April 4, 2007
Welcome to the first Quarterly Executive Summary of 2007, in which we highlight key developments in UK Labour and Employment Law over the past three months.
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 Quarterly Executive Summary or for assistance on any UK Labour or Employment law matter, please contact James Cox or Daniel Pollard in Gibson Dunn’s London office.
Headlines
Beware: Significant Compensation Uplift Awarded for Procedural Failings . A 40% uplift in compensation for unfair dismissal, awarded to penalise an employer for failing to comply with mandatory dismissal procedures, is upheld as reasonable on appeal. We examine the importance of procedural compliance when dismissing or disciplining UK employees and consider the future for the mandatory dispute and grievance procedures. Click for Details.
TUPE Developments. We report two significant cases concerning the "TUPE" regulations, which protect the rights of employees on the transfer of an undertaking (commonly a business sale or outsourcing). The first case highlights one of the dangers of changing employees’ terms of employment in connection with a TUPE transfer. The second case highlights the difficulties in dismissing employees in connection with a TUPE transfer. Click for Details.
New Hurdles for Applicants for Indefinite Leave to Remain. From 1 April 2007, applicants for indefinite leave to remain (including work permit holders and highly skilled migrants) will be tested for their knowledge of life in the UK. Applicants should allow additional time to comply with this requirement. Click for Details.
Paid Annual Leave Set to Increase. It is proposed that all UK employees and workers (whether full or part-time, temporary or permanent) will be entitled to almost 6 weeks paid annual leave. Persons working a 5 day week would see their entitlement to paid annual leave increase from 20 working days to 28 working days. Click for Details.
Fiduciary Duties Are Not Inflexible. The Court of Appeal gives helpful guidance concerning the fiduciary duties of a resigning director. Click for Details.
Court of Appeal Decides Ownership of Employee Invention. The Court of Appeal considers the circumstances in which an employee’s invention will belong to the employer giving valuable insight to those seeking to protect intellectual property created by employees. Click for Details.
Post-Employment Non-Compete Covenants Considered. The Court of Appeal upholds a 12 month non-compete restriction contained in the contract of employment of a managing director. We consider the impact of this decision, together with two other recent decisions of the High Court on the enforceability of post-employment restrictive covenants. Click for Details.
Annual Increase in Limits. The annual increase in statutory limits took effect on 1 February 2007. This brings the maximum compensation award, in cases of unfair dismissal where there are no aggravating factors to £69,900 (approximately US$135,000). Click for Details.
Information and Consultation. From 6 April 2007, employers with as few as 100 workers in the UK may be required to establish a formal process for information and consultation with employee representatives. We report on a recent case which clarifies the circumstances in which an employer may resist a request for establishing such a process. Click for Details.
ECJ Rules on Meaning of "Establishment". Employers are required to consult elected employee representatives when contemplating 20 or more dismissals at one establishment within 90 days. The European Court of Justice ("ECJ") provides useful practical guidance concerning the meaning of an "establishment". Click for Details.
And Finally… A number of legislative changes come in force in April 2007 including an increase in paid maternity and adoption leave to 39 weeks. Click for Details.
Set out below are details of the key cases and legal developments appearing in this Quarterly Executive Summary:
Beware: Significant Compensation Uplift Awarded for Procedural Failings. Even in ordinary cases of unfair dismissal (without any aggravating factors such as sex or race discrimination), compensation awards can be as high as £69,900 (approximately US$135,000) (see below). The case of Metrobus v Cook serves as a reminder of the importance of strict compliance with the applicable statutory dismissal procedures ("SDP") whenever an employer contemplates dismissal. The likely consequences of non-compliance are: (i) an automatic finding of unfair dismissal; and (ii) a compensation uplift of between 10% and 50% (subject to any applicable compensation cap).
