UK: As Employment Law Reforms Gather Pace, What Do You Need To Know?

Last week, the Government announced a number of proposals for changes to employment laws. These new measures come hot on the heels of other recent proposals on collective redundancies, dispute resolution, equality issues and executive pay. The majority of the new proposals are expected to come into force this year. However, we anticipate that changes to TUPE will take longer to implement.

We consider below the measures which are most likely to impact our readers, and comment on how these may affect day to day work and employment practices.

  • A more employer-friendly TUPE? The Government seems committed to repealing the service provision change regime (SPC provisions), allowing some post-transfer harmonisation of terms and conditions of employment and limiting the cases of post-transfer automatic unfair dismissal. However, the abolition of the SPC provisions will not necessarily exempt service contract transfers from TUPE, as they may still fall under the "business transfer" provisions. In fact, we anticipate greater uncertainty in determining when TUPE applies, similar to that experienced before TUPE 2006 was enacted. Whilst the proposals on flexibility around harmonisation of terms and conditions and dismissals are potentially very helpful to employers, their compatibility with EU law will need to be verified.
  • Cap the compensatory award for unfair dismissal at either one year's pay or the current limit (£72,300), whichever is lower. This may lead to swifter settlement discussions, based on more realistic expectations. But it may also result in increased reliance on other claims, in respect of which compensation is uncapped (e.g. discrimination or whistle-blowing) and, in turn, applications to strike out weak claims.
  • Pre-termination negotiations will be inadmissible in unfair dismissal claims, even in the absence of a dispute. Again, limiting the exemption to unfair dismissal claims may result in employees pursuing other types of claims, where disclosure will be permissible. The exemption will not apply where there was "improper behaviour" – a concept that is yet to be defined and may, in itself, result in satellite litigation.

TUPE's future: is certainty sacrificed and will proposals for more flexibility fail EU tests?

Repealing the SPC provisions will end the current state of (relative) clarity

TUPE's SPC provisions were introduced in 2006, to help clarify in what circumstances a change in service provider amounted to a relevant transfer under TUPE. Until 2006, transactions involving a change in service provider (whether an outsourcing, insourcing or second generation contracting out scenario) fell to be analysed under TUPE's "business transfer" provisions. A fact-specific analysis had to be carried out, against a background of a large body of conflicting European and UK case law. Once the SPC provisions are repealed, we will have to re-apply the pre-2006 position. This has proved to be a complex exercise which may require considerable time and financial investment. In some instances, it will make commercial sense to challenge the application of TUPE in a particular transaction; in others, where the potential impact and cost of the transfer is not too prohibitive, employers may decide they are better off assuming a TUPE transfer applies, than spending legal fees and facing the risk of legal action due to a notoriously uncertain law.

Inevitably there will be disputes along the way in some transactions as to whether TUPE applies.

The Government is planning a lead-in period before implementing its proposals. It is currently consulting on how long this period should be, with proposals ranging from one to five years.

Has the Government found a valid loophole which allows employers to harmonise employment terms post-transfer?

At the moment, post-transfer harmonisation of employment terms is not permissible where the change is:

  • by reason of the transfer; or
  • for a reason connected with the transfer, which is not an economic, technical or organisational reason entailing changes in the workforce (an ETO reason).

The Government is considering a number of changes in relation to these provisions:

  • Limit the restriction on harmonisation to changes made by reason of the transfer only.
  • Retain the prohibition on transfer-connected harmonisations, with the exception of changes which employers and employees could have agreed under the terms of the employment contract, had there been no TUPE transfer. This option does, however, raise a number issues. For example, will a transferee be able to rely on a "general" and "advance" consent in the contract of employment that allow an employer to change terms? How much will it cost a transferee to secure consent? And, how does this sit with EU case law which prohibits detrimental changes to employment terms, even where they are made with employees' consent?
  • Finally, the Government is also proposing to extend the meaning of ETO reason, which it believes has been interpreted too narrowly. The main proposal is for an ETO reason to include change of workplace location.

Dismissals for a reason connected with the transfer may no longer be automatically unfair, but defensible as a "normal" dismissal

As in relation to harmonisation of terms of employment, the Government believes that TUPE goes further than its underlying EU Directive, and is considering:

  • limiting cases where post-transfer dismissals are automatically unfair to those which arise by reason of the transfer;
  • widening the meaning of the term ETO reason to include change of workplace location (e.g. following a closure of a workplace). The Government hopes that this will expressly allow transferees to defend "normal" unfair dismissal claims in the same way as they would non-TUPE redundancies; and
  • limiting employees' rights where they resign because a transfer involves (or would involve) a substantial change in working conditions to their material detriment. Employees will no longer be able to complain of automatic unfair dismissal and, instead, their claim will be for wrongful dismissal and (in the majority of cases) will be limited to their notice pay.

New proposals are designed to increase settlements of disputes and limit compensation once the employment ends

Three of the Government's proposals are designed to impact on the manner employers and employees handle the end of the employment.

The Government has announced it will revise the cap on the level of the compensatory award for unfair dismissal claims

The cap will be the lower of one year's pay (calculated in accordance with the statutory concept of a "week's pay") or the current limit of £72,300. This is designed to align employees' expectations more closely with the levels of awards made by employment tribunals. For example, for the year 2011/12, the median award for unfair dismissal cases was £4,650. This may result in swifter conclusion to settlement negotiations, or it may lead to increased reliance by employees on claims where compensation is uncapped (e.g. discrimination).

There is a risk that this measure will be challenged as discriminatory, e.g. because of sex, disability or age.

Settlement discussions will be inadmissible in unfair dismissal claims – even in the absence of an existing dispute

Whilst this proposal is designed to facilitate earlier, more extensive exploration of settlement between employer and employee, it suffers from three shortcomings:

  1. Non-disclosure is limited to unfair dismissal claims only. In reality, many employees bring more than one claim in the tribunal and, as a result, the protection this measure offers to employers is significantly compromised.
  2. The exemption will not apply where there is "improper behaviour", a concept that is yet to be defined and, in relation to which, parties may engage in satellite litigation.
  3. The Government is planning to publish a Code of Practice and supplementary guidance which is designed to help employers conduct exempt negotiations. Various proposals are currently mooted, including an obligation on the employer to explain to the employee why it is bringing the employment to an end.

Under a new "early conciliation" procedure virtually all prospective claimants will have to contact ACAS before lodging a tribunal claim

The limitation period for bringing the claim will then stop for up to one month, to allow conciliation to take place. There will be no obligation on either party to participate in conciliation and, if either party does not want to do so, time will restart and the claim may brought in the tribunal. Where conciliation takes place, there is a window of up to one month (plus two weeks' voluntary extension) to reach a conclusion. If the conciliation is successful, the parties will need to enter into a binding agreement, namely a settlement agreement or a COT3.

All of these new measures are expected to come into force this summer.

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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Michal Stein
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