UK Employment and Labour Law — Executive Summary (September 2009)

September 8, 2009

Welcome to our Executive Summary, in which we highlight key developments in UK Employment and Labour Law. 

A headline summary of cases and developments is provided below.  A more detailed explanation and analysis is available by clicking on the appropriate link.  For further details concerning cases and developments discussed in this Executive Summary or for assistance on any UK Employment or Labour law matter, please contact James Cox, Daniel Pollard or Steven Cochrane in Gibson Dunn’s London office. 


(1)  Significant Increase in Tax Rates for Highest Earners.  Individuals earning over £150,000 face a new tax rate of 50% and a loss of higher rate tax relief for pension contributions.  Individuals earning over £100,000 also face a loss of their annual tax free individual allowance.  The changes are likely to lead to a renewed interest in tax favoured equity incentive plans for senior executives.  Click here for details.

(2)  Failure to consider applications from non-EEA nationals may be indirect race discrimination.  Employers who operate a blanket policy of not considering applications from non-EEA nationals when hiring may face race discrimination claims.  Click here for details.  

(3)  New ACAS Code of Practice replaces Mandatory Procedures  Employers have welcomed the new ACAS Code of Practice which has replaced the widely criticized mandatory statutory dispute resolution procedures.  Employers should review their dismissal and grievance procedures.  Click here for details.  

(4)  Immigration Rules Tightened.  From 1 April 2009, those wishing to enter the UK or extend their stay as a highly skilled migrant will require a masters degree, employers sponsoring employees will need to change the way that they carry out the "resident labour market test" and there is a new requirement that inter-company transferees must not directly replace settled workers.  Click here for details.  

(5)  Employees on Long Term Sick Leave entitled to Holiday Pay.  After years of controversy, it has finally been determined by the European Court of Justice that employees absent on long term sick leave are entitled to annual holiday pay even though not actively at work.  Click here for details.  

(6)  Employer loses right to dismiss employee for cause through kindness Where an employer has knowledge of employee misconduct which justifies dismissal for cause, it must take a firm stance and at the very least reserve its position in relation to the employee’s actions. Failure to do so could cause the employer to waive its right to dismiss for cause.  Click here for details.  

(7)  Dismissal by post is not effective until the employee has read the dismissal letter.  Where an employee was dismissed by letter, the Court of Appeal ruled that the dismissal was not effective for statutory purposes until the letter had actually been read by the employee which, because the employee was away from home at the time of delivery, was several days later.  Click here for details.  

(8)  Using length of service criterion in redundancy/lay-off selection is not necessarily unlawful The Court of Appeal has recently endorsed the High Court’s decision in Rolls-Royce plc v Unite the Union that employers can have regard to employees’ length of service when "scoring" employees during a redundancy or lay-off exercise notwithstanding the potential for indirect age discrimination.  Click here for details.  

(9)  Legislative Update.  Changes have been made to the cap on statutory redundancy payments, annual holiday entitlements, the rate of sick pay and maternity pay and an extension to the right to request flexible working.  Click here for details

And finally, we are currently awaiting the final decision from the European Court of Justice on the important question of when, precisely, the obligation to consult with employee representatives regarding a decision to make a reduction in force arises under the Collective Redundancies Directive (98/59/EC).  The Advocate General issued his (non-binding) opinion in this case on 22 April 2009 and we expect to report on the final decision in this important case later in the year.  In the meantime if you have any questions regarding this issue, please contact us. 

Set out below are details of the key cases and legal developments appearing in this Executive Summary.

