UK Employment — Key Developments for 2014

January 30, 2014

In this update we review recent key developments in UK employment law and look forward to some significant changes that are on the horizon in 2014. 

A headline summary is provided below.  A more detailed explanation and analysis is available by clicking on the appropriate link.  For further details or for assistance on any UK Employment or Labour law matter, please contact James Cox, Kathryn Edwards or Carly-Jane King in Gibson Dunn’s London office.

  • TUPE Reform.  On 10 January 2014, The Collective Redundancies and Transfer of Undertakings (Protection of Employment) (Amendment) Regulations 2014 were laid before the UK Parliament.  These Regulations amend The Transfer of Undertakings (Protection of Employment) Regulations 2006 ("TUPE") which protects the rights of employees who are affected by the sale or transfer of the whole or part of a business or undertaking and, potentially, by an outsourcing or a change of service provider.  We summarise key changes introduced which extend the rights of UK employers to change terms and conditions of employment and/or to dismiss employees for a reason connected with the transfer of a business or other TUPE transfer and which will assist a buyer of a business (or other transferee employer) to inform and consult about planned collective redundancies prior to closing of the business acquisition or other TUPE transfer event.  Click here for details.
  • Restrictions on an employee’s activities.  During employment an employee owes a duty of fidelity, such that they cannot act in competition with their employer and must have regard to their employer’s interests. It may also be possible to contract with an employee to restrict their competitive activities after employment has ended.  We provide updates on two recent UK cases which explore an employee’s duty of fidelity in the context of a team move and the validity of covenants restricting an employee’s solicitation of customers post-employment.  Although a highly fact-specific area of law these cases provide employers with useful guidance about how the UK courts currently interpret such restrictions.  Click here for details.
  • Settlement negotiationsWe review a recent High Court decision which serves as a useful reminder of the considerable care that must be taken by UK employers when negotiating settlements in respect of departing employees to avoid those discussions unintentionally concluding an early binding agreement.  Click here for details.
  • UK implementation of the ‘bonus cap’.  On 1 January 2014, the UK implemented certain provisions of CRD IV, the European package of reforms governing the regulation of EU banks, building societies and investment firms in relation to a number of policy areas, including the controversial ‘bonus cap’.  We summarise the steps being taken to implement the bonus cap in the UK, as well as examining the UK Government’s challenge to the legality of such measures.  Click here for details

TUPE Reform

The Transfer of Undertakings (Protection of Employment) Regulations 2006 ("TUPE") protects the rights of employees who are affected by the sale or transfer of the whole or part of a business or undertaking and, potentially, on an outsourcing or a change of service provider.

In its Coalition Agreement the UK Government announced its proposals to end the so called "gold plating" of EU Directives.  This refers to the practice of implementing domestic UK legislation which goes further than the minimum required by virtue of the UK’s membership in the European Union.  TUPE is an example of legislation that not only implements but "gold plates" the Acquired Rights Directive ("ARD") from which it derives.  Following a consultation the Government has announced the changes it will make to simplify TUPE and to align it more closely with the ARD.  The regulations implementing the changes were made on 8 January 2014, placed before UK Parliament shortly thereafter and are due to come into force on 31 January 2014, although certain provisions will have different commencement dates (the "Amended Regulations").

Although some welcome key changes have been made, the Amended Regulations are not as far reaching as initially proposed by the Government.  The key changes include the following:

Service provision change ("SPCs") – TUPE applies on a 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".  "First generation" outsourcing occurs when a client outsources an activity to a third party provider, such as outsourcing the provision of staff meals to an external catering company, whereas "second generation" outsourcing occurs when a client changes this third party provider to another one, such as by choosing a different catering company.  Occasionally, a client may decide to take an outsourced function back "in-house", such as by deciding once again to provide staff meals internally rather than use a catering company.

The Amended Regulations clarify that TUPE will only apply in the context of a SPC when the activities that are to be carried out following the SPC are "fundamentally the same" as those carried out beforehand.  Ultimately, the question of whether the pre-transfer and post-transfer activities are "fundamentally" the same will fall to be determined by the UK courts and employment tribunals.  However, it is hoped that these changes will provide greater flexibility for the parties to an outsourcing or insourcing transaction.  This amendment will apply to transfers that take place on or after 31 January 2014.

