UK: In Counsel - July 2012

Last Updated: 31 July 2012
Article by Janice Wall and Marlies Braun

Welcome to the latest edition of our In Counsel publication for in-house counsel, compliance officers, finance directors and company secretaries.

We are here to update you on some significant legal developments affecting your business. Top of the political agenda is the Government's new proposals on executive pay. We consider whether the payment of break fees might constitute unlawful financial assistance and whether unlawful financial assistance can be rendered enforceable by a later variation of the transaction; whether a party caught in a legal dispute is able to refuse mediation; and the landmark Supreme Court decision in Seldon v Clarkson Wright and Jakes (A Partnership) which considers whether it is possible after all to require employees to retire at 65. We also look at the new requirement for "quoted companies" to report on greenhouse gas emissions in their directors' report and accounts, and the decision of the ECJ that non-textual copying of the functionality of software does not infringe copyright – good news for competitors who are looking to develop programs with the same functionality as existing products (but bad news for authors of software hoping for greater protection for their products!). Finally we consider the extent to which rights to early retirement pensions transfer under TUPE and the implications of a recent HM Treasury and HM Revenue & Customs consultation for the tax status of non-executive directors.

We want to keep you updated on these and other relevant developments as and when they happen. If you would like to know more about any of the topics covered in this update please get in touch.

CORPORATE

The Government's New Proposals on Executive Pay

By Marlies Braun

The Government's proposals on executive pay have changed slightly since we last reported on this topic in April (see our April 2012 update). The new proposals1published on 20 June 2012 which were widely reported in the financial press constitute a good compromise between giving shareholders more influence on executive pay and avoiding shareholders micromanaging their companies.

In our April 2012 update we reported that the directors' remuneration report is proposed to be split into a forward-and a backward-looking section with:

  • the forward-looking section (referred to as the policy report) outlining the future remuneration policy and potential exit payments, and
  • the backward-looking section (referred to as the implementation report) explaining how the remuneration policy was implemented in the previous financial year.

The policy report

Back in March 2012, the Department for Business Innovation & Skills (BIS) proposed that the policy report be made subject to an annual binding shareholder vote requiring a higher than 50% majority. The Government's new proposal is that this section of the directors' report be subject to an annual binding vote only if the company intends to change its remuneration policy. If no such change is suggested, a binding shareholder vote would only be required once every three years. The required majority for this vote now appears to be a simple 50% majority of shareholders rather than a majority of between 50 and 75% as was suggested earlier this year.

If a company fails the binding vote it will be required to follow the existing remuneration policy until the shareholders approve a revised policy.

The implementation report

The backward-looking section of the directors' report is currently subject to an advisory shareholder vote only and this is suggested to remain unchanged. If a company fails the advisory vote it will be required in the following year to seek the shareholders' binding vote on its overall remuneration policy.

The implementation report will have to include a single figure of each director's total remuneration. A methodology for calculating this single figure has been developed by BIS together with the Financial Reporting Council's (FRC) Reporting Lab, companies and investors which "will reflect actual pay earned rather than potential pay awarded."

Proposed changes to the UK Corporate Governance Code

Where a substantial minority of shareholders votes against the company's remuneration policy or against its implementation, the company may be required to publish a statement setting out how it intends to address shareholder concerns. The FRC will consult on the necessary changes to the UK Corporate Governance Code to reflect this new requirement.

What next?

The Government is expected to publish amendments to the Enterprise and Regulatory Reform Bill shortly to reflect these proposals. BIS will also publish draft regulations setting out the format and content of the directors' remuneration report.

These reforms are due to come into force in October 2013.

Comment

We welcome the new proposal of making the future remuneration policy and potential exit payments subject to a binding 50% majority vote every three years (unless such policy is due to be changed) rather than an annual supermajority vote. It strikes a good balance between giving shareholders more influence on executive pay and avoiding shareholders micromanaging their companies.

Although we have not yet seen the proposed methodology for how the single figure of each director's remuneration shall be calculated, we expect the proposed requirement to publish such a single figure to increase transparency and induce remuneration packages to be less complex and more closely align director pay and performance. It will also enable investors to more readily compare and evaluate remuneration packages across companies.

Consultation on the Stewardship Code

By Shveta Nehra

On 20 April 2012, the Financial Reporting Council (FRC) published a consultation paper2proposing changes to the UK Stewardship Code (the Code). The Code was first published in 2010 and, at the time, was subject to criticism in certain areas. The Financial Reporting Council have waited for the principles of the Code to be adopted and implemented before making any proposals for change.

