UK: Online Update - Essential Information for Employers

Last Updated: 24 January 2011
Article by Andrew Lilley

In the News

A winter of discontent ...

Industrial action has come under the spotlight recently, with a spate of Tube strikes causing travel delays in London. Some trade unions have also hinted at further strikes in the public sector against spending cuts. This raises the question of how employers can deal with the flow on effects such as travel delays and disruptions to services?

As a general rule (and subject to any contractual provision which says otherwise), employees are not entitled to be paid when they are not working. So, for example, employees who are unable to get to work because of strikes affecting public transport are not entitled to be paid. However, it may be preferable from an employee relations point of view to allow some flexibility (for example, allowing employees to work from home or take the day as holiday), particularly where the delays affect many people and are for a relatively short period.

Public sector strikes may mean some employers are unable to provide work, eg because they are reliant on public sector contracts or goods which cannot be delivered. Employers in these circumstances are not usually able to stand employees down temporarily without pay. Unless there is an express contractual right to "lay-off", which is rare, to do so would breach the employment contract. Employers will therefore need to continue to pay employees who are ready and willing to work, even if there is little or no work for them to do. If the situation continues in the long term, redundancies may need to be considered.

... and the joys of spring

The government has announced an additional public holiday on 29 April 2011, on the occasion of the Royal Wedding of Prince William to Kate Middleton. Whether employees will be entitled to take this day off depends on their employment contract. If the contract provides that employees are entitled to a certain number of days' holiday plus all public holidays, then they will be entitled to take the Royal Wedding day in addition to the usual entitlement. Employees whose contract provides for holiday to be inclusive of public holidays will not be entitled to the additional day. In practice, many employers are likely to allow their employees to take this additional holiday even if they are not contractually entitled to it, in the interests of maintaining good staff morale.

Bonuses - can they be withheld?

Two recent cases have considered when employers can justify withholding discretionary bonuses.

Case 1: The employee was the chief economist of a mining company and part of his role was forecasting metal prices. In 2008, his forecasts proved to be significantly wrong, which contributed to the company incurring material losses. In addition to his salary, the employee was entitled to an annual discretionary bonus based on his performance for that year. Performance was graded from "grade one – unsatisfactory" to "grade six – superior" and only employees who received a "grade two – satisfactory" or higher received a bonus payment. Due to his poor forecasting, the employee's performance for 2008 was deemed "unsatisfactory" and he was awarded no bonus. The employee challenged this, arguing that, apart from the forecasting, his performance in 2008 had been no different to 2007 when he had been rated as "outstanding". He pointed out that no concerns had ever been raised about his performance prior to the "unsatisfactory" rating.

The High Court rejected his claim. It ruled that it was entirely up to the company to decide whether the employee's performance was "satisfactory" and how much emphasis should be placed on his poor forecasting. Although the failure to raise performance issues earlier might have been unfair, the question was whether the bonus decision was irrational, in the sense that no reasonable employer could have exercised its discretion that way. The Court ruled that it was not – the "unsatisfactory" rating was genuine and could be backed up by evidence. The Court also noted that performance in previous years was irrelevant when deciding the bonus amount for the current year.

Case 2: The employee was a sales account manager who was entitled to an annual sales commission on top of her salary. The commission was payable on reaching a set sales target and on any new business won above the target. The commission scheme allowed the company to limit the commission payment to 100 per cent of the employee's base salary, but stated that capping commission in this way would be "by exception only". The scheme also allowed the company to revise sales targets at the end of each quarter to ensure they were challenging. In 2007, the employee achieved sales revenue over three times her target which would have led to a commission payment of over three times her base salary. However, the company decided to cap her commission at 100 per cent of her salary. The employee argued this was a breach of her employment contract.

The employee won her claim. The High Court ruled that the company had a restricted right to cap commission "by exception only" – meaning it could only do so in exceptional circumstances, such as if the employee was guilty of gross misconduct or the company was in dire financial straits. No such circumstances existed here, so there was no basis for limiting the employee's commission. The Court added that the company could have revised the employee's sales targets if it was concerned about the potential payout.

The cases highlight the importance of careful drafting in discretionary bonus schemes. Case 1 shows that it is difficult for an employee to challenge the amount of a discretionary bonus where the employer has taken into account all relevant factors and its decision is genuine. The case also shows that it is possible, in some circumstances, for employers to justify a nil payment provided this is reasonable, consistent with the bonus criteria, and can be backed up with evidence. Case 2 warns that any terms in the scheme which are intended to limit the amount of a bonus will be interpreted narrowly. Employers who wish to impose a cap on bonuses or commission should make clear in the scheme the amount of the cap and when it will apply.

Humphreys v Norilsk Nickel International (UK) Ltd; GX Networks Ltd v Greenland

Redundancy - the importance of consultation

Two recent cases demonstrate the importance of thorough consultation with employees in a redundancy process.

Case 1: The employee was placed in a pool with two other employees, and they were all scored against the following selection criteria: attendance, quality, productivity, abilities, skills, experience, disciplinary record and flexibility. The employee's scores were the lowest and he questioned how they had been reached, in particular the score for flexibility, but the employer failed to provide an explanation.

