Employment law outlook for 2017
This year looks like being another busy year for employment law. There are a number of significant changes in the pipeline. Changes give rise to opportunities for employers to make employment contract mistakes and under calculate the payroll costs.
To help employers, we have shortlisted the most important employment law developments emerging:
Employment law developments over the calculation of holiday pay
The Court of Appeal (CA) in the case of Lock v British Gas confirmed that UK businesses must include results-based commission in statutory holiday pay calculations. Holiday pay should be calculated by reference to “normal remuneration”, where normal remuneration includes contractual commission and overtime. Failing to include these payments in future holiday pay could lead to claims under the Working Time Regulations or the deduction from wages provisions in the Employment Rights Act 1996.
The wider question of what is the appropriate reference period to use when calculating the commission element to holiday pay remains unaddressed. Employers will have to make a judgement call.
The matter is far from settled and British Gas is expected to appeal to the Supreme Court. This still leaves employers wrestling with the practical difficulties in calculating the commission element of statutory holiday pay. Possible scenarios include using the previous 12 months as the appropriate reference period or the previous 12 weeks. 12 weeks might be seen as unfair where there are significant seasonal variations in an employee’s commission.
There could easily be an employment contract mistake if the employer has not reviewed annual leave arrangements for pay.
Employment law development on the use of PILONs
HMRC continue to scrutinise payments to departing employees. In April 2018 changes to the taxation of termination payments will be introduced. There will be unnecessary commercial risk if account is not taken of the changes. The main changes include:
Taxation of non contractual payments
The removal of the distinction between contractual and non-contractual payments in lieu of notice (PILON). All payments made in lieu of notice will be treated as fully taxable and will be subject to income tax and employer and employee NICs. For employers PILON clauses offer flexibility. The change means that there is no reason not to include a PILON clause in an employment contract. PILONs do help protect the business from anti competitive behaviour by an employee.
(Before April 2018, PILONs were not included in the employment law contract to permit greater use of the £30,000 tax free limit. The basics were that the employer could breach the contract by not serving notice and then pay up to £30,000 tax free.)
Increased employers NIC burden
The introduction of the requirement for employers to pay NIC on non-contractual terminations payments above the £30,000 tax free limit – this is an additional payroll cost to budget for;
Abolishment of the foreign service relief exemption
Abolishment of the foreign service relief exemption will affect employers terminating the employment of employees with foreign service. Foreign service means where the employee has been non-UK resident whilst assigned to overseas offices. The use of enhanced tax free payments is being phased out.
Benefits in kind
Specific reforms are coming on line relating to benefits in kind. Employers need to review their employment contracts. The mistake for employers will be an unawareness of the increased PAYE burdens.
The tax and employer NICs advantages of salary sacrifice schemes will be restricted from April 2017. Currently employees save on tax by paying for benefits in kind before income tax and NICs are deducted. Employers also save on paying NICs on the sacrificed wages. Perks such as gym memberships, mobile phone contracts, company cars and medical insurance will be affected.
There will however be exceptions based on arrangements the government wishes to encourage which are pensions (including advice), childcare, cycle to work and ultra-low emission cars.
The effect on employees is that when swapping salary for benefits they will pay the same income tax as the vast majority of individuals who buy them out of their post-tax income. Employees will still save on NICs as these will continue to be deducted after the benefit has been paid for. The changes will be phased in and arrangements in place before April 2017 will be protected until April 2018. Arrangements for cars, accommodation and school fees will be protected until April 2021.
Valuation of benefits in kind
The government is reviewing the taxable value of benefits in kind. A consultation paper will be published shortly.
Employee business expenses
The government is also looking into the use of the income tax relief for employees’ business expenses. The government will review business expenses that are not reimbursed by their employer.
Employment law changes to post termination restrictions
The outcome of the government’s call for evidence on post termination restrictions is due this year. Post termination restrictions usually contained in employment contracts and or settlement agreements restrict employees from carrying out certain activities for a period of time following termination. The most commonly used and most contentious are non-compete clauses. The concern is that non-compete clauses stifle small businesses and entrepreneurs. The current requirement is that post-termination go no further than necessary to protect the legitimate business interests of the employer. This means that they must be reasonable in terms of scope, geography and duration and the skill lies in drafting enforceable provisions.
Any future change to post termination restrictions will need to strike a fine balance between the freedom of an individual to exploit their talents and the employer’s desire to protect its business interests.
Employers will need to review the terms of employment contracts and settlement agreements.
Employment law developments to the engagement of staff
There will be a variety of changes coming through relating to staff.
Employing foreign workers
Employers sponsoring foreign workers with a tier 2 visa will be required to pay an immigration skills charge of £1,000 per worker (£364 for small employers and charities) beginning in April 2017. The immigration skills charge will be in addition to current fees for visa applications.
In April 2017, the minimum salary threshold for “experienced workers” applying for a tier 2 visa will also increase to £30,000. New entrants to the job market and some health and education staff will be exempted from the salary threshold until 2019.
