2016 Year-End UK Employment Update

January 10, 2017

The year of 2016 has provided some unexpected political and legal developments impacting on all areas of law, with employment being no exception.

A brief overview is provided below.  More detailed information is available by clicking on the appropriate links to the Appendix. 

Holiday pay

Recent developments on the position of calculating holiday pay have caught many employers by surprise. The consequence for employers is that they must now take into account bonuses, commissions and other types of overtime when calculating holiday pay. We had hoped that the Court of Appeal would provide more clarity on what this means particularly in relation to the "look-back period", but that was not the case and so we will have to wait for both cases to go to the next level of appeal in 2017.

Restrictive covenants

The enforceability of restrictive covenants was also a hot topic in 2016. Employers may be able to recover compensation for breach of restrictive covenants even though unable to prove associated financial loss. Similarly, the court has demonstrated a willingness to apply a more liberal approach to the enforceability of restrictive covenants in share purchase agreements.

Vicarious liability

2016 saw two cases potentially extend vicarious liability for employers. In the first case, a prison catering manager was injured by the negligence of a prisoner and in the second, a customer was assaulted by a member of staff following an argument. In both cases the employer was found to be vicariously liable.

TUPE

Several Employment Appeal Tribunal cases is 2016 tackled some difficult questions regarding the application, and interpretation of TUPE to service provision changes. Service provision changes have always been a vexed area, and have been subject to debate and uncertainty due to tribunals taking different interpretations of TUPE. While the three recent cases below consider very specific and technical areas of TUPE, they all serve as a helpful lesson that it is necessary to carefully consider and analyse the circumstances leading to a service provision change before determining whether TUPE applies.

Gender pay gap reporting

The government has published draft Gender Pay Gap Regulations set to come into effect in April 2017. These regulations require affected employers to publish details of the gender pay gap within their organisations, with the first reports to be published in April 2018. Affected employers should consider taking preparatory steps in relation to their new reporting obligations in the new year, looking into how best to collate and analyse the required information and how to address any gender pay gaps amongst their staff.

BREXIT

We could not finish without acknowledging the decision on 23 June 2016 by the majority of British people to leave the European Union. You will no doubt have been inundated with Brexit related updates, and unfortunately it requires some crystal ball gazing for people to look ahead at what the legal landscape may look like further down the line and after Article 50 is triggered. There will be no immediate impact on the employment law landscape following the referendum decision, but in the coming months the Government will need to decide the extent to which it wishes to retain laws which have been enacted as a result of EU Directives. The two most significant of these laws in the employment sphere will be TUPE and the Working Time Directive.

Since the appointment of our new Prime Minister Theresa May and other senior cabinet members, we have seen early signs from the Government that while we may see some fine tuning in the areas of employment law impacted by EU Directives, we are unlikely to see any wholesale changes following Brexit. Perhaps more significant are the recent comments from the new Prime Minister that she plans to make changes to the way that company boards are made up which may see worker representatives on company boards, and changes to the way board members of public companies are paid.

We will update clients as and when concrete proposals emerge. In the meantime, please do not hesitate to get in touch with any member of the London employment team with questions about how any of the above developments may affect your business or your employees.

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APPENDIX

Where does the law stand on holiday pay and what should I do about it?

 As you may have read, the position on holiday pay has been thrown into confusion by two recent decisions (Bear Scotland Ltd v Fulton and others UKEATS/0047/13 and British Gas Trading Ltd v Lock and another [2016] EWCA Civ 983). As a consequence, employers must take into account bonuses, commissions or certain types of overtime which are "intrinsically linked" to an employee’s remuneration when calculating holiday pay, such that the well-established practice of calculating holiday pay by reference to basic salary only is susceptible to challenge. As a result, employers should consider their practices in relation to holiday pay when preparing a company or business unit for sale, when conducting due diligence on a potential purchase and also when structuring remuneration packages. It should be noted that both decisions are being appealed to the next appellate court. Whilst we don’t expect the premise behind the decisions to change, we are looking for clarification of exactly what should be included for the purposes of calculating holiday pay and the "look-back" period for calculating holiday pay.

