Driven by Labour MPs (of course), Parliament is now talking about banning the employment practice known as “fire and rehire” – a method for employers to reduce the wages they pay their employees, by releasing them from their current employment contract (fire), and then re-employing them under a new contract with lower wages (rehire). Sounds like a reprehensible tactic, doesn’t it? It’s unfair that employers can do this to their employees, right?
Why would an employer fire and rehire?
Sometimes businesses do need to reduce costs. Not just for the sake of profit, but it could be the difference between breaking even or unsustainable losses. Many big businesses will have bigger financial reserves, or are able to borrow money easier. But smaller businesses don’t have enough flexibility in their operational margins to weather losses for long periods.
Why would an employee accept fire and rehire?
If the employee can command a better wage elsewhere, why haven’t they gone to work for another employer, instead of coming back to their existing employer for a lower wage? Employees aren’t forced to stay with any employer. In a worst-case situation, the employee has to stay on the new lower wage only until they can find better employment elsewhere.
In most cases, unhappy employees facing an unfair reduction in wages should be able find another employer who pays them better. The only situations in which this is not true is if 1) there is a general economic downturn so wages are falling everywhere, or 2) the employee was being paid above market rate to begin with.
In both cases, why is it fair for any employee to get paid more for their work than everyone else on the market who does the same work?
What is the effect of banning fire and rehire?
Nevermind the issue of fairness. What’s more significant is the effect of banning fire and rehire on both employers and employees alike.
Without the ability to reduce employee wages, employers will not be able to reduce their operating costs as easily. More businesses facing financial difficulty will go out of business if they cannot lower operational costs whilst retaining the staff they need.
Alternatively, businesses can terminate existing staff, and hire new staff at lower salaries instead. This means existing staff are forced to become unemployed instead of simply having a lower wage.
It might feel unfair for an employee to be moved to a lower wage, but which is better, for employees to remain employed at a lower wage, or for the business to close down, rendering all staff and business owners without an income?
Bad policies can make a bad situation much worse – we have to be careful to not let good intentions cloud this reality from our judgement and decision-making.