions and leave entitlements (and related concepts such as pay calculation measures), certain shift schedules, and clauses allowing those terms to be varied.
• Where “fire and rehire” is used to make a non‑restricted variation (e.g. location or job role), it will not be automatically unfair — but will be assessed under ordinary unfair dismissal legislation.
• The Statutory Code of Practice on Dismissal and Re‑engagement is expected to be updated to align with the legislation later in 2026.  If the Code of Practice applies and an employer unreasonably fails to comply, tribunals can apply an uplift of up to 25% to any compensation awarded.

How the new framework will work in practice:

1) Restricted variations: what’s in scope?

It is expected that these will include:

• Reducing/removing an element of pay;
• Changing how pay is calculated where it is connected to output/performance (e.g. commission targets);
• Changes to pensions or pension schemes;
• Changes to working hours;
• Changes to shift timing/duration, where the shift meets conditions to be set in regulations;
• Reducing time off / leave entitlements;
• Any other categories specified in future regulations; and
• Inserting a term allowing an employer to make any of the above changes without the employee’s agreement.

Notably, the Government has not yet published the regulations on what shifts will be caught by the legislation and future regulations may cause other types of contractual terms to become ‘restricted’.

The Government is expected to publish these regulations and the new Code of Practice in late 2026 / early 2027.  Employment contracts can be updated before 1 January 2027 (to not be caught by the anti-avoidance provisions) with specific variation clauses, or restructuring benefits as non-contractual or discretionary.

2) Automatic unfair dismissal

• If an employee is dismissed in order to impose a restricted variation, following 1 January 2027 the dismissal would be automatically unfair in most cases. There would be no requirement for the employee to have qualifying length of service – this protection would be in force from day one of employment.

3) The financial difficulties exemption

• A narrow exemption will exist where an employer can evidence serious financial difficulty affecting (or imminently likely to affect) the employer’s viability as a going concern (or, for certain public sector bodies, financial sustainability), show the restricted variation change was necessary to address those difficulties, and demonstrate the need could not reasonably have been avoided.
• Even where an employer can meet that exemption, the tribunal will still assess fairness and must take account of factors including consultation and what was offered in return for agreement.

What should employers do now?

With 2027 approaching, employers should:

• Audit contracts and policies to identify terms that could fall within “restricted variations” and clarify what is contractual vs discretionary, and whether any existing provisions or structures are outdated, unsustainable or will otherwise need aligning with current working practices.
• Update contract templates well ahead of January 2027 to ensure they meet the needs of the business and allow for any required flexibility.  Consider using revised terms for new hires and (where appropriate) on promotion or pay revisions.
• Plan any necessary workforce-wide changes early, allowing time for consultation and exploring incentives/alternatives to secure agreement.

If you would like any assistance updating contracts and future-proofing your business for the Employment Rights Act, please reach out to our employment team who can offer bespoke services to suit your business.