Bear Scotland v Fulton

The EAT’s decision in Bear Scotland was that normal "non-guaranteed" overtime (overtime that the employer is not obliged to provide) should be included in the calculation of holiday pay where it comprises part of "normal remuneration". Whether certain aspects of an employee’s remuneration is "normal" should be assessed on the facts, however the EAT did indicate there was a time component involved, so the regularity of payments should be considered. The extent of potential claims for unlawful deductions from wages was limited somewhat by the EAT’s view that a series of unlawful deductions from wages (for miscalculated holiday pay), would be broken if there was a gap of more than three months between any two deductions. Claims also have to be brought within three months of the last in the series of deductions (save for certain exceptions).

Following this ruling, the government introduced a task force to assess the impact on employers and what it saw as "the potentially damaging impact of large backdated claims". The task force led to the January 2016 introduction of the Deduction from Wages (Limitation) Regulations 2014. These regulations prevent an Employment Tribunal from considering deductions made over 2 years before the unlawful deductions claim is presented.

British Gas v Lock

This year, attention soon turned to the Court of Appeal’s decision in British Gas. The Court of Appeal confirmed the EAT and the Tribunal’s view that commission payments regularly received by a salesman had to be included in the calculation of his holiday pay and the Working Time Regulations 1998 could be interpreted to require such additional remuneration to be included. The payments were considered to be "intrinsically" or "directly" linked to the performance of tasks under his contract of employment. This has potentially significant implications for employers if they make regular payments of commission or bonuses or other remuneration that are intrinsically linked to the role the employee performs and they do not already incorporate such amounts in calculating holiday pay.

British Gas concerned an employee whose income was in large part bolstered by success-related commission payments. Whilst he was on holiday, as he was not working, he did not have the opportunity to earn commission, so his income was reduced for the weeks following such leave. The approach taken by the EAT, and upheld by the Court of Appeal, recognised that as the employee’s commission was not linked to the amount of time or work he did, but instead the success of work done, any holiday pay calculation would not be required to be reflective of a reference period of 12 weeks (as would ordinarily be the case for employees with normal hours but variable pay). The practical impact of this set of circumstances was that the employee was in effect deterred from taking holiday he was entitled to, which the Court sought to remedy with its decision.

The Court of Appeal did not provide any practical guidance on calculation of compensation for the employee concerned, or importantly how holiday pay should be calculated in similar circumstances, which will need to be decided by the Employment Tribunal, subject to British Gas’s appeal to the Supreme Court, so this guidance is potentially months or years away from being provided.

Why does this matter?

As set out above, employers may wish to review their approach to holiday pay to identify any potential liabilities in light of these cases, and should bear these cases in mind when preparing a company or business unit for sale, when conducting due diligence on a potential purchase and when structuring remuneration packages. Any internal review should however be done with caution, as documentation or other records produced internally as part of such process could become disclosable if there is subsequent litigation. Given the lack of clarity on the practicality of the calculation of holiday pay from both decisions, calculations of holiday pay for the present and going forwards are not prescriptive. There will need to be some assessment of the types of payment employees are receiving, and where there are elements of remuneration that may need to be incorporated into holiday pay calculations, appropriate reference periods considered. It may be that the previous twelve weeks will fairly reflect normal remuneration, but depending on timing of payments it could be that a longer reference period will be appropriate.

As set out above, we are hopeful for clarification on these points from the Court of Appeal and Supreme Court. It is not yet clear when judgment on the Bear Scotland appeal will be handed down or when the British Gas appeal will be heard. We will watch developments and keep you updated.

Can’t prove financial loss?  Employers are now One Step closer to a remedy. . . 