Restrictions on changes to Terms and Conditions – Currently under TUPE, any change to an employee’s terms and conditions (even a consensual change) will be void if the sole or principal reason for the variation is the transfer itself or a reason connected with the transfer, unless the change is due to an economic, technical or organisational reason entailing changes in the workforce (an ‘ETO‘ reason).  An ETO reason is particularly difficult to establish in the context of a change of terms and conditions.  In order to align TUPE more closely with the wording of the ARD and the decisions of the European Court of Justice, the Amended Regulations provide that any purported variation to an employee’s contract will only be void if both: (i) the sole or principal reason for the change is the transfer; and (ii) the rationale for the change is not an ETO reason.  Thus the employer and employee are free to agree changes to terms and conditions of employment which are connected with the transfer even in the absence of an ETO reason so long as the transfer is not the only or main reason for the changes.  The UK Government has issued guidance as to when changes to terms and conditions will be considered to be "transfer related" and when such changes might be permissible for an ETO reason, which is to be welcomed by employers.  It should be noted, however, that employee consent may nevertheless be required before changes to terms and conditions can be made, even if those changes are permitted under the Amended Regulations.  This amendment will apply in circumstances where the transfer takes place on or after 31 January 2014 and the change is either agreed or takes effect on or after such date.

Collective agreements – The ARD permits member states to limit the applicability of terms derived under a collective agreement, to one year after the transfer.   The Amended Regulations clarify that the general restriction on changing an employee’s terms and conditions post-transfer (see above) will not apply to terms or conditions of employment derived from collective agreements where such changes take effect more than one year after the transfer (sale, transfer or SPC).  However, any such changes must be implemented in such a way that the terms of employment of affected employees are no less favourable, when considered as a whole, after such changes have been made.  The Government has also clarified that, where an employer inherits responsibilities under a collective agreement as a consequence of TUPE, that employer shall not be bound by post-transfer changes to the collective agreement made without its agreement (it being possible that the collective agreement may be or may become a multi-employer collective agreement). This amendment will apply to transfers that take place on or after 31 January 2014.

Protection against dismissal – Under the current TUPE regulations, transferring employees are protected against dismissal – a dismissal being automatically unfair if the sole or principal reason for the dismissal is the transfer itself or a reason connected with the transfer that is not an ETO reason.  As with the reform of the rules restricting changes to employees’ terms and conditions, these provisions are amended to bring them closer in line with the wording of the ARD.    Under the Amended Regulations a dismissal will no longer be automatically unfair by reason of being "connected" with the transfer, but it will only be automatically unfair if: (i) the sole or principal reason for the dismissal is the transfer itself; and (ii)  that reason is not also an ETO reason.  A dismissal which is not automatically unfair may nevertheless be considered unfair on ordinary unfair dismissal principles (e.g. because an employment tribunal considers that no reasonable employer in the circumstances would have dismissed the employee for that reason and/or because the dismissal process was flawed).  This change will apply in circumstances where the transfer takes place on or after 31 January 2014 and notice to terminate employment is given or termination takes effect on or after that date.

TUPE and business relocation – Recent case law has determined that employees dismissed following a TUPE transfer due to a workplace relocation will be unfairly dismissed if the TUPE transfer is the reason for or connected with the relocation even though such dismissals might otherwise be considered fair.    To rectify this anomaly, the Amended Regulations clarify that dismissals connected with a change in the workplace are an ETO reason and may therefore be justified as fair (on ordinary unfair dismissal principles) even if by reason of a TUPE Transfer.  This amendment will apply in circumstances where the transfer takes place on or after 31 January 2014 and notice is given or termination takes effect on or after such date.