In Metrobus, the Tribunal took a dim view of the employer’s failure to follow the applicable SDP and, in particular, to inform Mr Cook of his right to be accompanied to the disciplinary meeting, to inform him that he might be dismissed at the meeting and to hear his appeal within a reasonable time. The Tribunal also criticized the numerous interruptions that took place during Mr Cook’s disciplinary meeting. Taken together, the Tribunal considered these failures to be serious, labeling them "blatant". Accordingly, Mr Cook’s dismissal was found to be automatically unfair and his compensation was uplifted by 40%. Metrobus appealed to the Employment Appeal Tribunal ("EAT"). The EAT upheld the Tribunal’s decision, confirming that the extent of the compensation uplift should be influenced by the nature and extent of the employer’s procedural failure, rather than the financial loss suffered by the employee. As a consequence, Tribunals will be justified in awarding significant compensation uplifts (up to 50%) in cases where employers flout the SDP, rewarding some employees with compensation significantly in excess of their actual losses.
However, many employers will be pleased to read that the future of the widely criticised SDP is under threat. The UK Government is currently considering proposals to abandon the SDP altogether in favour of a less prescriptive approach to resolving employment disputes.
TUPE Developments. The Transfer of Undertakings (Protection of Employment) Regulations 2006 ("TUPE") implement the European Acquired Rights Directive in the UK and protect the rights of employees on a transfer of an undertaking (commonly the sale of a business or outsourcing of activities) from a transferor (i.e. the seller of a business or client on an outsourcing) to a transferee (i.e. the buyer or incoming service provider). TUPE requires prior communication and, on occasion, consultation with employees affected by a TUPE transfer and automatically transfers to the transferee the employment contracts and associated rights, powers, duties and liabilities (except certain pension related liabilities) of employees working in an undertaking when that undertaking transfers. In addition, TUPE provides enhanced protection for employees who face dismissal, changes to terms of employment or changes to working practices. This quarter saw two significant cases on TUPE:
Employees able to "cherry-pick" new terms following a TUPE transfer. In Power v Regent Security Services Limited the EAT allowed Mr Power to enforce a favourable change made to his terms of employment in connection with a TUPE transfer (in this case an increase in his contractual retirement age), without prejudicing his right to avoid any unfavourable changes made at the same time. The EAT reiterated that the purpose of TUPE is to protect employees and not employers. Thus employees whose terms of employment are changed in connection with a TUPE transfer can "cherry pick", enforcing those changes which are to their benefit whilst disregarding any changes which are to their detriment (such as new restrictive covenants). This rule applies even if the employee willingly consents to the changes and even if the impact of any unfavourable change is more than outweighed by a corresponding favourable change.
Whilst Power concerned TUPE’s predecessor, its impact will be continue to be felt in the vast majority of circumstances in which changes to terms of employment are made in connection with a TUPE transfer (see below).
Transferors are not able to "borrow" transferee’s "ETO" Reason. Dismissals for a reason connected with a TUPE transfer will be automatically unfair, and less favourable changes to terms of employment will generally be void, unless the employer can show an "economic, technical or organizational reason [for the dismissal/changes to terms of employment] which entails changes in the numbers or functions of the workforce" (commonly referred to as an "ETO" Reason).
In Hynd v Armstrong & Others, the Scottish Court of Session (whose judgments are persuasive but not binding in England) considered the issue of whether a transferor can rely on the ETO Reason of a transferee when deciding to dismiss employees in connection with a TUPE transfer. Mr Hynd was dismissed at completion of a TUPE transfer by the transferor because the transferee had no need for him. Whilst the transferee might have had an ETO Reason for dismissing Mr Hynd post-completion (i.e. redundancy), the Court held that the transferor did not have an ETO Reason of its own and could not "borrow" the transferee’s reason. Thus, Mr Hynd’s dismissal was automatically unfair. As a result of the operation of TUPE, the liability for Mr Hynd’s unfair dismissal automatically passed to the transferee. Parties to a TUPE transfer should therefore ensure that adequate contractual protections are in place to protect them against TUPE related liabilities.