As an employer, what can you do if your employees have breached the contractual duties owed to you, such as joining a competitor in breach of a non-compete restriction or taking your confidential information? The basic principle is that you can pursue the culprit for an injunction, i.e. preventing them from taking the action they wish to take. But what if you want financial recovery? You can pursue a simple damages claim, intended to put you in the position you would have been in if the contract had not been breached. If the individual owes you fiduciary duties (directors or senior executives), then you can also pursue them for an account of profits. So far, so good. The issue however, is that loss can be very difficult (if not impossible) to establish in these cases – for example, if a non-compete is breached, you must show how much business has been lost as a result of the breach and you will need to defend arguments that the work would have been lost in any event.

The good news, following the recent Court of Appeal decision of Karen Morris-Garner and Andrea Morris-Garner v One Step (Support) Limited [2016] EWCA Civ 180, is that employers may have a further remedy in such circumstances. Here, the court gave guidance on the circumstances in which damages may be awarded to the former employer by the ex-employee where no loss can be established through asking a hypothetical question: "if the parties to the litigation had negotiated in good faith for the business being seized by the culprit, how much would he have paid to take the business and effectively buy out his restrictions". A novel question and a potentially very useful tool for employers.

The facts

In the case of Karen Morris-Garner and Andrea Morris-Garner v One Step (Support) Limited, Mrs Karen Morris-Garner had been a director and 50% shareholder of One Step. In December 2006, she sold her shareholding in One Step for £3,150,000, resigned as a director and agreed not to compete with or solicit clients or customers of One Step for a period of three years. Mrs Andrea-Morris-Garner (Mrs Karen Morris-Garner’s civil partner and a senior employee of One Step) left the company at the same time and entered into similar restrictive covenants with One Step. Unbeknownst to One Step, the Morris-Garner’s had already, the previous July, incorporated a company by the name of Positive Living. The business was successful and sold by the Defendants in September 2010 for £12,823,205.

One Step alleged that the Defendants had breached their restrictive covenants, and Karen Morris-Garner had breached her obligations of confidence to One Step, by establishing and operating Positive Living. The Defendants denied any breach of covenant or obligation of confidence.  As is often the case for employers, One Step were unable to prove identifiable financial loss.

High Court

At first instance, the High Court held that the Defendants had been in breach of both the non-compete and non-solicitation covenants and that Karen Morris-Garner had breached her obligations of confidence to One Step.

On the question of remedies, the Court held that the case was not sufficiently exceptional to justify an account of profits, but was a "prime example" of a case in which, notwithstanding that One Step could not prove identifiable financial loss, damages should be and were available. It was therefore just for One Step to have the option of recovering damages in the amount which might reasonably have been demanded for release of the restrictive covenants.

Court of Appeal

The Morris-Garners appealed on this point, saying that such damages were not the appropriate award. The Court of Appeal held that damages are not restricted to cases where a claimant has suffered "no identifiable financial loss", nor must the case be "exceptional", factors which emanate from a principle known as Wrotham Park damages, following a property case in the 1970s. In this case it was held that if it would be "the just response" to award a financial sum the equivalent to that which would notionally have been agreed between the parties, acting reasonably, as the price for a release of a restriction or other provision in a contract at the time the parties entered into the contract, then the courts may do so, in addition to any other award made.

Why does this matter?

The precise scope of the One Step decision, and the scope of what is a "just response", remains to be seen, and it is important to note that two of the judges in the Court of Appeal emphasised that this was not a typical case. It will be interesting to see how this decision impacts on the number of Wrotham Park awards sought, and the number of awards actually made.

This more holistic and far reaching analysis for awarding these types of damages for breach of covenants is however a warning for those who breach restrictions or other provisions in a contract that such charges can be levied beyond the scope of non-identifiable financial loss, especially in employment and sale of business cases, and it may prove a very helpful tool in settlement negotiations for employers bringing or threatening to bring a claim against employees who have acted in breach of employment restrictions. Morris-Garner has been granted leave to appeal this decision to the Supreme Court. We will watch developments and keep you updated.

