Fire and Rehire After Section 104I: What Employers Must Prove

P&O Ferries dismissed almost 800 seafarers in March 2022 and crewed its ships with agency workers. Section 104I of the Employment Rights Act 1996, the provision the 2025 Act inserts to deal with fire and rehire, would not have caught it. The replacements were not P&O’s employees, and section 104I applies only where the work is to be done again under a varied contract of employment. P&O falls to section 104K.

Alan Bogg and Sarah Green build their article on that distinction. In ‘The Good, the Bad and the Ugly: Fire and Rehire in the Employment Rights Act 2025’ (2026) 55 ILJ 908 they treat P&O as the aberrant case and the legislation as aimed at the ordinary employer, which obeys the law and uses notice of dismissal to get a pay cut agreed. They call section 104I of the Employment Rights Act 1996 ‘a provision of labyrinthine complexity’ and then read it subsection by subsection. The questions below are the ones a tribunal will be asked first: who proves what, with what evidence, and what an employer can still do without dismissing anyone.

Commencement

Section 28 of the Employment Rights Act 2025 inserts three sections into the Employment Rights Act 1996: 104I, 104J and 104K. The Government’s timetable puts commencement at 1 January 2027, moved back from October 2026. At the start of October 2026 only the powers to make regulations were in force; the response to the February 2026 consultation on expenses, benefits in kind and shift patterns had not been published.

Two other changes are due on the same day: the qualifying period for unfair dismissal falls to six months, and the cap on the compensatory award goes. The first section 104I claims will therefore be uncapped. Whether a dismissal on notice given in 2026 and expiring in 2027 is caught depends on transitional provisions that have not yet been made.

The law being replaced

A dismissal for refusing new terms has until now been a dismissal for some other substantial reason, tested for reasonableness under section 98(4) of the Employment Rights Act 1996. Hollister v National Farmers' Union [1979] ICR 542 established that a sound business reason for a reorganisation would do. In Catamaran Cruisers Ltd v Williams [1994] IRLR 386 a tribunal had directed itself that such a dismissal was unfair unless the new terms were vital to the survival of the business. The EAT, Tudor Evans J presiding, held that this was wrong: ‘We do not accept as a valid proposition of law that an employer may only offer terms which are less or much less favourable than those which pre-existed if the very survival of his business depends upon acceptance of the terms.’

Garside and Laycock Ltd v Booth [2011] IRLR 735 applied that to a pay cut. The company, in trading difficulty, asked its staff to vote on a five per cent pay cut: 77 voted in favour, and Mr Booth, a welding maintenance worker of seven years’ service, was one of two who held out. The tribunal found his dismissal unfair because it was reasonable for him to refuse. Langstaff J and the lay members allowed the appeal: the tribunal had misread Catamaran as requiring a business in desperate straits, and had asked what it was reasonable for the employee to do when the statute asks whether the employer acted reasonably.

The EAT did add, at [23], that ‘equity’ in section 98(4) might require a tribunal to ask on whom the cuts fell, and whether management had kept its own pay intact. Bogg and Green’s verdict on this body of law is that an employer could dismiss to force through a change that was neither necessary nor proportionate. Section 104I reverses Catamaran by statute. For pay, hours and pensions, the survival test the EAT rejected in 1994 becomes the law.

Two reasons for dismissal

An employee is unfairly dismissed under section 104I(1) if the principal reason for the dismissal is one of two. The first, in subsection (2), is that the employer sought to make a restricted variation to the contract and the employee did not agree. The second, in subsection (3), is to enable the employer to employ another person, or to re-engage the same employee, under a varied contract to carry out the same or substantially the same duties. Bogg and Green call the first the ‘good’ case, because the employer at least asked, and the second the ‘ugly’.

A package of changes is treated as a whole. Under subsection (2)(b)(ii), where the employer sought more than one variation and the employee did not agree to a number of them that included a restricted variation, the reason is within the section. Ten proposals of which one touches the pension scheme make a section 104I case.

The employee must have been ‘employed for the purposes of a business carried on by the employer’. Bogg and Green read ‘business’ with the wide definition in section 235(1) of the 1996 Act and with the Explanatory Notes, which say the section does not apply to employees of private individuals engaged for non-business reasons. On that reading charities and public bodies are within the section; the nanny and the carer employed by a family are outside it.

Restricted variations: section 104I(5)

Place of work, duties and reporting lines are not on the list. A dismissal to force through a change of that kind goes to section 104J.

Was the term contractual?

A restricted variation is a variation of the contract, and the Explanatory Notes say that the contract means every contractual term, express or implied, written or oral. Many cases will therefore start with whether the shift pattern, the bonus scheme or the handbook benefit was contractual at all. An employer that has spent twenty years marking its benefits ‘non-contractual’ will say that there was nothing to vary and nobody needed dismissing. The claimant will answer with custom and practice, on the test in Park Cakes Ltd v Shumba [2013] EWCA Civ 974: whether the employer’s conduct conveyed that the benefit was enjoyed as of right.