(1)  Significant Increase in Tax Rates for Highest Earners.  In the Budget on 22 April 2009, the Chancellor of the Exchequer, Alistair Darling, announced a number of measures including the following which will significantly impact upon higher earners:

  • New 50% Rate of Tax.  From 6 April 2010, individuals earning over £150,000 will be taxed at the marginal rate of 50% (42.5% for dividends).  The existing higher rate of tax of 40% (32.5% for dividends), which currently applies to most individuals earning over £43,875 (in the 2009/10 year) will remain in place. 
  • Removal of Pension Relief for Higher Rate Tax Payers.  From April 2011, individuals with taxable income over £150,000 will no longer be able to claim full higher rate tax relief on contributions to registered pension schemes.  Tapering will operate so that those with taxable income over £180,000 will only be able to claim relief at basic rate (20%).  Full consultation on these provisions will be announced in due course.  In addition, anti forestalling measures will be introduced which will be backdated to budget day and which may effect those making pension contributions in excess of £20,000 outside their "normal pattern of regular pension contributions" with immediate effect.
  • Removal of Personal Allowance for those earning over £100,000.  From 6 April 2010, the basic personal allowance which provides a 0% rate of tax for the first £6,475  of earnings (in the 2009/10 tax year) will be reduced for individuals with adjusted net income over £100,000.  The reduction will be £1 for every £2 over the income limit until the allowance is reduced to nil meaning that the allowance will be entirely lost by those earning in excess of around £112,950 (based on the tax rates for the 2009/10 tax year).

In addition, the Chancellor announced numerous other changes affecting employers, including changes to both the income tax and corporation tax treatment of company cars and a clampdown on the use of "lease premiums" used as part of UK ex-pat packages. 

The changes to the taxation of higher earners are likely to lead to a renewed interest in the use of tax favored equity incentive arrangements — such as Company Share Option Plans, Enterprise Management Plans, Save As You Earn Plans and Share Incentive Plans — where taxable gains are taxed at a flat rate of just 18% (in the 2009/10 tax year).  Please contact Nicholas Aleksander or Daniel Pollard if you wish to consider implementing a tax favoured equity incentive plan in the UK. 

(2)  Failure to consider applications from non-EEA nationals may be indirect race discrimination.  Osborne Clark, in common with many employers, operated a policy of only considering applicants for certain positions from those who had the right to work in the United Kingdom.  Osborne Clark’s on-line application system was structured so that applicants who did not have the right to work in the UK and who would have required a work permit[1] were automatically rejected.  

In this case, which concerned an application by an Indian national, the Employment Appeal Tribunal upheld the decision of the Employment Tribunal that this policy constituted indirect race discrimination.  It was common ground that the applicant was a member of a racial group (identified as a "non-EEA national"), that the employer applied a requirement or condition that applicants for employment should not require a work permit and that the proportion of non-EEA nationals who could comply with that requirement was smaller than the proportion of persons not in that group who could comply with it.  The central issue was whether that policy was justified.

The employer pointed to the Border and Immigration Agency Work Permit Guidance which required that there be no other EEA national who had the qualifications or experience required to do the job.  This means that for as long as there were EEA nationals with the skills and experience required to do the job, an employer could not obtain a work permit for a non-EEA national even if that person was the best candidate for the job.

In a worrying decision for employers, both the Employment Tribunal and the Employment Appeal Tribunal essentially ignored the Work Permit Guidance.  They were swayed by the fact that Osborne Clark had obtained work permits for more senior positions and there had been insufficient dialog with the Border and Immigration Agency about whether the work permits could be obtained (although not referred to in the decision, in fact, under the rules as they then applied Osborne Clark may well have been able to obtain work permits on an exceptional basis).  

Employers should be wary of operating a blanket policy of only considering applications from those with the right to work in the UK.  The decision also suggests that before rejecting candidates on the basis of their immigration status employers should take steps to investigate whether it may be able to sponsor the worker. 

(3)  New ACAS Code of Practice replaces Mandatory Procedures.  Employers are welcoming the new ACAS Code of Practice on Discipline and Grievance which, subject to transitional provisions, replaced the mandatory statutory dispute resolution procedures on 6 April 2009.  