The Code

Seven principles form the basis for the Code which are directed at institutional investors who hold shares in UK companies. The Code's principal aim is to ensure institutional investors are active and engage in corporate governance in the interests of their beneficiaries.

Changes to the Code

The FRC stated that the purpose of the proposed changes3is not to broaden the scope of or change the seven principles but to reinforce them where necessary.

The proposed revisions to the Code include the following:

  • Definition of stewardship. Changes have been made to the introductory paragraph of the guidance to the Code to clarify and confirm the meaning of stewardship. The changes provide that stewardship activities include monitoring and engaging with companies on matters such as strategy, performance, risk, remuneration and corporate governance, as well as voting. Engagement is defined as "purposeful dialogue with companies on those matters as well as on issues that are the immediate subject of votes at general meetings".
  • Roles of asset owners/managers. The proposed changes seek to provide clarity on the different roles and responsibilities of asset managers and asset owners. The changes include an explicit recognition that asset owners have a stewardship obligation to their beneficiaries, while recognising that the specific stewardship activities carried out by owners and managers will vary depending on their circumstances.
  • Conflict of interest policies. Changes have been made to principle 2 to encourage institutional investors to prepare, implement and disclose a policy which sets out the process adopted to deal with conflicts of interest. The proposed changes recognise that the interests of clients may vary.
  • Collective engagement. Principle 5 was initially introduced to establish whether the signatory is willing and able to join forces with other investors. However, the FRC feels that the principle, as originally drafted, has not fully achieved its purpose. The revisions to this principle are therefore designed to encourage investors to provide an indication on the sorts of circumstances in which the investors may participate in collective engagement.
  • Use of proxy voting or other voting advisory services. Revisions are proposed to the guidance to principle 6 to encourage disclosure on the extent to which signatories use, rely upon and follow the recommendations of their advisors.
  • Stock lending. The proposals include the insertion of a reference to stock lending to the guidance to principle 6. The revisions seek for disclosure by signatories of their policy on stock lending and specifically whether signatories recall lent stock for voting purposes.
  • Other asset classes. The changes proposed to the introductory section to the Code are to encourage disclosure of whether the signatory applies its stewardship approach to other asset classes including overseas equities. The initial focus of the Code has been on UK equities but the FRC acknowledge that such equities may only be a small part of an institutional investor's portfolio and certain clients and beneficiaries may wish to apply the Code to other sections of the portfolio.
  • Assurance reports. The FRC is seeking to strengthen the language in principle 7 by proposing that managers 'should obtain' assurance reports rather than consider obtaining such reports. In addition, if requested, clients should also be provided access to such assurance reports.
  • Policy updates. The proposed changes to the Code provide that signatories review their policy statements annually, update them as necessary and indicate the date of the last review.

Other

There are other substantive changes to the Code, including:

  • the removal of any suggestion or inference that institutional investors should not become insiders; and
  • an emphasis on the role of support providers in promoting stewardship and clarification on the definition of support providers.

The consultation closed on 13 July 2012. The amendments to the Stewardship Code are intended to apply to financial years beginning on or after 1 October 2012.

The New UK Financial Services Regulatory Landscape

By Charlotte Baker

The UK financial services regulatory structure is facing major reform under the Financial Services Bill (the Bill) which was published in draft form in June 2011. As part of the overhaul, the Government has proposed the abolition of the current system including the Financial Services Authority (FSA) and the introduction of three new regulatory bodies, namely:

  • the Financial Conduct Authority (FCA);
  • the Prudential Regulation Authority (PRA); and
  • the Financial Policy Committee (FPC).

Under the proposed new system the FCA and PRA will undertake dual regulatory roles in respect of all firms considered by the Government to manage significant risks on their balance sheets including banks, building societies, insurers, credit unions and Lloyds's of London. The FPC will monitor the stability and resilience of the UK financial system and unlike the FCA and the PRA will not have direct regulatory responsibility for particular firms.

In addition the Bill proposes extensive amendments to the Financial Services and Markets Act 2000, the Banking Act 2009 and the Bank of England Act 1998.

The Prudential Regulation Authority

In its dual regulatory role the PRA will be responsible for the authorisation, prudential regulation and day to day supervision of applicable firms.

The PRA's general objective will be to promote the safety and soundness of the firms it authorises with the main aim of ensuring that firms carry on their business in a way that avoids adverse effects on the UK financial system. In addition it is proposed that the PRA will adopt an insurance objective that will apply when the PRA discharges its general functions in relation to insurance and insurers, the aim of which will be securing an appropriate degree of protection for those who are or may become policy holders.

