UK: Round-up of Employment Law Developments: April 2003

Last Updated: 29 April 2003

This article includes short summaries of the following developments:

  • Pay Transparency
  • Rolled-up Holiday Pay
  • Agency workers
  • HSE initiatives
  • Planning for employment law changes
  • Reminder: new legislation in force this month

Pay Transparency

The widely-reported case of Barton v Investec this month has once again highlighted the risks involved in an employer operating an "opaque" bonus system or other pay scheme. It is the first appellate decision in this area and is of great importance.

Louise Barton claimed that she received lower salary, bonuses and share option awards than male colleagues. Investec's bonus scheme was discretionary and employees were not told how the awards were calculated. Ms Barton's equal pay and sex discrimination claims failed at first instance, with the tribunal somewhat controversially stating that secrecy and a lack of transparency were "vital components" of the bonus culture in city institutions. This aspect of the decision was surprising, particularly given that the lack of transparency in Schroder Securities' bonus scheme was heavily criticised by the tribunal in Julie Bower's 2001 bonus claim and was material to the finding that her bonus awards were discriminatory (our summary of that decision is available here).

Ms Barton's appeal to the EAT was upheld and her claims were remitted to a fresh tribunal to reconsider. The EAT expressly disapproved of the tribunal's comments, stating that "no tribunal should be seen to condone a City bonus culture involving secrecy and/or lack of transparency because of the potentially large amounts involved, as a reason for avoiding equal pay obligations."

Particular emphasis was given to the provisions of the EOC Code of Practice on Equal Pay (which tribunals must take into account if relevant) referring to the importance of pay systems being transparent i.e. employees should be able easily to understand how their rate of pay is determined. As explained below, the burden of proof in many cases will now be on the employer to demonstrate that its treatment of the employee was not affected by the employee's gender. Investec's failure to comply with this aspect of the Code, together with its failure to deal properly with a statutory sex discrimination questionnaire, were held to be highly material factors in assessing whether it had done so in this case. As the tribunal had not properly considered whether Investec had in fact discharged this burden, the issue was remitted to a fresh tribunal to consider.

The EAT also took the opportunity to set out some guidelines on the burden of proof. An employee need only prove facts from which the tribunal can conclude, in the absence of an adequate explanation, that the employer has committed an act of discrimination, before the burden of proof shifts to the employer to disprove discrimination by demonstrating that gender played no part in the employer's treatment of the employee. Lack of transparency in a pay system, being a breach of the EOC Code, may in itself be enough to shift the burden of proof. An employer will be hard pressed to prove that sex played no part whatsoever, consciously or subconsciously, in its decisions. The tribunal will require cogent evidence and will examine carefully explanations for failure to deal with the questionnaire procedure and/or apply the Code of Practice.

The case highlights the need for employers at least to apply objective criteria fairly in awarding bonuses and to keep documentary evidence of their decisions, even if they do not wish to publish this information to employees. This, together with equal opportunities monitoring of pay and bonus awards and equal opportunities training for all managers involved in the decision-making process, will help in defending claims. Employers worried about risks inherent in their pay systems may also want to consider an equal pay audit, perhaps using the EOC equal pay review kit. However, maintaining opaque pay systems is probably only going to be a short term solution, in view of the media attention given to the new equal pay questionnaire in force from 6 April, which disgruntled employees may use to obtain information on bonus criteria.

Possible questions that could be asked in an equal pay questionnaire are suggested by the EOC on their website. While employers can probably resist providing details of individual employees' bonus awards unless the individuals consent or the tribunal orders disclosure (on the basis of data protection law), an employer will still need to provide information in a generic or anonymised form where possible – and this would certainly include bonus criteria.

Of course, where bonus criteria have been set (whether published to employees or not), employers must not let other extraneous factors influence the bonus decision or otherwise exercise their discretion "perversely or irrationally". Employers also need to take care that, where one of the criteria for bonuses is individual performance, the rating given to an individual for bonus purposes should be consistent with their appraisal rating.

Rolled-up Holiday Pay

Employers paying "rolled-up" holiday pay may face substantial claims for further holiday pay.

The Working Time Regulations 1998 oblige employers to provide workers with four weeks' paid holiday a year. Some employers have sought to comply with this by paying hourly or weekly rates of pay, which expressly include an element of holiday pay, during periods actually worked, rather than paying workers during the leave they take. This approach is useful where employees work varying hours, given the administrative burden in calculating average weekly pay in such cases. Whilst it has been clearly established that such an arrangement is ineffective if it has not been agreed with the employees, there have been conflicting EAT decisions as to whether such a mutually agreed arrangement satisfies the Regulations.

The issue was recently considered by the Scottish Court of Session in MPB Structures Ltd v Munro. It held that the right is to be paid for annual leave at the time that the leave is taken and therefore "rolled-up" pay does not satisfy the Regulations. Moreover, it held that the employer was not entitled to set off against its liability to provide pay during a period of leave the amounts already paid as part of the "rolled-up" rate prior to the start of the leave.

Decisions of the Court of Session are not binding on English tribunals, but are persuasive. Employers using this pay method may therefore be faced with substantial claims for "unpaid" holiday pay. Although claims under the Regulations must be presented within three months of the date on which the payment should have been made, the EAT in List Design Group Ltd v Catley held that workers can also bring deduction from wages claims for unpaid holiday pay, and as the "failure" to pay holiday pay would probably be treated as a series of deductions, time would only run from the last in the series of failures. This may expose employers to claims for pay dating back to the introduction of the Regulations in October 1998. It remains to be seen whether employers will be able to recover the holiday-related element of the wages paid, on the basis that it was paid under a mistake of law, whether by court action or as an overpayment of wages deductible from subsequent wages.