The EAT found that the employer had failed to consult fairly, because it had not provided adequate information on which the employee could respond. This was particularly important in relation to a subjective criterion such as flexibility. It may not always be necessary to give further explanation of scoring in more straightforward areas such as attendance or timekeeping. The EAT also commented that ideally most of the information behind the scoring would have been known to the employee already, via the appraisal process.

Case 2: The employee was an HR Manager who was assisted by an HR Executive. The employer decided to make the role of HR Manager redundant, and employee was dismissed. The EAT found that the redundancy was unfair because the employer had automatically decided that the HR Manager was in a pool of one and had failed to carry out any consultation on this point. Although the employer had considered whether to pool the two employees, and had even prepared written answers anticipating questions about this from the employee, the subject was not raised by either party at the consultation meeting. The EAT acknowledged that the question of how the pool is defined is up to the employer, and it is difficult for the employee to challenge it as long as the employer genuinely applied itself to the question. However, the employer should also have consulted the employee about pooling.

The result of case 1 is not surprising, as the employer clearly failed to provide sufficient information for the employee to be able to comment on his scores. However, it does demonstrate how a proper appraisal process can assist in a redundancy situation, by providing evidence to support the scoring exercise. In contrast, appraisals which are inconsistent with redundancy scores can undermine a redundancy selection process - eg where ongoing issues of poor performance have never been addressed at an appraisal but are subsequently used in a redundancy exercise. Employers should always check appraisals carefully before scoring employees against the selection criteria.

Case 2 does not mean that employers must always consult employees about how the redundancy pool should be formed. In many situations it will be clear how the pool should be formed and there will be no other reasonable alternative. But where there is more than one way in which a pool could reasonably be made up, the employer should consult on the issue, in order to reduce the risk of an unfair dismissal claim.

Pinewood Repro Limited t/a County Print v Page; Fulcrum Pharma (Europe) Limited v Bonassera

Retirement - a done deal?

The employee was a kitchen porter whose employment contract contained a retirement age of 65, as did the employer's retirement policy. In accordance with the statutory retirement procedure, the employee made a request to continue working beyond retirement. The employer rejected the request, and the employee's appeal, without giving reasons for either decision.

The Employment Tribunal found on the evidence that retirement was effectively "a done deal". At both meetings the employer made it clear that it was their policy to retire employees at 65 and no exceptions would be made. The Tribunal decided that the statutory retirement procedure requires employers to consider the employee's request to continue working in good faith. As the employer had failed to do so, the retirement amounted to unfair dismissal.

The default retirement age will be abolished on 1 October 2011, at which point the statutory retirement procedure will no longer apply. 1 April 2011 is the last date on which notices can be given under the statutory procedure. Any employer who receives a request to continue working under the procedure must consider the request in good faith. Although the procedure does not require the employer to give reasons, it would be prudent to do so in order to reduce the risk of a successful unfair dismissal claim.

From 1 October 2011, employees who are compulsorily retired will be able to bring claims for age discrimination and unfair dismissal. Any decision to retire an employee must be objectively justified in order to avoid age discrimination. The question of whether retirement is objectively justified will depend to a large extent on the specific business, but the hurdle is likely to be high, and the evidence will be closely examined by Employment Tribunals. In addition a fair procedure should be followed to avoid unfair dismissal, and this would include a genuine consideration of any request by the employee to continue working beyond retirement.

Ayodele v Compass Group plc

Are employees on PHI entitled to additional holiday pay?

Following the case of HMRC v Stringer in 2009, employees on long-term sick leave have been entitled to take, and be paid for, statutory holiday under the Working Time Regulations 1998. This potentially raises significant practical difficulties where employees are on long term sick leave and in receipt of permanent health insurance (PHI) benefits. Such a case has now been considered by an Employment Tribunal.

The employee had been on long-term sick leave, and receiving PHI benefits of approximately 50% of salary, for several years. On retirement she brought a claim for statutory holiday pay for the whole period of her sickness absence. During her sick leave she had neither taken nor requested holiday. The Employment Tribunal decided that since she had not taken or requested holiday, her entitlement had lapsed each year and the Working Time Regulations did not allow this to be carried over to the following year. Therefore she was only entitled to be paid in respect of her untaken holiday entitlement for her final leave year. In the Tribunal's view, her contract had effectively been varied when she started to receive PHI so that the lower salary was a permanent arrangement. Any holiday taken whilst on PHI would therefore have been paid at that rate, so she was not entitled to any additional holiday pay.

As this decision is only at Employment Tribunal level it is not binding on other Employment Tribunals. However, the Tribunal's view that an employee cannot claim compensation for untaken holiday if she did not take or request it is consistent with other recent Tribunal decisions. The Tribunal's conclusion that holiday pay was due at the lower PHI rate is helpful to employers, but will not necessarily be followed by other Tribunals. It may nevertheless provide employers with a useful starting point if they are faced with a claim for holiday pay from an employee who is receiving PHI benefits.