Together with the FCA, it is intended that the PRA will be granted new powers which go beyond those inherited from the current system:

  • Unregulated holding companies. The FCA and the PRA will be given the power to make directions imposing requirements on certain unregulated parent undertakings that control and exert influence over authorised persons;
  • Early publication of enforcement action. This new power will allow the FCA and the PRA to publish the fact that a warning notice has been issued to a firm, marking the start of formal enforcement proceedings, together with a summary of the content of the warning notice;
  • Investigations. The FCA and the PRA will be given the FSA's existing powers to carry out investigations into firms and individuals for enforcement and other purposes, which will include powers to obtain information and access to premises;
  • Increased disclosure. The Government is considering changes to the powers of disclosure currently held by the FSA with a view to allowing the FCA and the PRA to act without the level of restrictions imposed on the FCA in respect of disclosure.

The Financial Conduct Authority

Together with the dual regulatory role the FSA will hold with the PRA, the FCA will inherit the majority of the FSA's existing roles and will fulfil the role of the UK financial services regulator with the responsibility of all firms currently regulated by the FSA including personal investment firms, insurance and mortgage intermediaries, investment managers, custodians and corporate finance companies. The FCA will also act as the prudential regulatory for all firms that do not fall under the dual-regulation system.

It is intented that the FCA will have a more pro-active and interventionist approach to conduct regulation, aimed at addressing weaknesses in the current system and confronting actual and potential risks before they crystallise.

The Bill outlines the strategic objective for the FCA as ensuring that the relevant markets function well. In addition the FCA will have three operational objectives:

  1. the Consumer Protection Objective: to secure an appropriate degree of protection for customers;
  2. the Integrity Objective: to protect and enhance the integrity of the UK financial system; and
  3. the Competition Objective: to promote effective competition in the interests of consumers in the markets for regulated financial services.

In addition to those shared with the PRA, the FCA will gain the following powers:

  • Misleading financial promotions. The Bill will give the FCA power to require firms to withdraw or amend a misleading financial promotion with immediate effect and to announce that it has done so;
  • Product intervention. It is proposed that the FCA will be given new powers to allow it to make temporary interventions to address problems arising from financial products or services that it considers are detrimental to the interests of consumers or competition;
  • UKLA. The Bill will amend the Financial Services and Markets Act 2000 to reflect the FCA's role as the UK Listing Authority and its regulatory responsibilities for recognised investment exchanges; and
  • Competition: The Government is considering giving the FCA additional powers to enhance its operational objection to promote competition.

Current status of the bill

Royal assent is expected to be given to the final version of the Bill by the end of 2012 with the current expectation for completion of the necessary primarily legislation and the transfer of powers to the new regulatory bodies in March 2013.

New Rules Governing Prospectuses

By Marlies Braun

The obligation to produce a prospectus and the content and format requirements of prospectuses across the EU are regulated by the Prospectus Directive and the Prospectus Regulation. In 2010 the Prospectus Directive was amended by the Amending Directive. Member states are required to implement the Amending Directive by 1 July 2012. In the UK, the Amending Directive was implemented by the Prospectus Regulations 2011 and the Prospectus Regulations 2012 along with accompanying amendments to the FSA Handbook.

The Amending Directive amends some of the exemptions from the requirement to produce a prospectus and the thresholds determining if a prospectus is required.

The Prospectus Regulations 2011

The UK implemented two aspects of the Amending Directive in 2011 by amending the Financial Services and Markets Act 2000 (FSMA). These regulations came into force on 31 July 2011. The key change implemented early was to increase the thresholds in relation to two exemptions from the requirement to produce a prospectus:

  • Private placements. The threshold for the private placement exemption was increased from 100 to 150 persons, other than qualified investors, per EEA state.
  • Total consideration. The threshold for the total consideration of public offers not requiring a prospectus was increased from €2.5m to €5m calculated on an EU wide basis.

The Prospectus Regulations 2012

The Prospectus Regulations 2012 (the 2012 Regulations) introduce the following changes, among others, to FSMA and the Prospectus, Listing and Disclosure Rules:

  • The threshold for the minimum consideration per investor was increased in order to qualify for the prospectus exemption from €50,000 to €100,000.
  • The minimum denomination of the offered securities was increased in order to qualify for the prospectus exemption from €50,000 to €100,000.
  • The threshold for the total consideration of debt securities issued in a continuous or repeated manner by a credit institution was increased in order to qualify for the prospectus exemption from €50m to €75m.
  • The new definition of the term "qualified investor" adopts the professional investor definition of the MiFID (the Markets in Financial Instruments Directive).
  • The employee share scheme exemption was extended to apply to:
    • all EU companies ;and
    • non-EU companies whose shares are traded on a regulated market or an equivalent third country market.