Bogg and Green expect exactly this: ‘Battles over handbook incorporation may well become a proxy war in tussles over “fire and rehire”’. They add that the protective purpose of section 104I ought to shape how the common law of incorporation develops. A tribunal will more probably apply Park Cakes as it stands and leave that argument to the appeal courts.

Burden of proof

Section 104I sits among the automatically unfair reasons, and section 28(5) of the Employment Rights Act 2025 amends section 108(3) of the Employment Rights Act 1996 so that no qualifying period applies to it or to section 104K. The label does not fit, as Bogg and Green point out: the employer can defeat the claim by proving the financial exemption, which no employer can do under section 100 or section 103A. They prefer ‘presumptively unfair’. This site’s own tracker of the Act says ‘automatically unfair in most cases’; theirs is the better phrase.

Who proves the reason depends on service. An employee with the qualifying period need only raise the section 104I reason: under Kuzel v Roche Products Ltd [2008] EWCA Civ 380 the employer must show the reason for dismissal; the employee who asserts an inadmissible one has only to ‘produce some evidence of a different reason’ (Mummery LJ at [57]). An employee without it carries the legal burden of proving the reason, under Smith v Hayle Town Council [1978] ICR 996. From January that second group is confined to employees in their first six months.

The reason will seldom be in dispute, because the dismissal letter will state it. The contest lies in the exemption, where the burden is on the employer: subsection (1) does not apply ‘if the employer shows’ both limbs of subsection (8). Section 104J carries no exemption from the qualifying period, so an employee dismissed over a non-restricted variation needs six months’ service.

The section 104I test for a private employer

Proving the financial difficulties

Under section 104I(8)(a) the employer must show that the reason for the restricted variation was ‘to eliminate, prevent or significantly reduce, or significantly mitigate the effect of, any financial difficulties which at the time of the dismissal were affecting, or were likely in the immediate future to affect’ its ability to carry on the business as a going concern. Bogg and Green read this as a high bar. ‘Going concern’ is an accounting term, which auditors test over at least a year from the date of their report. The authors expect contested cases to turn on expert evidence from an auditor or forensic accountant: ‘bound to be unfamiliar evidential territory for many employment tribunals’.

The difficulties are tested at the time of the dismissal and not when the proposal was made, so a consultation that runs for six months while trade recovers may end in a dismissal the exemption no longer covers. ‘The immediate future’ excludes the five-year forecast.

Bogg and Green write throughout of what the employer must believe. The subsection makes the employer’s purpose a matter of its state of mind, but describes the difficulties as ones which ‘were affecting, or were likely’ to affect the going concern: facts, not beliefs. A claimant will say that an honest but mistaken pessimism in the boardroom does not satisfy the limb. I think the text supports the claimant, though ‘likely’ leaves the employer some room.

The exemption looks at ‘the employer’s’ ability to continue as a going concern, and many loss-making subsidiaries are going concerns on their audited accounts only because the parent has given a letter of support. Whether such a subsidiary can plead the exemption while the parent stands behind it is a question the section does not answer.

‘Could not reasonably have avoided’

The second limb, section 104I(8)(b), requires the employer to show that ‘in all the circumstances the employer could not reasonably have avoided the need to make the restricted variation’. Bogg and Green say this is an objective question for the tribunal itself and not a review of whether the employer’s view fell within a band of reasonable views. They are equally clear that it is not proportionality: Parliament had the Equality Act formula to hand and did not use it.

Subsection (10) supports them. For a public sector employer the tribunal must decide this limb by applying ‘the same principles as would be applied by a court on an application for judicial review’. A direction to review the public employer’s decision would be unnecessary if review were already the standard for everyone; for the private employer the tribunal decides the question.

Respondents will point to the word ‘reasonably’: an employer need not show that the variation was the only conceivable course, and tribunals have been told for forty years not to substitute their own view of how a business should be run. I think Bogg and Green have the better of the text; I expect the opposite to be argued in every case until the EAT rules.

Either way the evidence is the same: what alternatives the board considered at the time, and why it rejected each. The Garside question returns here as evidence. An employer that cut shop-floor pay while management pay and dividends went untouched will struggle to show that the cut could not reasonably have been avoided.

Public employers

Public sector employers face a different threshold, the financial sustainability of carrying out their statutory functions, and the judicial review standard on the second limb. Bogg and Green sketch what that might import, including legitimate expectation, and remark that ‘eager counsel will be scouring the 840 pages of Fordham’s Judicial Review Handbook’ once the provision is litigated. A local authority has no exemption at all unless a statutory intervention direction citing its financial difficulties is in force. The authors counted nine such interventions in March 2026.