Rush Hair Ltd v Gibson-Forbes & Anor [2016] EWCA 2589 (QB)

The facts

The first defendant, operated a number of hairdressing salons under a franchise agreement with Rush Hair Limited over the course of around six years. On 9 March 2015, the first defendant and the claimant entered into a share purchase agreement ("SPA") for the sale of two of the salons (the "Companies") established by the first defendant under the franchise arrangement. Under the SPA, just over half the consideration would be payable on completion, with the balance payable six months later, provided there had not been a breach of the agreement by the first defendant, in which case the deferred consideration would not be paid. The SPA had restrictive covenants including: (i) a non-solicitation and non-employment of certain named employees of the Companies, and (ii) non-compete with the "Rush business" (an undefined term) in a two-mile radius of where the Companies currently trade for two years from completion.

The first defendant subsequently employed two of the individuals named in the non-solicitation covenant of the SPA, so the claimant did not pay the outstanding balance of the purchase price under the SPA. In July 2016, the first defendant and her husband set up a new company ("Newco") and opened a salon within two miles of one of the Companies. Newco also engaged one of the individuals named in the non-solicitation covenant in the SPA as a consultant. The consultancy agreement was signed "for and on behalf of" Newco.

High Court

The judge did not accept the claimant’s assertion that the first defendant set up her new company to engage the individual named in the non-solicitation covenant in the SPA, as the first defendant habitually ran her business through a limited company.

Enforceability and breach of non-solicitation and non-employment restriction in the SPA

The judge found that the non-solicitation and non-employment provision was reasonable and enforceable, despite its two-year duration and the absence of geographical scope. The claimant had a legitimate business interest to protect and whether the provision was ‘reasonably necessary’ to protect that interest should be assessed at the date of the SPA with regard to the facts of the situation. The claimant was entitled to protect the goodwill of the businesses, an important part of which was the personal relationship between stylists and customers, and without which the claimant would not have been willing to pay anything for the Companies. It was held that there should be a less rigorous approach to analysis of enforceability of covenants in an SPA, and it was not accepted that the inequality of bargaining power of the parties in negotiating the SPA (as the business could only in reality have been sold to the franchisor), would render the covenants unreasonable. Finally, the absence of a similar restriction in the franchise agreement was not decisive.

As drafted, the restriction appeared to only prevent the first defendant from employing the named individuals directly, whereas the individuals had been employed by the first defendant’s company. However, the judge found that the provision was sufficiently ambiguous that it was appropriate to give the clause a commercially sensible meaning, extending it to apply to the first defendant acting as agent for her limited company. As part of the analysis of what was commercially sensible, it was relevant that both parties were aware of the first defendant’s use of a limited company to run her salons. For this reason, the claimant had been entitled to withhold the deferred consideration due under the SPA. The first defendant’s breach of this provision extended to the consultancy agreement entered into with a third individual on the basis that "employment" was a contractual relationship between two persons in which one provides work to the other, which the other does for remuneration.

Enforceability of non-compete provision in the SPA

The judge did not accept that the lack of definition of "Rush business" rendered the restriction void for uncertainty. In the context of the SPA as a whole it was clear the reference meant the claimant’s hairdressing business. The interest being protected by the non-compete restriction was legitimate and the geographical scope (of two miles) and duration (of two years) was reasonable, and breach of this restriction in the second year after the SPA could still cause real loss to the claimant’s business.

It appears to have been conceded that if the non-compete provision was enforceable; the first defendant was in breach by having set up Newco.

Repudiation of the SPA

A final point considered was whether a letter from the claimant’s company stating it was seeking repayment of sums paid under the SPA had the effect of repudiating the SPA. This argument was rejected on the basis that at the time of the letter, the claimant had no further substantial obligations under the SPA, in contrast to the first defendant who was still bound by the restrictive covenants, and there was no conscious intention by the claimant to bring the SPA to an end.

