Fire and re-hire is a hot topic at the moment, with the Government looking to ban it. Hot off the press, a recent employment tribunal decision in this area highlights some of the risks for employers of using this route to change terms. Employees were dismissed when they refused to agree to a change to their pension benefits but the tribunal found this was unfair and discriminatory because of a failure to properly consider alternative proposals made by employees.

With increasing employer contributions to the Teachers' Pension Scheme and VAT on school fees likely to be introduced this autumn, the finances of many private schools are under pressure. Many schools are therefore looking to cut costs in a variety of ways, including by taking staff out of the Teachers' Pension Scheme. Unsurprisingly, teaching staff are unhappy about this and some are unwilling to agree to the change, so some schools are terminating existing contracts and re-engaging staff on new terms which do not give access to the Teachers' Pension Scheme.

Loughborough Schools Foundation was facing a £28.5 million deficit by the end of the decade and therefore decided to consult with staff about removing access to the Teachers' Pension Scheme on the basis that this would save £9 million over ten years.

Staff were unhappy about this and through their representatives made various proposals to avoid this, including a proposal that staff be able to remain in the scheme in return for pay freezes. A three-year pay freeze would have saved £10.9 million. It wasn't entirely clear whether staff would accept this proposal and rather than clarifying, the Foundation decided to press ahead with closure of the scheme to all staff. Around 140 staff refused to agree to the change and the Foundation gave notice to terminate their contracts and offer new contracts not including the Teachers' Pension Scheme.

Two staff brought claims to the Employment Tribunal for unfair dismissal and sex/age discrimination. The Tribunal found that, although the Foundation had a fair reason for the dismissals, the dismissals were not fair in all the circumstances - essentially because the Foundation had not properly engaged with the alternative proposal put forward by the employee representatives, which the Tribunal viewed as a viable alternative. It also found that, for one of the employees, there was unlawful indirect age discrimination for similar reasons; whilst the proposal to close the scheme to all staff pursued legitimate aims, there were less discriminatory ways of achieving those aims.

Employers considering termination and re-engagement on new terms should make sure that they properly engage with alternative proposals and investigate whether they are viable before terminating. Making sure that the final proposal for change limits the impact on staff as much as possible (bearing in mind the employer's aims) will put employers in the best possible position to defend discrimination claims.

Although the Government has said they plan to ban fire and re-hire, it isn't clear how this will take account of situations where an employer has a pressing business need to change terms (such as making the savings required in this case). There must be a real danger that a blanket ban ends up with employers having no room to manoeuvre, resulting in businesses closing and employees losing their jobs entirely. At a time when everyone accepts that growth in the economy is needed, this could be an avoidable own goal.

For advice on changing terms and closing pension schemes, contact Doug Mullen or Lauren Broderick.