Duty to inform and consult – collective redundancy consultation and interaction with TUPE – The parties to a TUPE transfer are required to inform and may also be required to consult with appropriate representatives of employees who may be affected by the transfer. Separately, in circumstances when an employer proposes to dismiss 20 or more employees as redundant at one establishment within a period of 90 days or less it will have to comply with the requirement to inform and consult over the collective redundancies for a period of up to 45 days prior to making such redundancies.

Until now a "transferee" employer (acquiring the business, undertaking or assuming the activity) wishing to implement collective redundancies in the business or undertaking being acquired could not commence collective redundancy consultation until after Closing of the acquisition (i.e. until it had become the employer of the business employees) and so therefore could not start the clock ticking on any required collective redundancy consultation. In order to ease the burden on business, the Government is amending the Trade Union and Labour Relations (Consolidation) Act 1992 so that pre-TUPE transfer collective redundancy consultation may be commenced by the "transferee" employer pre-closing with the consent of the "transferor" employer.  Any "transferor" employer considering permitting a transferee to commence redundancy consultation pre-closing will wish to ensure that it is adequately protected under the terms of the Asset Purchase Agreement (including in circumstances where Closing does not take place).   This amendment will apply from 31 January 2014.

Employee Liability Information – TUPE currently requires "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 prevent this.  The Amended Regulations require "Transferor" employers to provide ELI to "Transferee" employers earlier (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.  These changes will apply to transfers that take place on or after 1 May 2014.

Consultation requirements for micro businesses – 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 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.  These changes will apply to transfers that take place on or after 31 July 2014.

Restrictions on an employee’s activities

Restrictions during employment – the duty of fidelity

During employment an employee owes an implied contractual duty of fidelity, such that they cannot act in competition with their employer and must have regard to their employer’s interests.  Depending on the nature of their job and their degree of unsupervised responsibility an employee may also owe a fiduciary duty of loyalty to their employer, which is an enhanced duty requiring an employee to act in the interests of their employer (rather than simply have regard to them).

In the recent case of Thomson Ecology Ltd and another v APEM Ltd and others [2013] EWHC 2875 (Ch), the UK High Court considered the actions of a senior manager employee who was responsible for orchestrating a team move from his employer to one of its competitors and whether this breached his contractual duty of fidelity and fiduciary duty of loyalty, although questions on breach of fiduciary duty were left to be determined at a later stage.

An employee’s implied duty of fidelity has been held to include a duty not to compete (and not to entice employees), a duty to disclose wrongdoing (in certain circumstances) and a duty of confidentiality and in this case the High Court concluded that the senior employee had breached his implied duty of fidelity in:

  • failing to disclose to his employer the threat posed by a competitor;
  • identifying colleagues that the competitor should consider recruiting;
  • discussing with the competitor confidential staff salaries; and
  • meeting with colleagues at his home along with representatives of the competitor to discuss new offers of employment.

This case highlights the careful line to be drawn between taking preparatory steps to compete whilst still employed (which is generally lawful, provided steps are taken during the employee’s own time and unless expressly prohibited by the employment contract) and actually competing (which is unlawful).  The duty of fidelity remains even while an employee is on garden leave (suspension for the duration of a notice period with pay), as the purpose of that leave is to secure loyalty for the period in question.

Restrictions post-employment – non-solicitation of customers and clients

The validity of a post-employment restriction (e.g. a non-compete, non-solicitation or non-poaching obligation) will depend upon whether that restriction constitutes a reasonable protection of a legitimate interest of the employer (such legitimate interests have been held to include the protection of goodwill, trade secrets and similarly highly confidential information, the protection of long-standing client relationships and the maintenance of a stable workforce).

When determining whether a restriction is reasonable, one factor which is taken into account is the duration of that restriction (if too long, it is likely to be perceived as a restraint of trade and unreasonable on public policy grounds).   Such cases are fact-specific.  For example:

In the case of Coppage and another v Safetynet Security Ltd [2013] EWCA Civ 1176, the UK Court of Appeal considered a six-month post-termination restriction prohibiting the solicitation of any customers of the employee’s former employer.  Somewhat surprisingly, the Court upheld this restriction as reasonable, due to its short duration of only six months (despite potentially applying to prevent the employee from soliciting business from customers of his former employer with whom he had never met or had dealings). However, it is generally considered best-practice to limit the scope of a non-solicitation restriction to those customers with whom the former employee had dealings.

