Legal Briefing

Change is the only certainty in employment law

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Employment | 05 July 2019

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How far and fast the world of work is changing is evident from a quick scan of recent headlines. It’s rare that an employment law issue won’t be prominent in the news. From establishing the status of workers in the gig economy to addressing the gender pay gap, employment rights and employers’ obligations are attracting greater scrutiny than ever.

At PwC, we’ve engaged in some innovative thinking about the evolution of the workforce to create a number of scenarios imagining what the future of employment could look like. These range from a world in which large global corporations dominate to arrangements that feature more flexible, community-based organisations that accentuate the role of individuals.

While these are not intended to be predictions, they nevertheless offer useful insights into the forces shaping the way people will be employed and the implications for employers. In fact, some of the scenarios, such as the rise of the gig economy and the impact of automation, have proven especially prescient. What these scenarios demonstrate is the speed at which employment issues evolve. For in-house lawyers, keeping pace with the wider trends and changes affecting employment is essential. In this article, we’ll examine some of the critical areas that are shaping employment law today.

The contingent workforce

The gig economy, and the wider issue of contingent workers, is one of the most dynamic and fast moving areas of human resources (HR). A number of cases addressing worker status are going through the courts. The new tax IR35 tax rules for personal service companies may well come into force in April 2020. The government’s Good Work Plan issued in December 2018 is starting to lead to legislative change for the benefit of individuals with increasingly different working patterns. All of this change has to be seen in the light of organisations seeking greater flexibility in the workforce by drawing from a talent pool beyond their existing employee population. While it’s easy to think of these changes having the greatest impact on companies in the gig economy, practically all organisations will be affected to a greater or lesser extent.

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In-house legal teams should certainly be addressing the issue of contingent workers. This is an area which is not typically ‘owned’ by HR and so it’s vital to ensure that all risks are properly mitigated. To do that requires input from the tax, procurement, HR, finance and legal functions. For example, the new IR35 rules will mean that an organisation will have to make an assessment of the status of contractors with a personal service company, even where that contractor has been hired through an agency. This means that agency contracts must be revisited to ensure that they are fit for purpose under the new regime and that the organisation has the right to audit its entire supply chain. Being caught within the IR35 regime will lead to additional National Insurance costs. Contractor agreements will have to be reviewed to establish where liabilities will fall.

It is not only the non-employed workforce that will be impacted by these changes. New rules on calculating statutory holiday pay and continuity of employment in force from April 2020 mean not only that contracts of employment and HR practices must change, but also that HR and payroll systems must reflect these new rules. Making those adjustments can take a significant amount of time. The government’s proposal to establish centralised enforcement of holiday pay rights means that organisations should start getting their house in order now to ensure that, in the event of an investigation, they have all appropriate recording and payment procedures in place.

Finally in this area, the government is planning to align the tests on employee and worker status for tax and employment rights purposes. We can therefore expect to see further and greater change in this area, although probably not by the time the changes described above have been introduced next year.

The collective landscape

Efforts by trade unions to halt the decline in their membership and grow their influence is seeing them take an increasing interest in the gig economy and in contingent workers more generally. The result is an upward trend in the number of cases being brought to employment tribunals with union backing. These mean that both the public and private sector are having to take trade union activity seriously.

Collective representation is a growth area in the gig economy. Traditional trade unions have started to pursue membership in the sector. For example, the GMB recently contracted an innovative deal about worker status with a large courier company. However, traditional unions are playing catch up with the Independent Workers of Great Britain, which has driven the collective agenda in the gig economy since its creation in 2015.

For more traditional organisations, moving to more flexible working arrangements can have challenges. That’s particularly the case for businesses (often ex-public sector) with a high density of union members, where longstanding collective agreements equate to high fixed costs. Delivering transformational business change in this sort of environment comes with a high risk of either direct industrial action (eg strikes), or indirect methods of disruption. The latter has led to some novel ideas, for example airline staff picketing outside the supermarket that supplies their on-board sandwiches, or ‘cyber-picketing’, where supporters of a strike repeatedly blocked seats through a cinema chain’s website to prevent the sale of tickets.

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There is recent good news for employers. Section 145(b) of the Trade Union & Labour Relations (Consolidation) Act 1992 prohibits employers from making an offer to workers who are members of a trade union, the effect of which would be prohibited. Prohibited here means the workers’ terms, or any of them, ‘will not (or will no longer) be determined by collective agreement’ with the union. Breach of this section could lead to a £3,800 penalty payable to each affected worker. Employers feared that this gave unions an absolute veto over even minor changes. The Court of Appeal has just taken a contrary view, holding that for the section to bite, the prohibited act would need to involve a degree of permanency.