Souter v Royal College of Nursing Scotland

Restrictive Covenants - how long is too long?

The employee was an accounts executive for a foreign exchange business. His employment contract contained a number of post-termination restrictive covenants, including a covenant preventing the employee from soliciting clients for 12 months following termination of employment. The employee left to join a competitor and the employer applied for an injunction to enforce the non-solicitation covenant. The employee argued that the 12 month period was too long. The High Court agreed. It took into account the fact that the foreign exchange market was notoriously fast moving and 12 months was much longer than was needed to establish relationships with clients. The High Court therefore refused to enforce the covenant.

This case is a reminder that careful consideration must be given to the drafting of restrictive covenants. When considering how long a non-solicitation covenant should last, employers should estimate how long a replacement employee would take to build and protect relationships with clients. It is rare for covenants to be enforced for a period of more than 12 months, and in many cases the appropriate period for the covenants will be shorter than this. Employees' restrictive covenants should be reviewed regularly to ensure that they are still appropriate. This is particularly important when an employee is promoted or moves into a different role or a different area of the business.

Associated Foreign Exchange Limited v International Foreign Exchange (UK) Limited New Law

Unfair dismissal compensation

For dismissals taking effect on or after 1 February 2011, the maximum compensatory award for unfair dismissal will increase from £65,300 to £68,400. The maximum amount of a week's pay for the purposes of calculating the unfair dismissal basic award and statutory redundancy pay will increase from £380 to £400 per week.

Statutory maternity, paternity, adoption and sick pay

On 11 April 2011, the lower rate of statutory maternity pay, and the rates of statutory adoption and paternity pay, will increase from £124.88 to £128.73 per week. Statutory sick pay will increase from £79.15 to £81.60 per week.

Additional paternity leave

As reported in the November 2010 Online Update, a new right to additional paternity leave will come into force for fathers of babies due, or matched for adoption, on or after 3 April 2011. This will allow eligible fathers to take up to six months' additional paternity leave in addition to the current entitlement of one or two weeks. The right applies not only to biological fathers, but also to the spouse, civil partner or partner of the mother, and is also available to adoptive couples.

Equality and diversity

From 6 April 2011, it will become lawful for an employer to recruit or promote someone on the basis of their sex, race, religion or belief, sexual orientation, disability or age in certain circumstances. Such "positive action" will only be allowed when choosing between two equally qualified candidates in order to redress an imbalance in the workforce – eg selecting a female over an equally qualified male to join an all male management team. There is no definition of "equally qualified", so it is unclear what this expression means - eg whether it refers to formal qualifications only or also includes skills and experience. If the two candidates are not equally qualified, recruitment or promotion on the basis of sex, race, etc will amount to direct discrimination. It is therefore unlikely that many employers will use this right and there is no obligation on employers to do so.

Childcare vouchers

From 6 April 2011, the way that tax relief works on employer-provided childcare vouchers will change. Currently, the first £55 a week (or £243 a month) of eligible childcare vouchers is exempt from income tax and national insurance contributions, regardless of the employee's rate of income tax. From 6 April 2011, the value of vouchers which are tax and NICs free will vary according to the employee's tax rate. This is designed to even out the tax savings available for all employees. Employers will, therefore, need to estimate the employee's earnings to determine the value of vouchers that can be provided tax-free. The change only affects people joining an employer's scheme on or after 6 April 2011 – employees who already participate in an employer scheme as at 5 April 2011 are not affected. HMRC has published guidance on the changes, including how to estimate the employee's earnings, which is available at www.hmrc.gov.uk/thelibrary/esc-qa.htm

Watch This Space

Immigration

The Government has announced a raft of immigration reforms that will have a significant impact on employers recruiting foreign workers. The key changes from April 2011 are:

  • the tier 1 highly skilled route will be closed to all applicants (this route has already closed to overseas applicants on 23 December 2010)
  • the tier 1 highly skilled route will be replaced with a new tier 1 exceptional talent category which will be limited to 1,000 scientists, academics and artists per year
  • for registered immigration sponsors, tier 2 general will be restricted to graduate level jobs and will be limited to 20,700 applications per year from April 2011 (in the meantime, there will be an interim limit of 10,832 on tier 2 certificates of sponsorship until April 2011)
  • for international companies that are registered sponsors under tier 2, it will still be possible to transfer existing staff from offices abroad but employees coming for more than 12 months will need to be paid at least £40,000 per year, and their stay will be limited to 5 years.

The closure of the tier 1 highly skilled route is very significant for many businesses (particularly those with a highly skilled workforce). This places more emphasis on tier 2, which requires employers to have a sponsor licence, and either demonstrate there are no suitably qualified European candidates for the role or transfer an existing employee from an office abroad.

The Government is also proposing to end the right for foreign students to work for up to two years after completing a degree in the UK. Affected employers can make submissions to the UKBA through a public consultation on foreign students which closes on 31 January 2011. The consultation document is available at: www.ukba.homeoffice.gov.uk/sitecontent/documents/policyandlaw/consultations/students /

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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