Why does this matter?

This case emphasises the need for due attention to be paid to the drafting of restrictive covenants in SPAs to avoid or limit challenges as to enforceability. Additionally, provided restrictions are reasonable (taking into account the factual matrix at the time of the agreement) and go no further than is reasonably necessary to protect a legitimate business interest, the courts have shown they are willing to enforce covenants even where they would be unlikely to be enforceable in an employment contract.

The law on vicarious liability is still on the move 

Two 2016 Supreme Court cases have extended the circumstances in which an employer can be held vicariously liable for the actions of its employees (Mohamud v WM Morrison Supermarkets plc [2016] UKSC 11 and Cox v Ministry of Justice [2016] UKSC 10). The courts have expanded the category of relationships which will be sufficiently ‘akin to employment’ (Cox), as well as expanding the situations where there will be a sufficient connection between the nature of the job and the wrongful conduct (Mohamud). The consequences for businesses could be significant.

Background

Vicarious liability in tort requires two things: first, a sufficient relationship between the defendant and the wrongdoer, and second, a connection between that relationship and the wrongdoer’s act or default, such as to make it just that the defendant should be held legally responsible to the claimant for the consequences of the wrongdoer’s conduct. Cox considered the former of these questions, whilst Mohamud considered the latter.

Originally, the doctrine of vicarious liability was confined to cases where a wrongdoer was employed by a defendant. It was later recognised that a relationship can give rise to vicarious liability even in the absence of a contract of employment.

Facts and analysis of the two cases

Cox v Ministry of Justice

Mrs Cox was catering manager at a prison and was in charge of four members of staff, and supervised about 20 prisoners who worked in the prison kitchen. Cox instructed four prisoners to transfer some kitchen supplies. A sack of rice was dropped by one of the prisoners, and it burst open. Cox bent over to try to stop the spillage and in the meantime another prisoner lost his balance and negligently dropped a sack of rice onto Cox’s back.

The County Court held that the Ministry of Justice was not vicariously liable for the prisoner’s negligent act. The Court of Appeal allowed Cox’s appeal. The Ministry of Justice appealed to the Supreme Court arguing, among other things, that the relationship between the prison service and prisoners working in a prison is fundamentally different from that between a private employer and its employees. It does not seek to make a profit, but rather acts in the public interest. Crucially, unlike employees, prisoners have no interest in furthering the objectives of the prison service. The Supreme Court rejected this argument. It held that prisoner’s activities form a part of the operation of the prison, and are of direct and immediate benefit to the prison service itself.

Mohamud

Mr Mohamud stopped at a petrol station which formed part of a Morrisons store. Mr Mohamud went into the kiosk and asked if he could print some documents on a USB stick he was carrying. Mr Khan, who was on duty at the time, replied in expletive terms that he could not. Mohamud objected to being sworn at, and Mr Khan then used foul and racist language to order Mr Mohamud to leave. He returned to his car, and when he was about to drive off, Mr Khan approached the car, opened the passenger door and told Mr Mohamud to never come back. When Mr Mohamud asked Mr Khan to get out of the car, Mr Khan punched Mr Mohamud in the head and went on to attack him further. Mr Khan ignored the instructions of his supervisor, who tried to stop the attack.

Mr Mohamud brought a personal injury claim against Morrisons, and the issue arose whether Morrisons was vicariously liable. The Supreme Court found that the acts of Mr Khan were sufficiently connected to this employment for it to be just that Morrisons was held liable.

Analysis

On the one hand Cox provides some much needed clarity on the law of vicarious liability by specifying clear criteria by which employers can be held vicariously liable for the acts of workers they do not directly employ.

The consequences of Mohamud are less clear. Employers may be anxious that they will now be liable for reckless acts of their employees whilst at work. The judgment appears to not clarify the position on whether employers will be vicariously liable for the acts of their employees but rather is an illustration of the broad approach that the courts already take to the "close connection" test. What is clear though is that the court will place specific emphasis on the individual facts in question.