The old procedures required employers to complete a three step procedure before dismissing an employee and required an employee to lodge a grievance in writing before being able to lodge certain claims in the Employment Tribunal.  Employers who failed to comply with the procedures risked a finding of automatic unfair dismissal and an increase in compensation of up to 50%.  The dispute resolution provisions were widely criticized as being inflexible, burdensome and overly complex. 

The old procedures have been replaced with a new ACAS Code of Practice (the "Code") which sets out the procedures which employers should follow in cases of employee misconduct and that employees should follow if they have a grievance at work.  In the case of an unreasonable failure to comply with the Code (by either the employer or the employee) the Employment Tribunal may increase or decrease any compensation awarded by up to 25% as it considers just and equitable.  

The new Code has been widely welcomed by employers although employers should note the following:

  • The Code suggests that employees/representatives should be "involved" in developing the procedures.
  • The Code suggests that employees should be given a reasonable opportunity to "call relevant witnesses".  As disciplinary meetings have never been intended to be judicial proceedings, employers will generally interview witnesses as part of their investigation and witnesses would be involved in the disciplinary meetings but the revised Code suggests that in appropriate cases employers may now need to consider going further.   
  • The Code only applies to misconduct and poor performance dismissals — not those by reason of redundancy or termination of a fixed term contract. 
  • Transitional provisions mean that the old rules will continue to apply to some dismissals that take place after the new rules came into effect on 6 April 2009. 

Employers should review their disciplinary and grievance procedure in light of the Code.  This should see procedures become shorter and less complex.  Please contact James Cox, Daniel Pollard or Steven Cochrane if you would like us to review your HR policies.  

(4)  Immigration Rules Tightened.  As a result of changes made on 1 April 2009 and 7 August 2009, the Immigration rules make it more difficult for migrant workers to come to work in the UK.  The most significant changes are that:

  • Under Tier 2 (General), all skilled jobs must now be advertised through JobCentre Plus (other than inter company transfers, those listed as shortage occupations and a small number of exceptions including directors, chief executive officers and legal partners whose salary package is over £130,000 per annum).  This requirement is in addition to the sector specific recruitment required to satisfy the "resident labour market test" and means that most posts will need to be advertised in at least two ways.
  • Under Tier 2  (Inter-Company Transfer), there is a new requirement that the migrant must not be "directly replacing a settled worker". 
  • Under Tier 1, all highly skilled migrants seeking entry to the United Kingdom will require a master’s degree and previous earnings of £20,000.   This change to the minimum qualification required is affecting the large number of former work permit holders who, following the loss of their jobs, had been seeking to switch into Tier 1 in order to remain in the UK.

The changes are a direct political response to current economic challenges and if unemployment worsens we can expect further tightening of the rules.  Employers who may previously have decided not to become licensed sponsors on the basis that prospective employees were likely to qualify under Tier 1 may wish to reconsider.

(5)  Employees on Long Term Sick Leave entitled to Holiday Pay.  Since the decision in Kigass Aero Components v Brown [2002] there has been confusion about the extent to which employees who are absent on long term sick leave are entitled to statutory holiday pay.    Employees argue that the EU Working Time Directive (implemented in the UK by the Working Time Regulations 1998) provides that they are entitled to 5.6 weeks paid annual leave each year.  Employers find it surprising that employees should be entitled to paid "annual leave" when they are not actively at work and that they should be entitled to be paid (at their normal rate of pay) even when they have exhausted their entitlement to statutory sick pay and/or company sick pay.  

In HMRC v Stringer [2009], the UK Court of Appeal overruled Kigass and held that employees were not entitled to annual leave whilst absent on sick leave.  On appeal, the House of Lords referred the question to the European Court of Justice who found for the employees.  The European Court of Justice held that employees on long term sick leave are entitled to either: (a)  take paid holiday during sick leave; or (b) carry over their entitlement to the next leave year holiday and in the event that their employment terminates before they are able to take the holiday in question then they would be entitled to a payment in lieu upon termination.    

The Working Time Regulations 1998 provides that statutory annual leave "may only be taken in the leave year in respect of which it is due" and so the default position in the UK will be that employees are entitled to take holiday pay in the leave year to which it relates.  