Post-employment restrictions can also be interpreted in light of industry practice. In the case of Romero Insurance Brokers v Templeton [2013] EWHC 1198, the UK High Court considered a twelve month non-solicitation covenant, which restricted an employee’s solicitation of an insurer’s clients with whom that employee had dealings in the six months prior to termination.  The Court upheld this covenant as reasonable and, in so doing, was influenced by the particular nature of the insurance business (namely that there is a typical twelve month renewal cycle, which is the real window of opportunity for client contact). 

Case Update – Settlement negotiations

In the recent case of Newbury v Sun Microsystems [2013] EWHC 2180 (QB), the UK High Court scrutinized the attempts of the parties’ solicitors to negotiate settlement terms after Sun Microsystems wrote to Mr Newbury via its lawyers stating that their client was willing to settle proceedings, with such settlement to be recorded in a suitably worded agreement.  In the same letter, the lawyers noted that their client would in full and final settlement pay Mr Newbury, within 14 days of accepting the offer, a specific sum of money in damages plus a further sum in relation to his legal costs.  On behalf of Mr Newbury his lawyers accepted the terms of the offer, being payment of the sums, noting that they would forward a draft settlement agreement for Sun Microsystems’ approval.  A subsequent dispute arose as to the form of the settlement agreement and Sun Microsystems argued that final agreement had not yet been reached as to the terms of the settlement and that negotiations were still on-going.

The Court concluded that the correspondence between lawyers gave rise to a binding legal contract between the parties, notwithstanding the fact that the parties intended the terms to be recorded in a suitably worded agreement.  The Court held that an agreement had been reached in the exchange of correspondence and that any further agreement was simply intended to record the terms more formally.  Interestingly, the Court added that the letter from Sun Microsystems was not expressed to be "Subject to Contract" which would have made it clear that the terms were not yet binding or agreed until a formal contract was agreed. 

This case serves as a useful reminder that parties must clearly state their intention not to conclude an agreement during negotiations unless and until both parties have approved and executed a settlement agreement.  The use of the words "Subject to Contract" on all communications during negotiations is a useful means of evidencing the parties’ intention not to conclude an early agreement.

UK implementation of the ‘bonus cap’

Bankers’ remuneration, and in particular bankers’ bonuses, have faced increased scrutiny against the backdrop of the global financial crisis.  The package of reforms announced by the European Parliament and contained in the CRD IV Directive (2013/36/EU) and the Capital Requirements Regulation (Regulation 575/2013) (together known as "CRD IV") impacting the regulation of EU banks, building societies and investment firms in relation to a number of policy areas, includes a cap on variable rates of remuneration for executives and ‘key risk takers’ (known as the "bonus cap"). 

The UK financial regulators, the FCA (Financial Conduct Authority) and the PRA (Prudential Regulation Authority), both issued consultation papers in October 2013 explaining how they proposed to amend the FCA and PRA Handbooks to implement the bonus cap for those institutions that they regulate.   The key provisions are summarized below.

Legal challenge of the bonus cap

It is worth noting that the bonus cap is being introduced in the UK notwithstanding the UK Government’s legal challenge of the same launched with the European Court of Justice on 25 September 2013.  The UK Government consider that the legislation, as currently drafted, is not fit for purpose (i.e. to improve stability across the banking system) and that the bonus cap provisions will "undermine responsibility in the banking system rather than promote it".  The Government has indicated that it believes the proposals will lead to an increase in fixed salaries which would result in instability in the sector.  A decision by the European Court of Justice is not expected before early 2015.

The basic principles of the bonus cap

CRD IV establishes a number of key principles regarding the payment of variable remuneration to relevant staff which are adopted by the UK:

  • The ratio between fixed (basic salary as well as other non-variable benefits and allowances) and variable (annual bonuses) remuneration shall be capped at 1:1, with flexibility to increase to 1:2 with special shareholder approval.  Special shareholder approval requires at least 66 per cent shareholder support, provided that at least 50 per cent of shareholders are represented. Otherwise, at least 75 per cent of the ownership rights represented must vote in favour. 