What does this mean for you as an employer?

Generally, employers can avoid vicarious liability by adopting a range of measures. An employer can shield themselves from liability for the discriminatory acts of their employees by making sure that they take reasonable steps to encourage employees to behave appropriately, for example, by establishing appropriate policies and training, and conducting thorough background checks prior to the commencement of employment.

The same principles apply in relation to contractors. These cases highlight that care must be taken when outsourcing work to contractors. The increased exposure to the risk of vicarious liability means that employers should try to negotiate greater contractual protection (such as indemnification against vicarious liability) with outsourcing providers.

TUPE or not TUPE? The question is clarified in relation to service provision changes

A partial transfer of a service may trigger TUPE

In Arch Initiatives v GMW Mental Health NHS Foundation Trust & Others [2016] UKEAT/0267/15/RN the Employment Appeal Tribunal determined that there could be a service provision change under the Transfer of Undertakings (Protection of Employment) Regulations 2006 ("TUPE") where only part of the service being carried out by the transferor is subsequently performed by the transferee. The case clarifies an area of TUPE which was previously unclear and it is a departure from the previous position which was that in a service provision change the whole of a particular service must transfer before the regulations would be triggered.

The case considered a scenario where Bolton Council re-tendered services that were provided by GMW, splitting the services into two separate functions which were awarded to two separate service providers. It was held that TUPE did not apply because there could not be a transfer of part of a service.

Two questions must be satisfied by a transfer to trigger a service provision change:

• were the activities carried out by the employee post-transfer fundamentally the same as the activities they carried out pre-transfer (as per regulation 3(2A) TUPE)? and
• pre-transfer, was there was a group of employees whose principle purpose was to carry out those activities for the client? This is a question of fact and degree and there is no reason to limit the number of organised groupings of employees in any service provision change.

If both of those questions can be satisfied a service provision change will be triggered. The case is an important reminder that service provision changes will not always be clear cut, and that it is difficult to avoid the application, and consequences of TUPE.

"Organised grouping of employees" to be assessed immediately before the transfer

In order for TUPE to be triggered by a change in service provider there must be an "organised grouping of employees" whose principal purpose is carrying out the transferring activities for the relevant client. In Amaryllis Limited v MacLeod [2016] UKEAT/0273/15/RN, the Employment Appeal Tribunal considered the point at which an employer must assess whether an organised grouping of employees exists.

The case concerned a furnishing company that had carried out work for the Ministry of Defence for over 50 years. In 2014, the contract for furnishing renovations was retendered and awarded to Amaryllis Limited. At first instance, the Employment Tribunal held that TUPE applied to the transaction, and that employees of the furnishing company should have transferred to Amaryllis under TUPE because the purpose of the furnishing department was originally to service the MoD, although immediately prior to the transfer that group of employees serviced a number of customers, of which the MoD was the largest.

On appeal, the EAT held that the relevant time to look at whether there is an organised grouping of employees is immediately before the transfer. Here, while there may have been such a grouping in the past, immediately before the change the group was not dedicated to carrying out activities on behalf of the MoD. Accordingly, TUPE did not apply.

This case highlights the difficult technical questions which need to be considered when assessing whether TUPE applies to a service provision change.

A temporary cessation of activities pre-transfer may not defeat TUPE

In Mustafa and another v Trek Highways Services Limited [2016] UKEAT/0063/15/B, the EAT considered whether the temporary cessation of activities prior to a transfer was sufficient to justify a finding that TUPE did not apply. The Employment Tribunal at first instance held that because a sub-contractor’s employees had been laid off as a result of a commercial dispute 12 days before the service was transferred, TUPE did not apply. In reaching this decision the Employment Tribunal held that the employees were not employed "immediately before" the transfer as required by TUPE.