The 2012 Regulations also make amendments to the requirements for prospectus summaries and the format and validity of a prospectus.

The 2012 Regulations were published on 15 June 2012 and came into force on 1 July 2012.

The Impact of Chandler v Cape plc on Corporate Holding Structures

by Marlies Braun

In our October 2011 update we reported on the High Court decision in Chandler v Cape plc.4The Court of Appeal has now upheld the High Court decision confirming that the holding company owes a direct duty of care to the employees of its subsidiary.

Facts

To briefly recapture the facts of the case (see for further detail our October 2011 update) the claimant was an employee of Cape Building Products Ltd (Cape Products) in 1959 and 1961/62 at a site which manufactured asbestos boards. During the course of his work, the claimant was exposed to asbestos dust which was produced during the manufacture of the boards and contracted asbestosis. His exposure had been caused by negligence and constituted a breach of statutory duty on the part of Cape Products.

At the relevant time, Cape Products was a wholly-owned subsidiary of Cape plc and one of many subsidiary companies within the Cape group which had as its core business the production of asbestos-based products. Cape Products had no policy of insurance to indemnify it against claims for damages for asbestosis and had ceased to exist at the time of the claim.

High Court decision

The High Court held that Cape plc owed a direct duty of care to the employees of its subsidiary because it assumed overall responsibility for the relevant matters in relation to those employees. The judge based his decision on the three-stage test established in Caparo Industries v Dickman5stating that Cape plc:

  • had actual knowledge of the Mr Chandler's working
  • conditions;
  • should have foreseen the risk of injury to Mr Chandler;
  • employed a scientific officer and a medical officer who were responsible for health and safety issues relating to all employees within the Cape group;
  • dictated policy in relation to health and safety issues; and
  • retained overall responsibility for ensuring that its own employees and those of its subsidiaries were not exposed to risk of harm through exposure to asbestos.

Court of Appeal decision

The Court of Appeal confirmed the decision of the High Court holding that responsibility of a parent company for the health and safety of its subsidiary's employees may be imposed where:

  1. the businesses of the parent and subsidiary are in a relevant respect the same;
  2. the parent has, or ought to have, superior knowledge on some relevant aspect of health and safety in the particular industry;
  3. the subsidiary's system of work is unsafe as the parent company knew, or ought to have known; and
  4. the parent knew or ought to have foreseen that the subsidiary or its employees would rely on its using that superior knowledge for the employees' protection.

These points reflect the findings of the High Court. However the decision of Arden LJ seems to be broader than the High Court decision. She states that, for the purposes of element (4), it is not necessary to show that the parent is "in the practice of intervening" in the subsidiary's health and safety policies. Rather, courts will look at the group structure more widely and may find element (4) established "where the evidence shows that the parent has a practice of intervening in the trading operations of the subsidiary, for example production and funding issues".

Comment

This is one of the first cases in which a parent company was held to owe a direct duty of care to, and be liable for, a subsidiary's employees. It is not a case of "piercing the corporate veil" and the decision to impose a direct duty of care on the parent company was not based on the parent company's control of its subsidiary. Rather, it was the assumption of responsibility by the parent company over the relevant affairs of its subsidiary that forms the basis of the court's judgment.

The case specifically relates to the parent company's responsibility for health and safety matters of its subsidiary's employees. However, the way the Court of Appeal phrased its decision in relation to element (4) above suggests that it may have wider implications for parent company liability: To prove this element it will be sufficient to show that the parent company has a practice of intervening in other group-wide matters, matters entirely unrelated to health and safety issues.

The case also establishes that such a liability may be imposed on a parent company a long time after the relevant subsidiary ceased to exist. In the context of corporate transactions, this will have to be taken into account when conducting due diligence on a target group of companies.

When Do Break Fees Constitute Unlawful Financial Assistance?

By Rebecca Patrickson

In its decision in Paros Plc v Worldlink Group Plc,6the High Court considered whether break fees in heads of terms constitute unlawful financial assistance.

Facts

ParOS plc (ParOS) and Worldlink Group plc (Worldlink) were in negotiations with a view to undertaking a reverse takeover, that is, the unquoted Worldlink was proposing to acquire the larger AIM-quoted ParOS with the result that the shareholders of Worldlink would become majority shareholders in ParOS.

ParOS and Worldlink entered into heads of terms in respect of the proposed reverse takeover. Some provisions of the heads of terms were intended to be legally binding whereas others were intended not to be legally binding:

  • The non-binding provisions of the heads of terms stipulated that Worldlink would re-register as a private company as soon as possible and ParOS would acquire the entire issued share capital of Worldlink.
  • The binding terms provided (among other things) that Worldlink would pay ParOS a break fee which amounted to ParOS's costs and fees in the transaction.

