UK Employment – 2014 Mid-Year Review

July 29, 2014

In this alert we review recent key developments in UK employment law and look forward to some significant changes that are on the horizon later in the year and in early 2015.

A headline summary is provided below.  A more detailed explanation and analysis is available by clicking on the appropriate link. 

  • The Transfer of Undertakings (Protection of Employment) Regulations 2006 ("TUPE")
    • We consider the impact of a couple of recent decisions handed down by the UK courts, including:
      • whether TUPE transfers can occur in a share sale context in certain circumstances; and
      • the need for careful drafting when describing the activities to be carried out under a services agreement for the purposes of determining whether TUPE applies on a change of service provider or "insourcing".
    • We also summarise recent changes to the rules requiring a transferor (commonly the seller of a business) to provide employee liability information to a transferee (commonly the buyer of a business) concerning transferring employees.  
    • Click here for more details.
  • Employment risks associated with LLP structures
    • We consider the impact of recent changes to the law according to which some UK limited liability partnership ("LLP") members who have been taxed as self-employed will now be taxed as if they are employees, as well as a recent Supreme Court decision considering whether members of a UK LLP can be "workers" for the purposes of UK employment protection.
    • Click here for more details.
  • Flexible working
    • We consider the circumstances in which, following recent changes to the law, an employee may now submit a request for flexible working for any reason and their employer must consider this in a reasonable manner, within a three month period.
    • Click here for more details.
  • On the horizon
    • Looking ahead, we highlight:
      • Proposals from the Prudential Regulation Authority ("PRA") to amend rules on the claw-back of bonuses in the financial services sector which are due to come into force on 1 January 2015.
      • The new system on shared parental leave due to come into force in April 2015.
    • Click here for more details.

The Transfer of Undertakings (Protection of Employment) Regulations 2006 ("TUPE")

TUPE case update

We consider two interesting TUPE decisions handed down by the UK courts over the past few months, which deal with the following principles or issues:

Share purchases and TUPE – TUPE applies on a relevant transfer, which includes the transfer of an undertaking (or part of an undertaking) where there is a transfer of an economic entity that retains its identity before and after the transfer.  Generally, in the context of a share sale there will be no TUPE transfer, because there is no change in the identity of the employer.  However, in the case of Jackson Lloyd v Smith the Employment Appeal Tribunal ("EAT") upheld a finding by an Employment Tribunal that employees of a target company TUPE transferred to the parent following an acquisition of that target company’s shares in circumstances where, following the acquisition, the parent:  (i) indicated an intention that target employees would be moving to the parent; (ii) appointed an on-site integration team; and (iii) acquired day to day control of the target company.  Surprisingly, a TUPE transfer was found to have taken place notwithstanding that the assets of the subsidiary did not transfer to the parent. 

The Employment Tribunal appeared swayed by the view that it is not typical for a parent company to take over the day to day management of a target company, rather than act as shareholder.  However, in our experience this situation is not uncommon.  Trade buyers wishing to integrate a newly acquired subsidiary should take note.

Contractual description of ‘activities’ in an SPC can be relevant – TUPE applies on a service provision change ("SPC") where certain conditions are met – SPC’s can include both first and second generation outsourcings of an activity by a client as well as the insourcing of such activities, when they are taken back "in-house".  TUPE may apply in the context of an SPC which occurred on or after 31 January 2014 if the activities that are to be carried out following the SPC are "fundamentally or essentially the same" as those carried out beforehand. 

In the case of Qlog Limited v O’Brien and others, the EAT held that the Employment Tribunal was entitled to take into account the description of activities included in the contractual documentation when assessing whether the nature of the activities was fundamentally or essentially the same as those carried out beforehand.  Notwithstanding the fact that the relevant activities were carried out in a very different way by the new service provider, the contractual agreement evidenced an intention that the activities themselves were continued, which meant that there was a SPC under TUPE.  In this case, the contract had been written up a year after the arrangements were put in place which did lend force to the argument that the contractual terms reflected the reality of the arrangement.  Nonetheless, employers should bear in mind that contractual documentation can influence the assessment as to whether TUPE applies and subsequently whether they will inherit transferring employees and associated liabilities in an outsourcing or insourcing scenario.

Changes being made to TUPE

In our January newsletter we reported on the changes being made to TUPE by the Collective Redundancies and Transfer of Undertakings (Protection of Employment) (Amendment) Regulations 2014 (the "Amended Regulations").  The Amended Regulations came into force on 31 January 2014, although certain provisions had commencement dates later in the year:

  • Employee Liability Information – TUPE previously required transferor employers to provide transferee employers with Employee Liability Information ("ELI") about transferring employees (including identity and ages of employees, particulars of employment, information relating to claims or possible claims, collective agreements) at least 14 days before the relevant transfer, unless special circumstances prevented this.  In respect of any transfer that has taken place on or after 1 May 2014, the Amended Regulations now require transferor employers to provide ELI to transferee employers at least 28 days before the relevant transfer to help them understand the rights and obligations that they are acquiring and for the process to run more effectively. 
  • Consultation requirements for micro businesses – For transfers that take place on or after 31 July 2014, micro businesses (those with 10 or fewer employees) will be allowed to inform and consult employees directly regarding transfers, rather than via elected representatives, in circumstances where there is neither a recognised union nor any existing representatives in place.  This measure, aimed at reducing the burden on small businesses by affording them a proportionate approach, is to be welcomed, particularly in view of the penalties on businesses for failure to inform and consult. 