On appeal, the EAT remitted the case back to the Employment Tribunal. It held that although the employees had not carried out work "immediately before" the transfer, this temporary cessation did not necessarily prevent the employees transferring. A temporary cessation of work, here due to a commercial dispute, did not automatically mean that there was no longer an "organised grouping of employees".

In light of the EAT’s decision, employers will need to consider the length and reason for a temporary cessation of work before determining whether employees in such a situation transfer under TUPE.

Gender Pay Gap reporting

Subject to Parliamentary approval, the draft Equality Act 2010 (Gender Pay Gap Information) Regulations 2017, which will come into force on 6 April 2017, will require large private and voluntary sector employers (but not public sector employers), defined as those companies with 250 or more employees on 5 April of each year, to report on their gender pay gap.

The final draft regulations were published on 6 December 2016 together with a draft Explanatory Memorandum. The government’s formal response to the consultation followed on 9 December 2016.

The government has announced an intention to publish guidance which will hopefully deal with some of the trickier aspects that remain unclear. That guidance, however, will not be published until the regulations have received parliamentary approval.

Which employers are affected? 

The regulations will apply to any "relevant employer", which is a private or voluntary sector employer with 250 or more employees on the "snapshot date" (this is 5 April in the relevant year). "Employer" is not defined but the regulations clearly suggest it would include companies, LLPs, partnerships, limited partnerships, unincorporated bodies or any other types of employing entity. Public sector employers are outside the scope of these regulations, however, the government plans to introduce similar reporting obligations for public sector employers within the same timeframe.

The government response has confirmed that each company in a group is to be considered as a separate entity for gender pay gap reporting, the rationale being that single-entity pay gap reporting is "more meaningful" than group-level reporting as a group’s subsidiaries may operate across a wide range of sectors and the government wants senior leaders at each individual employer to take ownership of the issue in respect of their workforce. This means that the obligation to prepare a gender pay report will be triggered by having at least 250 employees working for an individual entity, meaning that a group of companies will have only some of its entities covered by the regulations, or that the whole group could be outside the scope of these requirements if it does not have any single entity that employs 250 or more employees. Furthermore, large corporate groups may find that they have to produce several reports, one for each separate entity that employs 250 or more employees. Moreover, senior executives are sometimes engaged through a different entity to the remainder of the company’s workforce. In such cases, their pay and bonuses may fall outside the gender pay gap reporting duty, or at least would be reported separately.

Which employees are affected?

"Employees" for the purposes of the 250-employee threshold are defined by reference to a wide definition of employment. There are a number of factors which will determine how wide that definition goes.

Those likely to fall within scope

LLP members: there is a possibility that LLP members may be included in the threshold.

Casual workers: whether or not a casual worker will count towards the 250 threshold will depend on the type of contract they are engaged on. For example, a casual worker engaged on an umbrella contract will count towards the threshold even if they have not been given any assignments during the pay period. However, a worker who is engaged on a contract where there is no mutuality of obligation between assignments will only count towards the threshold if they have actually been engaged on an assignment on 5 April.

Contractors: contractors may also come within the scope of the regulations if they are employed under a contract that obliges them to perform the work personally, for and under the direction of another person: in other words, they must be in a relationship of subordination and must not be permitted to sub-contract any part of the work or employ their own staff to do it.

The government has acknowledged that the inclusion of casual workers and contractors may cause practical difficulties for employers in terms of reporting and so the final draft regulations contain an exclusion for contractors for whom the employer does not have, and it is not reasonably practicable for them to obtain, the relevant data.

Employees working overseas: employees who are permanently based abroad may be included in the scope of the reporting requirements, however, there is some uncertainty over the extent to which foreign-based employees may be covered. The government response to the consultation on draft regulations suggests that the regulations cover "those who are not based in Great Britain but are still regarded as being employees of employers within scope … because of a close connection with Great Britain".

Those likely to fall outside of scope

Agency workers: agency workers will generally be regarded as employed by the employment business that supplies them, rather than by the end user.