The intention behind the proposed re-registration of Worldlink as a private company was that it could then, once re-registered, lawfully give financial assistance to ParOS in connection with the share acquisition as the prohibition in the Companies Act 2006 on the giving of financial assistance only applied to public companies.

However, the structure of the transaction changed later in the negotiations: Rather than providing for Worldlink to re-register as a private company (and thereby avoid the statutory prohibition on the giving of financial assistance), the parties attempted to achieve the same result by structuring the transaction as an asset rather than a share acquisition. No other provisions of the heads of terms were varied.

Decision

The court had to consider if the break fee constituted unlawful financial assistance.

The Companies Act 2006 prohibits:

  • a UK public company from giving financial assistance for the purpose of the acquisition of its shares or those of a parent company, and
  • a UK private company from giving financial assistance for the purpose of the acquisition of shares of a public parent company.

The court held that, although it is not clear whether a break fee is always financial assistance, in this case, at the time when the transaction was structured as a share acquisition, the break fee was "smoothing the path to the acquisition of the shares" and therefore amounted to unlawful "other financial assistance" (at least unless and until Worldlink re-registered as a private company) and had a material effect on the net assets of Worldlink.

However, once the heads of terms were varied to provide for an asset rather than a share acquisition, the court found that the break fee ceased to be unlawful financial assistance and therefore held that the break fee should be treated as rendered enforceable.

Comment

The case demonstrates that an initially unlawful provision of financial assistance can be rendered enforceable by later on varying the structure of the transaction. It also highlights the importance of ensuring that, if the parties decide to vary the structure of a transaction following execution of heads of terms, all provisions of the heads of terms are considered to make sure they continue to reflect the intentions of the parties.

DISPUTE RESOLUTION

Can You Refuse to Mediate?

By Jeremy Lederman

In its recent decision in Swain Mason and others v Mills & Reeve,7the Court of Appeal gave some encouragement to parties wishing to decline to enter into mediation to resolve their disputes.

Background

The courts encourage parties to use Alternative Dispute Resolution (ADR), including mediation, to resolve their disputes. This is derived from the Practice Direction on Pre Action Conduct and Pre Action Protocols, under the Civil Procedure Rules and Court Guides.

The court can penalise in costs a party who in its view has unreasonably refused to mediate. This can include depriving a successful party of an order that the losing party pay its costs. The court can also make case management orders such as a stay granting the parties time to mediate.

Facts of the case

Mr Swain and his family instructed Mills & Reeve solicitors (MR) to assist them in the sale of their shares in their company. Advice was sought as to the sale of the shares and some tax advice given as to how to structure the sale in relation to the proceeds of sale. As matters proceeded Mr Swain indicated he was suffering from an illness and was about to undergo an operation. There was no indication either was life threatening. No request for tax advice in the event of his death was sought or given. The transaction was entered into and completed. Unfortunately shortly afterward, following his operation, Mr Swain unexpectedly died. A claim was made that MR should have advised taking into account Mr Swain's possible death. The suggestion was if he had received proper advice a subtantial saving in inheritance tax would have been made either by deferring the transaction for a short period, so that it took place after his death or that it be arranged that the proceeds be immediately re-invested in qualifying securities.

MR declined to mediate throughout. They were convinced they had a good case.

MR succeeded at trial. They "lost" on various issues but were found overall not to be liable. The trial judge noted MR's refusal to mediate. He ordered that MR only be able to recover 50% of their costs. The parties appealed.

Decision

The Court of Appeal dismissed the claimants' appeal on the substantive merits.

On costs, the Court of Appeal was reluctant to interfere with the trial judge's findings on the issues based decisions, including MR pursuing an extensive and costly disclosure exercise as regards the sellers' accountants.

On refusal to mediate the Court of Appeal took a different view from the trial judge. It decided that the MR had not unreasonably refused to mediate.

It took the parties back to the Court of Appeal decision of Halsey v Milton Keynes General NHS Trust and that the case was authority that:-

  • Parties should not be compelled to mediate;
  • ADR and mediation was not a panacea for every case;
  • A party's reasonable belief that it has a strong case is a factor in deciding whether it was unreasonable to refuse mediation.
  • Account needs to be taken of whether a meditation would succeed, given the parties' stances.
  • The court should be astute that parties are not wrongly put under costs pressure as regards mediation.

The Court of Appeal taking a broad brush approach substituted an order that MR recover 60% as opposed to 50% of its costs.