New Hurdles for Applicants for Indefinite Leave to Remain. From 1 April 2007, applicants for indefinite leave to remain (including work permit holders and highly skilled migrants) need to demonstrate knowledge of life in the United Kingdom as well as be able to speak English. This is similar to recently introduced requirement for citizenship applications. Most work permit holders and highly skilled migrants are likely to meet the English language requirements and so will simply need to complete the "Life in the UK Test" (click here for overview). The test costs £34 and it takes 45 minutes to complete the 24 multi-choice questions. However it will require attendance by the applicant at a test centre which must be booked 1-4 weeks in advance. With a pass mark of 75% the test should not be too onerous but applicants will need to study the test handbook in advance and this additional requirement will add a further 2-5 weeks to the application time-line. If applicants are unable to satisfy this requirement before their current leave expires then it is essential that they apply for further limited leave to remain.
Paid Annual Leave Set to Increase. Employees and workers in the UK are entitled to a minimum of four weeks paid annual leave (i.e. vacation) under the Working Time Regulations 1998, which implement European rules governing working time in the UK. Many, but not all, employers in the UK exceed their statutory obligations, providing employees with at least four weeks paid leave in addition to paid time off for public holidays. The UK Government considers this more generous approach to be best practice. As a result, many full time employees (working five days per week) already enjoy a total of 28 working days (or 5.6 weeks) paid annual leave, 8 days more than the legal minimum entitlement. The Government committed in its last election manifesto to take steps to increase the statutory minimum requirement to bring it in line with perceived best practice.
The Work and Families Act 2006 contains a power to increase the statutory minimum annual leave entitlement. Not unexpectedly, the Government has proposed that the minimum entitlement to paid annual leave will increase in two stages, to 4.8 weeks (24 days for most full-time employees) on 1 October 2007 and to 5.6 weeks (28 days) on 1 October 2008. Employers who wish to require employees to work on public holidays will need to provide paid time off in lieu.
Fiduciary Duties Are Not Inflexible. Directors of UK companies owe various fiduciary duties to the company in which they hold office, both at common law and under statute. The Companies Act 2006 codifies directors’ duties for the first time. Further details are available in our Client Alert — "The Companies Act 2006 impacts upon directors of UK companies". Please contact us if you would like a copy.
In Foster Bryant Surveying Limited v (1) Bryant and (2) Savernake Property Consultants Limited, the Court of Appeal gives helpful guidance concerning the fiduciary duties of a resigning director who takes steps, prior to leaving, which may be considered competitive by the company in which he still holds office. For so long as a director holds office (regardless whether he or she has served a notice of resignation) that director owes fiduciary duties to the company to act honestly, loyally, in good faith and to avoid a conflict of interest.
Whilst these duties were expressed by the Court to be "exacting requirements" which must be "exactingly enforced", the Court recognised the need for some flexibility depending upon the facts of each case. In particular, the duties of a director who, having tendered his or her resignation, remains a director in name only without remuneration or access to company information may be limited to protecting company property and confidential information. In any event, directors who, having tendered their resignation, take preparatory steps to set up in competition, without acting disloyally towards the company, are unlikely to breach their fiduciary duties.
Court of Appeal Decides Ownership of Employees Invention. The Court of Appeal considers, for the first time, the meaning of those provisions of the Patents Act 1977 (the "PA 1977") which govern the ownership of employee inventions in the case of LIFFE Administration and Management v (1) Pavel Pinkava (2) De Novo Markets Limited. Dr Pinkava created an invention involving credit swap systems whilst working for LIFFE. The PA 1977 (section 39(1)) provides that an invention made by an employee will belong to the employer in a number of circumstances including where that invention is made during the course of the employee’s normal duties in circumstances where an invention might reasonably be expected to result from the carrying out of those duties. The Court of Appeal held that the invention in question belonged to LIFFE because it was created during the course of Dr Pinkava’s normal duties (which included the development of an exchange tradable credit derivative). Furthermore, Dr Pinkava was recognised as an "innovative thinker" and it was therefore reasonable to expect that his normal duties may have led to the creation of an invention. There was no requirement for the employee to be set a specific problem nor for the invention to be similar to that which might have been expected.
Given the focus upon evidencing the duties which an employee actually performs, employers should review job descriptions issued to employees involved in innovative work in order to ensure that they adequately reflect the employee’s role as it evolves.