Practically, the decision:

  • Leaves open the question of whether payment of holiday pay is conditional upon employees making a formal request to exercise the right (as would be the case if the employee were actively employed). 
  • Means that employers who offer enhanced company sick pay may wish to amend their sick pay arrangements so as to "off set" statutory holiday entitlements.    
  • Means that employers who offer "permanent health insurance (i.e. long term disability) benefits may also find that they must continue to pay holiday pay to employees irrespective of the benefits provided by the insurer and may wish to review their permanent health insurance arrangements in light of the decision.

In addition, the House of Lords held that employees can treat the failure to pay holiday pay as a series of unlawful deductions from wages and, accordingly, can seek recovery of unpaid holiday pay under Part II of the Employment Rights Act 1996 within three months of the last deduction in the series.   This is significant as the Working Time Regulations require that a claim be bought within three months of the end of the holiday year in question, effectively, meaning that employees would lose the right to claim for historical non-payment.    

This aspect of the decision appears to be of general application and may mean that any workers who are improperly denied holiday pay are able to recover historical underpayments.  

(6)  Employer loses right to dismiss employee for cause through kindness.  In Cook v MSHK Ltd & Ministry of Sound Recordings Limited, Mr Cook had been employed by the Ministry of Sound for around nine years, latterly in a senior position.  In May 2007, Mr Cook  resigned to join a new employer and was asked to work his notice.  During his notice period, Ministry of Sound learned that Mr Cook had misled them as to the nature of the role he would be undertaking for his new employer, at which point Ministry of Sound may have been entitled to dismiss Mr Cook for cause.  However, before disciplinary action could be taken, Mr Cook became ill and was signed off from work by his doctor owing to work-related stress and did not return to the office for around two months.  During this time Ministry of Sound took no steps to discipline Mr Cook and instead, demonstrated a commitment to supporting Mr Cook back to work for the remainder of his notice period.

When Mr Cook eventually returned to work, Ministry of Sound summary dismissed Mr Cook for cause for breach of trust and confidence and breach of his fiduciary duties.   However, the Court of Appeal decided that, since Ministry of Sound had not reserved its position in relation to Mr Cook’s alleged misconduct, it could not rely on misconduct of which it had been aware for two months to subsequently justify his dismissal for cause.

This case illustrates the importance of employers acting swiftly upon becoming aware of employee misconduct which might give rise to summary dismissal.  In this case, Ministry of Sound were in a difficult position due to Mr Cook’s subsequent illness.  However, the Court decided that they could and should have reserved their rights in relation to Mr Cook’s behaviour.  Employers beware!

(7)  Dismissal by post is not effective until the employee has read the dismissal letter.  In Gisda Cyf v Barratt, Ms Barratt was dismissed for cause by letter on 29th November.  The letter was sent by recorded delivery.  The letter was delivered to Ms Barratt’s home on 30th November, but as she was away, she did not read it until 4 December.  

Ms Barratt lodged an unfair dismissal claim against her employer on 2 March, which she was required by law to lodge within three months of the effective date of termination of her employment. If the effective date of termination was deemed to be the date on which the letter was posted by Gisda or delivered to Ms Barratt’s home, then her claim would be out of time.  However, if the effective date of termination was deemed to be the date on which Ms Barratt received and read the dismissal letter, her claim for unfair dismissal was lodged in time.

The Court of Appeal, recognising that Ms Barratt would lose the right to pursue her unfair dismissal claim if the effective date of termination occurred on the date of delivery of the dismissal letter, decided that her effective date of termination was, in fact, the date upon which she read the letter (i.e. 4th December) with the effect that her claim was brought in time.  The Court decided that where dismissal is communicated by post, the effective date of termination will be the date on which the employee becomes aware of the dismissal (unless the employee has deliberately taken steps to avoid receiving or reading the dismissal letter).