Implications

This case needs to be set in context as an example of where the court had some sympathy for a party declining to mediate.

It is a reminder of a few of the non–exhaustive list of considerations from Halsey that the court will take into account when deciding if a party has unreasonably refused to mediate:

  1. The nature of the matter. In Halsey the court recognised that some kinds of cases are not suitable for mediation (for example those with issues of law or construction), however it noted that many cases are not unsuitable for mediation.
  2. Did the successful party reasonably believe it had a strong case?
  3. Were other options for settlement pursued?
  4. The costs of mediation.
  5. Would the mediation delay the trial of the action?
  6. Would the mediation have had no reasonable prospect of succeeding?

As to 4 – It has been possible to conduct mediation on a reduced costs basis for some time.

As to 5 – Some mediation providers market an emergency service setting up a mediation as quickly as the next day.

The onus is on the unsuccessful party to establish that the winning party unreasonably refused to mediate.

A party refusing to mediate will still remain at risk including where they consistently do so where there have been changes in the case (as often happens).

A party refusing to mediate due to its belief that it has a strong case will be subject to scrutiny by the court as to whether that opinion is reasonable.

Careful consideration of offers to mediate continues to need to be made.

EMPLOYMENT

Justifying a Retirement Age of 65 – There's Life in The Old Dog Yet!

By Richard Isham

As many of you may have seen reported in the press, the Supreme Court has turned down Mr Seldon's appeal against the Court of Appeal's decision that his law firm, Clarkson Wright & Jakes, was entitled to force him out because he had reached the firm's retirement age of 65.8However, the Supreme Court has sent the case back to the tribunal to determine whether the age of 65 is the appropriate age for retirement. In other words, can the law firm provide satisfactory evidence that 65 is the right retirement age required to achieve the "legitimate aims" that it put forward to justify the retirement age of 65? So what does this mean for you?

Not an employer's charter

The Supreme Court's decision should not be taken as carte blanche for employers to have a compulsory retirement age of 65 (or any other age). Indeed, if you have a compulsory retirement age, you should give very careful consideration as to:

  • the business reasons underpinning the age decided upon;
  • the evidence that objectively supports those reasons; and (in the light of the Seldon case); and
  • how the business can show that 65 (or the compulsory retirement age decided on) is the right age, i.e. that the choice of the mandatory retirement age is a proportionate means of achieving those legitimate aims, rather than, say, 70 or some other age.

It may well be the case that, being able to evidence objective justification, a business is put to very considerable expense in relation to collating the statistical data required to support its case. This alone may be a disincentive to having a compulsory retirement age.

Devil in the detail

Certainly, the devil is in the detail of the Supreme Court's decision. The Supreme Court, after an analysis of the relevant European cases, concluded that our Government has legitimately given UK employers and partnerships "the flexibility to choose which objectives to pursue, provided always that (i) these objectives can count as legitimate objectives of a public interest nature (emphasis added) .... and (ii) are consistent with the social policy aims of the state and (iii) the means used are proportionate, that is both appropriate to the aim and (reasonably) necessary to achieve it".

'After the event' rationalisation of the aim is lawful

An important point came out in the Seldon litigation, namely that at the time Mr Seldon was compulsory retired, the firm had not identified the aims that it subsequently relied upon in defending the claim. The Supreme Court concluded that it is not necessary for the stated aims relied upon to defend a claim of direct or indirect age discrimination to have been in the minds of those adopting the measure at the time of its adoption.

Once the aim is identified it must be shown to be "legitimate"

The Supreme Court made it clear that once the aim is identified, there still has to be evidence to show that it is legitimate. The court gave examples:

  • improving the recruitment of young people and so having a balanced and diverse workforce, is in principle a legitimate aim, but if, in reality (demonstrated by recruitment statistics) there is no problem in recruiting young people, rather in retaining older workers, then this cannot be a legitimate aim for the particular business; and
  • avoiding the need for performance management may be legitimate, but if sophisticated performance management measures are embedded in the business, it may not be legitimate for the business to avoid them in relation to only one class of the workforce (those who have attained the compulsory retirement age).

Sting in the tail

Employers choosing to have a compulsory retirement age could be in for a shock once the tribunal hear the case as to whether or not 65 was a proportionate means of achieving each of the stated objectives of Mr Seldon's former firm. The statistical analysis needed to show that 65 was more proportionate than say 66, 70 or 75 may be very onerous – the need to show, for example, that at age 65 a partner's performance decreased such that he/she was likely to fall below the standards required of partners in the firm, may be hard to prove at a general level (evidence that individual's mental faculties decrease once over 65 making the pursuit of law harder), let alone amongst those who have served as partners in the firm.