Post-Employment Non-Compete Covenants Considered. Restrictive covenants operate as a restraint of trade and are therefore generally unenforceable under English law as a matter of public policy. In certain circumstances, a restrictive covenant which is proved to be reasonable in the interests of the parties will be enforced by the courts provided that it affords no more than adequate protection of the party in whose favour it is imposed. As a result, a party seeking to enforce a restrictive covenant must demonstrate that the covenant: (i) protects a legitimate business interest of that party (e.g. confidential information and/or customer connections); and (ii) does so in a manner which is no more than adequate to protect that interest. Covenants which do not protect a legitimate business interest or which do so in a manner which is excessive are unenforceable. Reported judgments in restrictive covenant disputes are rare and, in the cases reported below, we consider recent decisions from both the Court of Appeal and High Court which provide useful guidance on the enforceability of restrictive covenants.
In Thomas v Farr plc, the Court of Appeal upheld a 12 month non-compete contained in the contract of employment of a managing director of a insurance broker which specializes in the social housing sector. The Court rejected the argument that the employer’s interests were adequately protected by confidentiality and non-solicitation provisions. They considered that a restriction preventing the employee from operating as an insurance broker in the social housing sector (but which permitted him to operate in all other sectors of the insurance industry) was reasonable in scope and that the period of 12 months was reasonable in duration. Whilst this is a useful example of a relatively long employment covenant being enforced, each case turns on its particular facts. As is illustrated below, restrictive covenants must be tailored both to the reasonable needs and interests of the particular business and the role and seniority of the particular employee if they are to stand up to scrutiny by the courts.
The recent High Court decision in Intercall Conferencing Services Limited v Steer is also favourable to employers seeking to enforce non-compete covenants. Mr Steer was employed as Head of Training and Development at Intercall and was in possession of confidential information including information concerning Intercall’s infrastructure, equipment, customers, strategy, and the remuneration of key sales staff. Mr Steer’s employment contract contained a 6 month non-compete. The High Court decided that the risk of Mr Steer inadvertently divulging confidential information to a competitor was sufficiently high that an injunction enforcing the non-compete was ordered pending a full trial.
However, the decision of the High Court in Beckett Investment Management Group Limited and others v Hall and others serves as a warning to employers to ensure, when drafting restrictive covenants, that covenants are carefully tailored. Two senior former employees of Beckett, Mr Hall and Mr Yadev, were employed by a non-trading holding company but worked in the business carried out by subsidiaries owned by their employer which provided financial services and investment advice. Mr Hall and Mr Yadev were able to persuade the High Court to set aside restrictive covenants which purported to restrict them for 12 months post-employment from dealing with certain clients of the Beckett Group because: (i) the covenants did not focus properly on the business interests of the subsidiary companies in which Mr Hall and Mr Yadev carried out their duties and were poorly drafted; and (ii) their employer was unable to provide evidence justifying the requirement for a 12 month restraint period which was therefore deemed to be unreasonable.
Annual Increase in Limits. The annual increase in statutory limits took effect on 1 February 2007. The cap on a week’s pay, for the purposes of statutory redundancy payments and the basic unfair dismissal award, has increased to £310 (approx. US$600) per week. The cap on the maximum compensatory award in "normal" cases of unfair dismissal (i.e. where there are no aggravating factors — see below) has been increased to £60,600 (approx. US$117,000) bringing the maximum unfair dismissal award to £69,900 (approx. US$135,000). However, no cap applies in certain cases where aggravating factors exist such as whistle-blowing, maternity and unlawful discrimination. As the amount of a week’s pay has traditionally increased each year in line with inflation, but has lagged behind earnings, there is likely to be a more significant one off increase in April 2008.
Information and Consultation. The Information and Consultation of Employees Regulations 2004 encourage and, in certain circumstances require, employers to put in place a formal process for information and consultation with employee representatives. The Regulations require employers with 150 employees (reducing to 100 employees from 6 April 2007 and 50 employees from 6 April 2008 — see below) who receive a request from at least 10% of their workforce (a "Formal Request") to initiate negotiations for a formal information and consultation agreement. An employer which is unable, or fails, to negotiate a formal agreement with employee representatives will have a default procedure imposed upon it. An employer which has introduced certain qualifying information and consultation arrangements in its business (known as a pre-existing agreement) may resist a Formal Request unless it is endorsed by at least 40% of the workforce. Disputes concerning the application of the Regulations are determined by the Central Arbitration Committee ("CAC"). In the case below, the CAC considers the requirements for a pre-existing agreement.