Gender pay reporting

Regulations requiring mandatory gender pay reporting came into effect in 2017, requiring organisations with 250 or more employees to:

  • calculate gender pay gaps annually from April 2017; and
  • publish these gaps, along with salary quartile information, on a government portal and on their website.

The impacts of these changes are wide-ranging and very significant. They require the disclosure of highly sensitive and emotive pay information, which is all too often misinterpreted and misconstrued. A gender pay gap is a simplistic measure that assesses the difference in average male and female pay across an entire workforce. This is very different to the concept of ‘equal pay’ for ‘equal work’, enshrined in UK law since 1970, which assesses pay between men and women doing the same or similar work.

An organisation’s gender pay gap is therefore typically driven by its demographics – the gender makeup across the various levels of seniority. Employers with predominantly male leadership teams will invariably have a gender pay gap, although this does not necessarily indicate equal pay problems.

However, the publication of this sensitive pay data carries the very real possibility of reputational, legal and commercial risks, to which many major employers in the UK have been subject. Raised awareness of diversity and possible pay disparities within organisations, is bringing with it knock-on impacts on employee attraction, retention and engagement, as well as wider negative publicity.

In addition, the increased awareness of employees’ legal entitlement to pay equality has led to a surge in equal pay claims. In our experience, due to the complexity of the legislation, many organisations may have significant equal pay exposure without realising it.

It is therefore crucial that employers take proactive steps to investigate and manage their pay systems, to ensure fairness and consistency across the workforce. This investigation should look more widely than just gender. It appears likely that mandatory pay gap reporting will be extended to ethnicity, and a number of organisations have already published their sexual orientation and disability pay gaps. By gaining a clear understanding of what is driving pay gaps, employers will be able to effectively communicate this to employees and other stakeholders, and take appropriate steps to address any inequalities they identify.

National minimum wage (NMW)

In recent years, HMRC’s budget for enforcing the NMW has risen significantly and it has opened an unprecedented number of investigations as a result. Their investigations are typically triggered by a complaint from an individual worker or simply because HMRC is focusing on a particular industry.

The penalties for failure to comply with the NMW can be severe, both financially and in terms of reputation. If HMRC concludes that an employer has underpaid its workers, it will issue a notice of underpayment requiring the employer to not only make repayments to workers it has underpaid, but also to pay a financial penalty to HMRC of up to 200% of the amount of any underpayments (capped at £20,000 per worker). In addition, the Department for Business, Energy and Industrial Strategy (BEIS) has the power to publicly name organisations found to have underpaid their workers. Although this naming scheme is currently suspended pending the outcome of a government review, it is unlikely to be closed permanently and the potential reputational damage to an organisation of being named can often be of greater concern than the requirement to pay arrears and penalties.

While organisations very rarely pay anyone less than the NMW intentionally, NMW legislation is particularly complex and can be challenging for many employers. Even where employers pay above the NMW rate, HMRC’s application of the NMW legislation may result in workers falling below the statutory minimum level. In particular, employers are often caught out by not recognising the time their workers are required to spend on-site before and after their shift (changing into uniform, for example) as payable working time, or by requiring their workers to purchase specific items of clothing to perform their role.

When an investigation is opened, HMRC will contact the employer and seek information on the entire workforce. HMRC are also likely to interview individual workers as part of their review, during which they check whether an employer’s contracts and policies are reflected in practice. Where possible, there is a real benefit in employers proactively self-reviewing their historic compliance with the NMW before HMRC involvement. If an employer has corrected any historic NMW underpayments by the time HMRC opens an investigation, it will not be liable for the potentially severe financial penalties and will not be subjected to public naming.

The #Metoo world: using non-disclosure agreements (NDAs)

The use of NDAs has recently come under intense public scrutiny following sexual harassment allegations against a number of high-profile figures, some of whom had NDAs in place prohibiting their accusers from speaking publicly about the allegations. In the wake of the #MeToo movement, the government has been considering a ban on NDAs, also commonly known as ‘gagging clauses’, where they are intended to prevent employees from reporting allegations of sexual harassment. With the use of NDAs still very much in the public spotlight, organisations should be reviewing how NDAs are used in these circumstances.

Change the only certainty

Perhaps the overriding theme from all of the above is ongoing and increasingly rapid change. That change comes from evolving case law, new legislation and the demands of maintaining a flexible workforce to secure competitive advantage. Addressing all this change while retaining vitally needed talent and reducing risk is a major challenge. In-house legal teams have a central role to play in addressing it successfully.

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