Fairness after the exemption

An employer that proves both limbs has only removed the presumption. Section 104I(11) then requires the tribunal to consider consultation with the employee, consultation with a recognised union or, where there is none, with any other representative who had authority to be consulted, and ‘anything offered to the employee by the employer in return for agreeing to the restricted variation’. Bogg and Green treat this stage as close to the ordinary test of fairness with a mandatory list.

Other routes for the employer

Non-restricted variations fall under section 104J, which has no financial threshold. The tribunal decides fairness having regard to the reason for the variation, the same consultation factors and anything offered in return; Bogg and Green expect the range of reasonable responses to apply. A change of location or duties is therefore still governed by something close to the old law.

Existing flexibility clauses survive. Paragraph (h) catches the inclusion of such a term by dismissal; it does not strike down a clause already in the contract, and nothing stops the parties agreeing one at the point of hire. In Bateman v Asda Stores Ltd [2010] IRLR 370 the EAT held that a handbook clause reserving the right to revise its contents allowed Asda to move staff onto a new pay structure without their consent. The exercise of such a power must be rational under Braganza v BP Shipping Ltd [2015] UKSC 17, which Bogg and Green think will rarely help an employee where the employer has a real business reason.

Orthodox contract law says that a change made under a contractual power is not a variation of the contract. Paragraph (h), however, describes what the clause enables as a ‘variation … without the employee’s agreement’. An employee dismissed for refusing to work to a pay cut imposed under a Bateman clause can therefore argue that the employer ‘sought to vary’ the contract and that she ‘did not agree’. I do not know how that argument will fare.

Imposing the change without dismissing anyone has been a dead end since Rigby v Ferodo Ltd [1988] ICR 29: the employee who works on under protest has not agreed, and recovers the shortfall. Agreement remains available, including agreement through a recognised union where the contract incorporates collective terms. The Act gives no collective opt-out from section 104I of the kind it gives for guaranteed hours, which Bogg and Green would have included.

Replacing employees with contractors or agency workers is section 104K. It applies the same financial exemption, and excludes the case where the employer’s need for the work has ceased or diminished. Bogg and Green think it ‘may be one of the most radical measures’ in the Act, because it restricts the outsourcing of a core workforce and not only the cutting of its terms.

The injunction

A tribunal claim under section 104I follows the dismissal. An employee with a specific contractual promise may be able to stop it. In Tesco Stores Ltd v Union of Shop, Distributive and Allied Workers [2024] UKSC 28 the Supreme Court held that Tesco was ‘precluded by an implied term from exercising the contractual right to dismiss the claimants on notice for the purpose of removing or diminishing their right to receive permanent retained pay’ (Lord Burrows and Lady Simler at [57]), and restored the injunction.

Bogg and Green regard the facts as unusual and doubt that Tesco reaches an employer cutting ordinary pay. Lord Leggatt’s wider suggestion, that the common law rule allowing a capricious dismissal might give way to a Braganza term, was expressly not adopted by Lord Reed. For most employees the remedy will be the statutory one.

Practical points

• Claimants: plead section 104I and ordinary unfair dismissal in the alternative. An employee with under six months’ service carries the burden on the reason, so keep the consultation documents and the dismissal letter.
• Claimants: ask at the first case management hearing for the going concern evidence: the audited accounts with the going concern note, management accounts and cash-flow forecasts current at the date of dismissal, lender correspondence and board minutes. Raise expert accountancy evidence at the same hearing.
• Unions: a dismissal and re-engagement exercise is a dismissal ‘as redundant’ under section 188 of the Trade Union and Labour Relations (Consolidation) Act 1992, because section 195 defines that as dismissal for a reason not related to the individual. Twenty or more proposed dismissals at one establishment trigger collective consultation; the protective award now runs to 180 days’ pay. The statutory Code of Practice on Dismissal and Re-engagement, in force since 18 July 2024, also applies: an unreasonable failure to follow it can increase compensation by up to 25 per cent.
• Employers: separate the proposals. A package that mixes a restricted variation with unrestricted ones falls under section 104I of the Employment Rights Act 1996 as a whole.
• Employers: establish which terms are contractual before proposing anything. A benefit that is not contractual needs no variation; a benefit paid without exception for a decade may be contractual whatever the handbook says.
• Employers: reliance on the exemption needs evidence dated at the dismissal, not at the start of consultation: a current forecast, the alternatives considered, and the reasons each was rejected. All of it will have to be disclosed.
• Employers: put any flexibility clause into new contracts at hire. Inserting one into existing contracts by dismissal is itself a restricted variation.

Table of Authorities

Further Reading

1. Alan Bogg and Sarah Green, ‘The Good, the Bad and the Ugly: Fire and Rehire in the Employment Rights Act 2025’ (2026) 55(3) Industrial Law Journal 908 — doi:10.1093/indlaw/dwag014. Open access. The article this note discusses; its first half sets fire and rehire within the law of long-term contracts.
2. Employment Rights Act 2025, section 28: the text of the three new sections as they will be inserted into the 1996 Act.