Employees on leave: employees are now excluded from the pay reporting obligation if they receive less than full pay as a result of leave. Only full-pay relevant employees are taken into account on the snapshot date for the calculations relating to mean and median hourly rates of pay, or the proportion of male and female employees in each quartile (but note that all relevant employees are included in the calculation of the gender bonus gap).

What counts as pay?

Employers will be required to report on "pay" and "bonus pay".

"Pay" is defined as basic pay, bonuses, allowances (such as on-call and standby allowances), pay for piecework, pay for leave (but only fully paid leave) and shift premiums. It excludes overtime pay, expenses, benefits in kind and the value of salary sacrifice schemes.

"Bonus pay", which is included in both the headline gender pay gap (albeit on a pro-rated basis if necessary) and the separate gender bonus gap figures, is defined as remuneration in the form of money, vouchers, securities, securities options or interests in securities which relates to profit sharing, productivity, performance, incentive or commission.

The relevant period for bonus pay reporting is the 12-month period ending on the snapshot date. Note that where the bonus relates to a period of longer than a year (for example, a long-term incentive that relates to a period of, say, three years) there is no provision for pro-rating for the separate bonus pay gap.

The regulations set out detailed step-by-step guide to how to run each calculation which is welcomed.

What is required in the report?

Affected employers must publish:

• Overall gender pay gap figures for relevant employees, calculated using both the mean and median average hourly pay;
• The numbers of men and women in each of four pay bands (quartiles), based on the employer’s overall pay range;
• Information on the employer’s gender bonus gap, that is, the difference between men and women’s mean and median bonus pay over a 12-month period; and
• The proportion of male and female employees who received a bonus in the same 12-month period.

Employers will also have the option to include a narrative explaining any pay gaps or other disparities, and setting out what action, if any, they plan to take to address them.

Timing and publication

Affected employers must analyse their gender pay gap each April, and publish their gender pay gap report within 12 months. The report must be published on their own website and kept online and publicly available for three years. They must also upload the information to a government website.

Enforcement

The draft regulations do not contain any enforcement provisions or sanctions for non-compliance. However, the government has stated in the Explanatory Memorandum that the Equality and Human Rights Commission will be able to use its existing powers of enforcement to conduct investigations if it suspects that the company has not complied. It has also stated that it will run checks to assess for non-compliance, publish tables of employers’ reported gender pay gaps, and might establish a database of compliant employers.

What should employers be doing now to prepare?

There are several steps that employers should consider taking in preparation for the new regime:  

• Identify whether they are a relevant employer, i.e. will they have 250 or more "employees" as at 5 April 2017;
• Identify any areas of uncertainty over who is in scope, for example, in relation to casual workers or contractors and employees based overseas but employed by a UK entity;
• For groups of companies, consider which employing entities will be relevant employers for the purposes of the regulations, and identify how many separate gender pay gap reports will need to be produced. Some employers may wish to consider a corporate restructure, so as to be comprised of smaller entities with less than 250 employees in each;
• Consider the remuneration packages offered to employees and analyse which elements would be reportable under the regulations;
• Calculate the gender pay gap information under the regulations to assess how big the gap is likely to be when the first report is published, and to identify any issues which may be harmful to the employer’s reputation when published. Consider instructing external consultants to prepare the draft gender pay gap information;
• ·         Consider the potential contents of any narrative which will accompany the gender pay gap information and whether any additional, more comprehensive, data will be produced, going beyond the basic requirements of the regulations; and
• Identify the senior individual who will sign the written statement confirming the accuracy of the published information. Ensure that this person is familiar with the regulations and that they are prepared to be involved in producing the gender pay gap information.

The regulations will pose different challenges for each employer, so our advice to businesses is to engage with the new regime as soon as possible, to ensure a full understanding of what the regulations mean for them and to plan an effective internal and external communication strategy around the publication of their gender pay report.