In Amicus v Macmillan Publishers Ltd, the CAC upheld a complaint pursued by Amicus (the largest manufacturing Trade Union in the UK) on behalf of employees who had made a Formal Request. Macmillan argued that the Formal Request should be endorsed by at least 40% of the workforce in the establishment because pre-existing agreements (certain employer-sponsored consultation arrangements) were already in existence. The CAC rejected Macmillan’s argument because the arrangements in question did not satisfy the requirements in the Regulations relating to "pre-existing agreements". In particular, those arrangements did not cover all the employees in the undertaking (which comprised several different sites) and were, in a number of cases, not in existence at the date upon which the Formal Request was made.
An employer which fails to comply with its obligations under the Regulations is at risk of a fine of up to £75,000 for non-compliance. Whilst the Regulations were not universally embraced by the UK Trade Unions when introduced, half the Formal Requests received by the CAC during the first year of their application were supported by Trade Unions. In its press release about the case, Amicus’ assistant general secretary was quoted as saying "Amicus will use the [Regulations] to get our members their rights at work". With effect from 6 April 2007, employers with as few as 100 employees may face a Formal Request under the Information and Consultation Regulations. This number will reduce further to 50 employees from 6 April 2007. Without doubt, formal information and consultation arrangements will play an increasingly important role in UK workplace relations in years to come.
ECJ Rules on Meaning of "Establishment". Employers are required under European law to consult elected employee representatives for minimum periods when contemplating set numbers of dismissals at one "establishment" within 90 days. In the UK, collective redundancy consultation is triggered where 20 or more redundancies are proposed by an employer at one establishment over 90 days or less. Where an employer operates at one or more sites it can be unclear whether or not each site constitutes a separate establishment.
In Athinaiki v Panagiotidis, the European Court of Justice ("ECJ") held that one of three independent production units employing 420 staff, with specialist equipment and workers, including a dedicated production director, "had the air of an establishment about it": notwithstanding that each unit was managed from a head office which housed purchasing, sales, accounting and general management functions. The ECJ decision may assist employers seeking to argue that multi-site businesses are different establishments for the purposes of collective redundancy consultation. Accordingly, collective redundancy consultation may not be triggered in the UK in the case of a multi-site redundancy exercise even though more than 20 redundancies are made in aggregate across those sites over a 90 day period.
And Finally. A number of legislative changes come into force in April 2007.
Of particular note is the increase in statutory maternity entitlements. For women whose expected week of child birth falls on or after 1 April 2007, the period of paid maternity leave has been extended from 26 weeks to 39 weeks. The period of paid adoption leave has also been increased and the rates of statutory maternity and adoption pay have increased in line with inflation. The period of paid maternity and adoption leave are expected to be further increased to 52 weeks during 2009.
In our January client alert "Developments in UK Labour and Employment Law–Looking Ahead to 2007" we set out an overview of the legislative changes expected this year and so please contact us if you would like a copy.
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 Labour or Employment law matter, please contact the Gibson Dunn attorney with whom you work, James A. Cox, our UK Labour and Employment Partner (+44 (0)20 7071 4250, [email protected]) or Daniel Pollard (+44 (0)20 7071 4257, [email protected]) in the firm’s London office, or Gibson Dunn’s Labor and Employment Practice Group Co-Chairs Eugene Scalia in Washington, DC (202-955-8206, [email protected]) or Deborah Clarke in Los Angeles (213-229-7903, [email protected]).
Gibson Dunn’s UK Labour and Employment Practice has been recently strengthened by the arrival of English solicitor Daniel Pollard. Daniel has experience advising on all aspects of UK employment law, having previously worked at another major US law firm in London, and is also able to offer business immigration advice. Daniel joins English qualified partner James Cox in the UK Labour and Employment Practice.
© 2007 Gibson, Dunn & Crutcher LLP
The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.