Personal Services Company (PSC)
The government intends to amend the IR35 legislation from 6 April 2017 for workers who provide services via a personal services company (PSC) to the public sector. Currently the responsibility for paying the correct employment tax lies with the PSC. The changes will shift the onus onto the public sector body engaging the PSC. The relevant party will generally be required to operate PAYE and national insurance contributions on fees paid to the PSC for services provided.
Modern working practices
The outcome of the government’s review into modern working practices will be published this year. Increasing numbers of self-employed and of those carrying out casual work or working in the ‘gig economy’, sparked a series of reviews in 2016. The purpose is to consider how the employment market may need to change in order to keep pace with new business models.
Gender pay gap reporting
The government’s new gender pay gap regulations require private and voluntary sector employers with 250 or more employees (including workers and certain contractors) to publish details of their gender pay gap. The first report of its kind is due by 4 April 2018 and must be a ‘gender pay snapshot’ taken on 5 April 2017. Employers with slightly less than 250 employees during the 12 month period to 5 April 2017 are also encouraged to provide the report. The gender pay gap calculations will be based on basic pay, paid leave, allowances, shift premiums and bonus payments made in the 12 months to 5 April 2017. The legislation is likely to come into force on 6 April 2017.
Funding of apprenticeships will change from April 2017. Employers operating in the UK will have to pay a levy, calculated at 0.5% of an employer’s pay bill. A ‘levy allowance’ of £15,000 per year will mean that in practice only employers with an employee pay bill of over £3m will be caught. An employer’s levy payments will be paid into the government’s new Digital Apprenticeship Service (DAS), from which they will be able to access the funds (plus a government top-up) to fund approved apprenticeship training. Employers should start planning how they will use this levy as it is paid into the DAS on a ‘use it or lose it’ basis. If an employer does not use its funds within its DAS account within a specific period, they will be made available to another employer.
Employment law developments to data protection
In 2016 the General Data Protection Regulation (GDPR) was finally adopted. The GDPR will be directly applicable in all Member States without the need for enabling national legislation. The Regulation will be effective from 25 May 2018. How the General Data Protection Regulation will be implemented in the UK does depend upon how the Brexit talks develop. However, it is likely that even with a “hard exit” the UK will be forced to implement something similar.
Extending the current scope of data protection
The GDPR expands the territorial scope of European data protection. The data protection laws will apply to all organisations that control and process personal and sensitive personal data of any EU citizen. It will apply to European and non-European businesses alike. This means that an organisation does not need to have an office in the EU for the full data protection force of GDPR to apply to them.
Huge increase in penalties for breaches of data protection
There are some onerous obligations which will take organisations time to prepare for. The penalties for non-compliance are substantially increased. The maximum penalty is 4% of annual global turnover or up to 20m Euros (whichever is the higher).
New considerations for employers
The considerations for employers include:
- The requirement to carry out audits of employee personal data they collect and process to ensure it meets the GDPR conditions for employee consent;
- New governance and record-keeping requirements;
- The overhaul of policies and processes on privacy notices, data breach responses and subject access request.
Prescribed persons required to report annually
Regulations came into force on 1 April 2017, which require “prescribed persons” to publish an annual report on any matters that are reported to them. Under the new regulations the report must be brought to the public’s attention. The most likely route will be for the prescribed person to place the report on their website. There are strict timings and the report must be published within 6 months of the end of the reporting period. The reporting period will be a 12 month period from 1 April each year.
The list of prescribed persons includes HMRC, the Director of the Serious Fraud Office and the Health and Safety Executive. The idea of a prescribed person is that employees can report whistleblowing concerns without the need to make the disclosure to the employer. However, the employee will only be able to make the disclosure in this way providing certain conditions are satisfied. These conditions are far more stringent than those where an employee is making a whistleblowing disclosure to their employer. Details relating to the worker, the employer or a person in respect of whom the disclosure has been made are not reported.
Employers will need to publicise this development and the conditions so that the workforce know about this new avenue for whistleblowing concerns. Staff handbooks should be reviewed.
The European Commission has recently introduced a whistleblowing tool that allows employees to report anti-competitive practices while retaining their anonymity. The measures are likely to lead to an increase in investigations and reduce the availability of the leniency programmes which allow businesses to report their involvement in anti-competitive practices for a reduced fine.
UK CMA cracking down on cartels
A recent advertising campaign launched by the UK Competition & Markets Authority (CMA) aims to raise awareness of cartels and encourage employees and contractors to report illegal cartel behaviour that they may have witnessed. The CMA are getting behind this initiative by offering up to £100,000 for valuable disclosures.
What do these measures mean for businesses?
These measures will increase the chances of anti-competitive behaviour being recognised and disclosed at European or national level. Due to the elevated risk of disclosure, businesses should re-evaluate their competition risk assessment, competition compliance programme and internal whistleblowing processes.