In light of this decision, employers should, where possible, communicate decisions to dismiss in person, by telephone or by hand-delivered letter.  Employers should also consider sending a duplicate copy via e-mail to  the employee’s personal email account.

(8)  Using length of service criterion in redundancy/lay-off selection is not necessarily unlawful.  The Employment Equality (Age) Regulations 2006 (the "Age Regulations") make it unlawful to discriminate against employees (and certain other protected individuals) on grounds of their age or age group.  Age discrimination can take the form of so called "indirect discrimination", which occurs where an employer has in place a ‘provision, criterion or practice’ which, whilst not obviously age related, disadvantages a particular age group.  Under the Age Regulations, discrimination is lawful where shown to be a ‘proportionate means’ of achieving a ‘legitimate aim’.  Additionally, service linked benefits which fulfill ‘business needs’ such as rewarding experience, encouraging loyalty and/or motivating staff are considered lawful (the "Business Needs Exemption").

Prior to the introduction of the Age Regulations, Rolls Royce entered into a Collective Agreement with its recognised Trade Union which included agreed redundancy/lay-off selection criteria.  These selection criteria consisted of five conduct/performance related criteria and one length of service criterion which favoured employees with longer service. Following the introduction of the Age Regulations, Rolls Royce sought to remove the length of service criterion on the basis that it disadvantaged younger employees (who were more likely to have short service) and therefore amounted to indirect age discrimination but met resistance from their union and the issue was litigated.

The Court of Appeal decided that the length of service criterion both fell within the Business Needs Exemption and was capable of being objectively justified as a ‘proportionate means’ of achieving a ‘legitimate aim’.  The Court of Appeal identified Rolls Royce’s ‘legitimate aim’ as being the achievement of a stable workforce during a redundancy situation (and the protection of older employees who would find it more difficult to secure future employment).  Proportionality could be evidenced by the fact that length of service was only one of six factors considered by Rolls Royce when scoring employees.

This decision ought to provide some comfort to those employers who weight redundancy selection criteria to protect longer serving employees.  However, any length of service element should be incorporated into a balanced selection of relevant criteria.

(9)  Legislative Update.   The following updates came into effect since 1 January 2009:

  • Redundancy Payments.  Each year, the maximum amount of a week’s pay that is used in the calculation of redundancy/severance pay is increased in line with inflation and this change took affect on 1 February 2009 when the rate was increased to £350pw.  On 22 April 2009, Chancellor of the Exchequer announced a further "one off" increase from £350 to £380 per week which will bring the maximum statutory redundancy payment to £11,400 with effect from 1 October 2009.
  • Annual Holiday.  On 1 April 2009, the statutory annual leave entitlement under the Working Time Regulations 1998 increased from 4.8 weeks to 5.6 weeks (equivalent to 28 days a year; which is often expressed in terms of 20 days holiday plus 8 bank holidays).   
  • Flexible Working.  On 6 April 2009, the right to request flexible working was extended to parents of children up to the age of 16.  Employers should amend their policies as appropriate.  
  • Statutory Sick Pay and Family Leave Pay.   From 5 April 2009, the weekly rate of statutory sick pay increased to £79.15 (from £75.40) and weekly rate of statutory maternity pay, statutory paternity pay and statutory adoption pay increased to £123.06 (from £117.18).

[1]  The Work Permit System has since been replaced by the Tier 2 of the Points Based System which makes use of a similar "resident labour market test". 

Gibson, Dunn & Crutcher LLP

Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. For further details concerning cases and developments discussed in this Quarterly Executive Summary or for assistance on any UK Employment or Labour law matter, please contact the Gibson Dunn attorney with whom you work, James A. Cox (+44 (0)207 071 4250, [email protected]), Daniel E. Pollard (+44 (0)207 071 4257, [email protected]) or Steven F.C. Cochrane (+44 (0)207 071 4275, [email protected]) in the firm’s London office, or any member of Gibson Dunn’s Labor and Employment Practice Group

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