Conclusion

In relation to retirement policies, employers need to speak to their lawyers, whatever their age!

Let's Be Frank... The Truth About Protected Conversations

By Laura Conway

Imagine the following situation... you have long standing employees with a below average performance record (although shockingly no formal procedures have been started) and they have no disciplinary record but are as irritating as a leg full of mosquito bites. Wouldn't it be great if you could tell them outright that it is not working out and that you want to discuss the terms upon which they would agree to leave? This is the intention behind the Enterprise and Regulatory Reform Bill (the Bill).

At present, there is a risk associated with discussing departure terms with an employee as you will not be covered by the "without prejudice" rule unless there is an existing dispute. Such a discussion could fuel bullying allegations or be used as evidence in an unfair dismissal claim.

Under the Government's proposals, the intention is that you would be able to have a fair conversation with any employee about terminating their employment without the employee being able to use that conversation in an unfair dismissal claim. Sounds simple enough doesn't it? Whether wording can actually be drafted to safely put it into practice is altogether a different issue.

The draft wording in the Bill states that in an unfair dismissal claim "an employment tribunal may not take account of any offer made or discussions held, before the termination of the employment in question, with a view to it being terminated on terms agreed between the employer and the employee."

This provision does not give employers as much scope as previously thought when protected conversations were initially discussed. The intention appears to be that settlement terms are put forward during the conversation. A BIS press release stated that the offer could be in the form of a settlement agreement or a letter, although the Bill wording does not specify that settlement terms need to be put forward during the conversation or that they need to be in writing. This provision will not apply in cases of automatic unfair dismissal (e.g. whistleblowing) and such conversations can be used as evidence in a discrimination claim.

BIS have said that settlement agreements should not replace performance management and that fair processes would still need to be followed. However, there is no pre-requisite that there be any motivation for having such a conversation (although if there is no context to such discussions an employee may be led to conclude that there was a discriminatory reason).

In addition, and this is no doubt where things could potentially get very messy indeed, if an employment tribunal considers that anything said or done was "improper" or "connected with improper behaviour" it will be admissible. There is no guidance yet on what "improper" means but it may well be put on you to adduce evidence of issues with the employment relationship and perhaps evidence that the settlement terms put forward were reasonable?

There is definitely potential for the waters becoming muddied in the employment tribunal with judges potentially having to decide whether a conversation is improper and, if not, then putting knowledge of it aside for purposes of an unfair dismissal claim but not any related discrimination claim. It is also difficult to see how the conversation could be completely disregarded if it forms one element of a constructive dismissal claim, or if a grievance is raised subsequently as a consequence of the conversation. This may put extra pressure on the tribunal system if there is a need for more pre-hearing reviews, or it adds to the length of the hearing.

Also, for many, this concept will go against the protectionist intentions of the Employment Rights Act. Essentially, if the employee does not agree to go on the proposed terms they will have to stay on in employment, knowing management want them out, without recourse. Employers may well be tempted to put forward an offer that they know will not be accepted to sow the seeds of doubt in the employee and push them to move on.

The Bill is not yet finalised and we will let you know when there are any further developments. In the meantime, as before, we suggest you seek legal advice if you are considering having any pre-termination settlement discussions with employees.

Holiday & Sickness – No Welcome Break in Their Relationship!

By Adam Grant

If an employee falls ill during a period of paid annual leave is it just bad luck or should they be allowed to reschedule any leave days on which they were sick for later in the year? The European Court of Justice (ECJ) was asked to consider exactly this point in the recent case of Asociación Nacional de Grandes Empresas de Distribución (ANGED) v Federación de Asociaciones Sindicales (FASGA) and others (the ANGED case).9

Background

It was established in the ECJ case of Pereda v Madrid Movilidad SA that if a worker has prearranged statutory annual leave but this then coincides with a period of sickness absence, the worker has the option to reschedule the leave. If necessary, the worker can carry over any statutory leave which was not taken as a result of sickness to the next leave year.

However, in Pereda, the worker concerned was on sick leave before the period of planned statutory annual leave began. In the ANGED case the ECJ considered whether workers who fell ill during a period of statutory leave should be permitted to reschedule those days on which they were ill.

The ANGED case

The dispute arose in relation to a Spanish collective agreement for a number of department stores. While the agreement expressly allowed workers to reschedule periods of paid holiday where it coincided with periods of temporary incapacity due to pregnancy, workers were not permitted to reschedule holiday by reason of general ill health.