Employment risks associated with LLP structures

Taxation treatment of profit shares

With effect from 6 April 2014, Her Majesty’s Revenue and Customs ("HMRC") introduced a change to the taxation treatment of profit shares for members of a UK limited liability partnership ("LLP"), such that certain LLP members can be treated as "salaried members" (employees of the LLP for tax purposes) whose income is subject to UK employment tax and National Insurance (social security) contributions, where all 3 of the following conditions are met:

a)      disguised salary: at least 80% of the total amount payable by the LLP in respect of the member’s performance is either fixed or, if variable, varies without reference to the overall amount of the profits or losses of the LLP (or is not otherwise affected by such profits or losses);

b)      no significant influence over the LLP: the mutual rights and duties of individual members of the LLP and of the LLP and its members do not give the member significant influence over the affairs of the LLP; and

c)      capital contribution: the member’s capital contribution to the LLP is less than 25% of the total amount of the disguised salary (see above) which, at the relevant time, it is reasonable to expect will be payable by the LLP in respect of the member’s performance during the relevant tax year of services for the LLP in his or her capacity as a member of the LLP.

One of the biggest financial impacts on LLPs that these changes will have, if the conditions are met, is the payment of National Insurance contributions for affected members.

If at least one of the three conditions above is not met in relation to a member, then he or she will not be treated as a salaried member and his or her profit share will not be taxed on an employee basis (but will instead be taxed akin to a partner in a traditional partnership, i.e. on a self-employed basis).

Possible "worker" status of LLP members

Hot on the heels of these changes by HMRC is the recent Supreme Court decision that a member of an LLP can be a "worker" for the purposes of UK employment law in the case of Bates van Winkelhof v (1) Clyde and Co LLP (2) Morris [2014]. 

"Workers", for UK employment law purposes, includes individuals who have entered into or work under:

a)      a contract of employment (i.e.  employees); or

b)      any other contract, whether express or implied and (if it is express) whether oral or in writing, whereby the individual undertakes to do or perform personally any work or services for another party to the contract whose status is not by virtue of the contract that of a client or customer of any profession or business undertaking carried on by the individual.

Under UK law, "workers" enjoy some but not all of the statutory rights and protections afforded to employees, including protection against retaliation for whistleblowing, working time protections, paid vacation and automatic enrolment in a qualifying pension scheme.

In the aforementioned case, the Supreme Court, overturning an earlier decision of the Court of Appeal, concluded that Ms. Bates van Winkelhof (a former equity member of the LLP) was a "worker" and therefore enjoyed protection against retaliation for whistleblowing.  In reaching its decision, the Supreme Court concluded that Ms. Bates van Winkelhof could not market her services as a solicitor to anyone other than the LLP, she was an integral part of its business and the LLP was in no sense her client or customer and therefore met the statutory definition of a "worker".

It remains to be seen how LLPs will deal with their members going forward with regard to their potential "worker" status.  It will also be interesting to see whether the UK courts find themselves dealing with a number of further claims brought by LLP members in relation to these rights and protections.  It is important to note, however, that an LLP member "can" be a worker but will not always be so, and each case will turn on its own facts.

Flexible working

The law relating to flexible working in the UK changed with effect from 30 June 2014.  Now, any employee with at least 26 weeks’ continuous service has the right to make a flexible working request for any reason (this right was previously reserved for employees who were parents of children or carers of adults).  It is worth noting that this right is afforded to employees, as distinct from "workers", discussed above.  Employees are only permitted to make one request in any 12-month period.

Crucially, this is a right to make a request for flexible working and is not an absolute right to work flexibly.  Following the change in the law, employers no longer need to follow a formal statutory procedure when dealing with a flexible working request, but are instead required to deal with requests in a "reasonable manner".  The Advisory, Conciliation and Arbitration Service ("ACAS" – an independent body which aims to improve employment relations), has published a statutory Code of Practice ("Code") with guidance for employers.  An Employment Tribunal may take the employer’s compliance (or non-compliance) with the Code into account when deciding whether a flexible working request has been dealt with in a reasonable manner.

Employers must still deal with flexible working requests within three months of receiving them (this time frame includes any appeal that the employee may wish to make against the decision).  In essence, employers should meet with the employee as soon as possible to understand the request and particular circumstances, to then carefully consider the request being made.

UK law provides eight possible reasons which an employer may need to use when rejecting a request, such as the burden of additional costs or the inability to reorganize work among existing staff.  Employees should be informed of the decision as soon as possible and allowed to make an appeal.