    Guidance on what constitutes ‘fixed remuneration’ for the purposes of the bonus cap is expected, but is not yet issued;

  • Up to 25 per cent of bonuses paid in long-term financial instruments (those deferred for at least five years) may be discounted by a notional rate reflecting the risk of those financial instruments.  Such discount would have the practical effect of increasing the ratio between fixed and variable pay.  Any long-term financial instruments in excess of 25 per cent will not benefit from the discount rate. 

    The European Banking Authority ("EBA") is expected to issue guidelines by 31 March 2014 on applicable notional discount rates to apply to long-term instruments (taking account of relevant factors such as inflation rate and risk);

  • All variable remuneration must be subject to claw-back arrangements;
  • The rules governing the payment of bonuses will apply to all European banks and credit institutions, European subsidiaries of non-European banks and credit institutions and the staff of European banks and credit institutions, whether based in Europe or not.

Timing

  • Implementation of the bonus cap in the UK was required by 1 January 2014.  The cap will apply to bonuses paid in 2015, in respect of performance in 2014.  What this means is that whilst the cap has been implemented, its effects will not be felt until 2015.  To the extent that any agreements have been entered into that will cut across the bonus cap rules, they will need to be reviewed and revised.

Which staff will the cap apply to?

  • CRD IV provides that the bonus cap will apply to ‘Identified Staff’ (defined as ‘senior management, risk takers, staff engaged in control functions and any employee receiving total remuneration that takes them into the same remuneration bracket as senior management and risk takers, whose professional activities have a material impact on their risk profile.’ )
  • In a consultation paper issued in May 2013 the EBA set out proposals on how to identify categories of staff whose professional activities have a material impact on an institution’s risk profile.  If these proposals are implemented in the UK then staff will be identified as material risk takers if they (subject to narrow exemptions where it can be shown that the individual has no material impact on the organisation’s risk profile) meet certain criteria connected to their role and decision-making power (e.g. staff that are a member of a management body, are a senior manager, have the authority to commit significantly to credit risk exposures, etc.) or any of the following applies:
    • their total annual remuneration exceeds €500,000;
    • they fall within the highest earning 0.3 per cent of staff within the bank;
    • their remuneration bracket is equal to or greater than the lowest total remuneration of senior management or other risk takers; or
    • their variable remuneration exceeds €75,000 and 75 per cent of the fixed component of remuneration.

The EBA is expected to finalise Regulatory Technical Standards on the criteria to identify categories of staff whose professional activities have a material impact on an institution’s risk profile at the start of 2014 and we will report on these in due course.

Comment

Whilst the bonus cap provisions are now effective in the UK, a number of key points remain outstanding or unclear.  Namely, it is yet to be established who will constitute ‘Code Staff’ and be caught by the cap, equally, the Guidance on what constitutes ‘fixed remuneration’ will provide welcome clarification for banks and financial institutions once issued, as will confirmation from the EBA on the factors to be taken into account in calculating the discount rate to be applied to up to 25 per cent of long-term instruments forming part of bankers’ variable pay.  What is clear is that the cap is likely to lead to an increase in fixed remuneration within the financial institutions to which the cap applies particularly in jurisdictions where EU governed banks are in competition with non-EU governed banks not subject to the same level of regulation.  With higher reliance on fixed elements of pay there is less flexibility for organisations to reward performance and to retain talent, although there is likely to be a shift in thinking on how that may be achieved.  The market has already started to see changes in pay structures including the introduction of "role-based" pay allowances paid in 12 monthly installments either as cash or by way of shares or bonds.  It is likely that there will also be an increase in the provision of more generous pension arrangements (subject to applicable allowances), non-cash insurance benefits or long term investment plans, in circumstances where such provision can act as a retention tool, but remain within the scope of the legislation.

Conclusion

2013 has been another interesting year for UK employment law and with more changes to come in 2014 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.  

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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