Various trade unions took the matter to the Spanish High Court where they were successful in obtaining a declaration. However, on appeal by ANGED (the National Association of Large Distribution Businesses), the matter was referred to the ECJ.

Unsurprisingly, the ECJ's ruling was consistent with the previous ruling in Pereda. It held that the entitlement of every worker to paid leave is an important principle of EU law from which there should be no derogations. It made a distinction between the purpose of paid annual leave, to enable the worker to enjoy periods of relaxation and leisure, and sick leave, the purpose of which is to enable a worker to recover from an illness which has temporarily made them unfit for work.

Crucially, the court clarified that the point at which the worker becomes ill was irrelevant and that it made no difference whether the worker was unfit to work before they went on leave or whether they became unfit whilst already on leave. If, therefore, a worker becomes unwell while on leave, they are entitled to reschedule leave for those days on which they were unfit for work. If necessary, these can be taken outside the relevant leave year.

How can an employer reduce the risk of abuse of sickness leave by its employees?

The decision in ANGED comes as no great surprise but it does open up the potential for abuse by employees. For example, what is to stop an employee coming back from a week's holiday claiming that he was unwell for three of his five days' leave and that he therefore wishes to reschedule these days for later in the year or even roll them over to the next leave year? Following the ANGED case, the employer must allow these leave days to be rescheduled. However, how can the employer reduce the risk of abuse of this rule?

  • If company sick pay is being provided, in order to qualify for it the employer could require that sickness be reported in the usual way even if the employee is on annual leave (for example, by contacting their manager by a specific time on the first day of sickness). There is also nothing to prevent an employer making the payment of company sick pay conditional on the production of medical evidence that states that the employee was unfit for work. While an employer should not restrict the employees' rights to reschedule their annual leave, they need only pay them statutory sick pay (SSP) if the employee is unable to produce the necessary medical evidence. However, it may be difficult for employees to obtain such evidence particularly if they are abroad and thus the employer may wish to consider whether they strictly enforce such a policy.
  • If an employer only chooses to provide SSP during sickness absence, employees are less likely to falsely claim that they are unwell on holidays if it means that they will only be paid SSP particularly because they are not entitled to anything until the fourth day of sickness.
  • An employer could choose to adopt a mixed policy so that an employer may be entitled to company sick pay but not when it falls within prescheduled annual leave. There is a danger that the above policies could lead to mistrust and resentment amongst the workforce and, in some cases, implementing these rules could require changes to contractual terms which can be problematic.

The best policy may simply be to monitor sickness absence and warn workers that abuse of the system could lead to disciplinary action against them. Somehow we doubt that this will be the last case on this vexed issue and we will of course update you as and when there are any further developments!

To read edition in full, please click here.

Footnotes

1 The Government's new proposals on executive pay are available at http://www.bis.gov.uk/assets/biscore/business-law/docs/d/12-900-directors-pay-guide-to-reforms.pdf.

2 The consultation paper is available at http://www.frc.org.uk/getattachment/fa05e79c-22c6-4f8f-b5b3-2ab55ec41113/Consultation-Document-Revisions-to-the-UK-Stewards.aspx.

3 The proposed changes to the Stewardship Code are available at http://www.frc.org.uk/Our-Work/Publications/Corporate-Governance/Consultation-Document-Revisions-to-the-UK-Stewards/Appendix-to-Consultation-Document/Appendix-to-Consultation-Document-Draft-Revised-UK.aspx.

4 The Court of Appeal decision in Chandler v Cape plc [2012] EWCA Civ 525 is available at http://www.bailii.org/ew/cases/EWCA/Civ/2012/525.html.

5 The decision in Caparo Industries v Dickman [1990] UKHL 2 is available at http://www.bailii.org/uk/cases/UKHL/1990/2.html.

6 The High Court decision in Paros Plc v Worldlink Group Plc [2012] EWHC 394 (Comm) is available at http://www.bailii.org/cgi-bin/markup.cgi?doc=/ew/cases/EWHC/Comm/2012/394.html.

7 The decision in Swain Mason & Others and Mills & Reeve (a firm) [2012] EWCA Civ 498 is available at http://www.bailii.org/ew/cases/EWCA/Civ/2012/498.html.

8 The Supreme Court decision in Seldon v Clarkson Wright and Jakes (A Partnership) [2012] UKSC 16 is available at http://www.bailii.org/uk/cases/UKSC/2012/16.html.

9 The ECJ decision in Asociación Nacional de Grandes Empresas de Distribución (ANGED) v Federación de Asociaciones Sindicales (FASGA) and others C-78 (2011) (ECJ) is available at http://www.bailii.org/eu/cases/EUECJ/2012/C7811.html.

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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