Employers in this position will also want to terminate their current "rolling-up" arrangements. As with any contract variation, the legal position should be carefully analysed before doing so to minimise potential claims.

Agency workers

Can agency workers be employees, either of the agency or the client? Tribunals have tended to accept that the agency set-up does not meet the requirements for an employment contract by either party. Two cases this month suggest that the issue remains open to debate and that, in the right factual case, a tribunal will find that an employment relationship exists.

In deciding whether someone is an employee, there are two preconditions: there must be sufficient control by the alleged employer and there must be the necessary mutuality of obligation (i.e. a contract whereby the employee is obliged to provide his own work and skill in return for remuneration). The tribunal will then consider whether there are provisions of the contract inconsistent with employment, balancing all the relevant factors.

An agency worker has a contract with the agency but is usually subject to the day-to-day control of the client. Arguments for an employment relationship with the agency tend to fail due to the agency's lack of practical control, those for an employment with the client fail due to the absence of a contractual relationship between the worker and client.

However, in Dacas v Brook Street Bureau, the EAT held that an agency worker supplied for six years to provide cleaning services for a client was an employee of the agency. The tribunal found as a fact that the agency exercised "considerable control" over the worker in paying her wages and being entitled to discipline her or terminate her services (although "day-to-day" control was exercised by the client). The EAT thought that the agency's control was sufficient to satisfy the required control factor for the worker to amount to an employee of the agency. The agreement between the worker and agency stated that she was not an employee, but the label applied by the parties is only determinative if the other points are inconclusive, and here the other factors pointed towards employment.

The flip side of the coin was considered by the Court of Appeal in Franks v Reuters. In this case the client was held to have sufficient control in terms of its day-to-day management of the worker. The issue was therefore whether the worker could be the client's employee in the absence of a written contract directly between the worker and client. The Court held that such a worker could be an employee of the client. The existence of only two written agreements, one between the worker and agency and another between the agency and client, does not mean that there cannot be a contractual relationship between worker and client. The tribunal must consider whether there was an implied contract of employment which had come about through conduct. This would involve examining the circumstances and what was said and done by the parties at the start of the work and subsequently. Length of service might be relevant in a case such as this, where an agency worker stayed with the client for over five years and was re-deployed in that period. The Court thought that dealings over a period of years "are capable of generating an implied contractual relationship". As the tribunal had not fully considered this question, the case was remitted to the tribunal to reconsider.

This decision can be contrasted with the earlier case of Hewlett Packard Ltd v O'Murphy concerning an agency worker who contracted through his own personal service company with the agency, which then contracted with the client. The EAT held that in such a case, had the tribunal correctly asked itself whether there was a contractual nexus between the worker and client, it would have had to conclude that there was none. It may be that four parties is one too many.

The cases illustrate the importance of findings of fact by the tribunal, which it will be hard to challenge on appeal. So how should agencies and clients respond to these cases? From the client's perspective, the risks of a contractual relationship between it and the worker being implied are decreased if the period of engagement is kept short and if it ensures that the written documents between it and the agency and (to the extent it can influence this) between the agency and worker include statements that the worker is not an employee of the client. It should also try to ensure that as much control as is practical remains in the hands of the agency. Agencies will of course seek to do the reverse, e.g. include statements that the worker is to be the employee of the client. It may become increasingly common for the parties to apportion the risk of employment claims by way of indemnities.

HSE initiatives

The HSE is reported to be training its inspectors to carry out inspections on stress in the same way as they inspect for other workplace risks, with inspections to be introduced later this year. Employers are already required to carry out risk assessments on health and safety issues including stress. This may be a good time to check your house is in order.

The HSE has also indicated that it intends to step up efforts to improve the safety of work-related driving, working with police to examine failures in companies' health and safety management following road traffic incidents. They will look particularly at the imposition of unrealistic delivery schedules, inadequate training and failure to properly maintain vehicles. Guidance for employers on work-related road safety is planned for publication in August 2003.

Planning for employment law changes

In an attempt to make employers' lives slightly easier, the DTI has announced that new UK employment laws will come into effect on either 6 April or 1 October each year. The exceptions will be the annual increases to tribunal compensation limits, which will continue to take effect on 1 February, and legislation to implement existing European legislation. From January 2004, the DTI will publish an annual statement of forthcoming employment regulations.

Reminder: new legislation in force this month

On 6 April 2003 the following employment–related legislation came into force:

  • Employment Act 2002 (part only) and associated regulations: provisions relating to maternity, paternity and adoption leave and pay, right to request flexible working, and equal pay questionnaires. Note that a third set of flexible work regulations was implemented very recently, providing that flexible work claims can be submitted to ACAS arbitration as an alternative to a tribunal claim.
  • Working Time (Amendment) Regulations 2002: amendments to implement the Young Workers Directive and amending slightly the method of calculation of the average working week.
  • The Income Tax (Earnings and Pensions) Act 2003: new statutory references for tax legislation.
  • Regulations providing for the new National Insurance rates announced in the 2002 Budget, plus other minor changes to employment-related tax provided for in the 2003 Budget (details can be found in a briefing on the 2003 Budget available here).

ACAS has also drafted a revised Code of Practice on time off for trade union duties and activities, including guidance on time off for union learning representatives (a new right brought into force by the Employment Act 2002). The Code came into force on 27 April 2003.

Article by Anna Henderson

© Herbert Smith 2003

The content of this article does not constitute legal advice and should not be relied on as such. Specific advice should be sought about your specific circumstances.

For more information on this or other Herbert Smith publications, please email us.

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