On the horizon

Bonus claw-back (from 1 January 2015)

Following a period of consultation the Prudential Regulation Authority ("PRA") will, with effect from 1 January 2015, extend the Remuneration Code (which sets out the standards that banks, building societies and designated investment firms have to meet when setting pay and bonus awards for their staff), to ensure that the remuneration practices are consistent with effective risk management.  The proposal seeks to advance the PRA’s general objective to promote the safety and soundness of firms.

With effect from 1 January 2015, in line with the existing requirements on malus (the reduction or forfeiture of unvested variable remuneration), a firm should be able to "claw-back" vested variable remuneration when:

a)      there is reasonable evidence of employee misbehaviour or material error;

b)      the firm or the relevant business unit suffers a material downturn in its financial performance; or

c)      the firm or the relevant business unit suffers a material failure of risk management.

The PRA expects firms to amend employment contracts to allow for the application of claw-back to all vested variable remuneration on a group-wide basis up to six years after vesting.

Shared parental leave (April 2015)

Earlier this year the UK Government published draft regulations governing the new system of shared parental leave ("SPL") and pay, which are intended to come into force on 1 October 2014 and will apply to the parents of babies due (or children placed for adoption) on or after 5 April 2015.  SPL is being introduced under The Children and Families Act 2014 which introduces several changes for working parents.  The new system will effectively allow parents to share the statutory leave and pay that is currently only available to mothers under the maternity leave and pay system.  The Government has indicated that it hopes that the new law will challenge the old-fashioned assumption that it is the mother’s role to be the primary carer and encourage more fathers to play a greater caring role, eradicate gender bias, and enable both parents to retain a strong link with the labour market.  These are high hopes and it will be interesting to see how the system contributes to such shift in views.

The key elements of SPL are:

  • The default position shall remain the same in that, subject to meeting certain qualifying conditions, women shall be entitled to 52 weeks’ statutory maternity leave, of which 39 weeks shall be paid.  An initial two-week period of compulsory maternity leave shall continue to apply.
  • Should the woman choose to curtail her maternity rights or return to work, she may opt into the SPL system instead.
  • Under SPL, qualifying parents will be able to share between them the outstanding balance of the mother’s statutory maternity leave and pay at the point of curtailment or return to work; i.e. a maximum of 50 weeks of SPL and 37 weeks of shared parental pay ("SPP") shall be available (six weeks paid at the higher rate and 33 weeks at the lower rate) on the basis that the first two weeks of maternity leave must continue to be taken by the mother as compulsory maternity leave.
  • Qualifying parents shall be able to take leave at the same time or separately, as long as the total leave taken does not amount to more than 52 weeks.
  • The leave may be taken in discontinuous or concurrent blocks, which must be accepted by each employee’s respective employer.
  • Notice requirements shall apply.  Employees must give their employer at least eight weeks’ written notice before the start of each block of SPL and SPP, containing certain information and declarations.  Employees must also provide a non-binding indication of what their expected pattern of leave will be at the outset. 
  • Employers shall not be obliged to agree to the pattern proposed, although they will not be able to refuse leave altogether.  If agreement cannot be reached then the system provides a default position such that the employee shall take the leave in a continuous block, to start at a date that they choose.
  • Employees will be able to take up to three separate blocks of leave, or make three changes to the plan proposed, unless otherwise agreed with their employer.
  • Employees will have 20 Keeping in Touch ("KIT") days (which allow the individual on maternity leave or SPL to attend work during leave).  These KIT days will be in addition to the 10 KIT days that a mother is entitled to during her statutory maternity leave.
  • Employees returning to work from SPL will have the right to return to the same job if they have taken 26 weeks or less leave in total.  This applies whether or not the leave has been taken in one block or not.  Where the leave taken amounts to more than 26 weeks, then the employee has the right to return to the same or a similar job.

The practicalities of administering the SPL system have been criticised, particularly by small employers.  The Government Department for Business Innovation and Skills has indicated that they are working on a range of information and guidance on the new system, which will "start becoming available from the summer."

Conclusion

The first half of 2014 has been another interesting period for UK employment law and with more changes to come later in the year and in 2015, Gibson Dunn’s UK Labour and Employment team will be on hand to help clients understand and respond to these changes as and when they happen.  For further details or for assistance on any UK Labour and Employment law matter, please contact James Cox, Kathryn Edwards or Carly-Jane King in Gibson Dunn’s London office.

Gibson, Dunn & Crutcher LLP  

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these and other developments.  Please feel free to contact the Gibson Dunn lawyer with whom you usually work or the following lawyers in the firm’s London office:

James A. Cox (+44 20 7071 4250, jacox@gibsondunn.com)
Kathryn Edwards (+44 20 7071 4275, kedwards@gibsondunn.com)
Carly-Jane King (+44 20 7071 4258, cjking@gibsondunn.com)
 

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