After months of speculation over what the future might hold for employment law in a post-Brexit world, last week the government revealed its hand. The bonfire of employment rights that many feared has not materialised but some potentially significant reforms look to be on their way. In this article, we take a closer look at those proposed reforms and what they might mean for employers.
No more automatic sunsetting of EU laws
In autumn last year, the government published the Retained EU Law (Revocation and Reform) Bill which provided (amongst other things) that all EU-retained law would be revoked automatically at the end of 2023. It included a few exceptions to these so called sunsetting provisions, such as where the government decided to specifically preserve a particular piece of law.
Last week, the government reversed its position and announced that the sunsetting provisions in the Bill will be replaced by a list of the retained EU laws that it intends to revoke at the end of 2023. All other EU-retained legislation will not, therefore, be automatically revoked and will continue to be binding beyond the end of this year – giving businesses much needed certainty. The current list of laws to be revoked has also been released and it does not contain any major employment legislation, easing fears of an employment law bonfire.
Whilst wholesale changes have been avoided as a result of the government’s confirmation of the removal of the sunsetting provisions, there were some potentially significant changes to employment law announced at the same time. In a new policy paper titled ‘Smarter regulation to grow the economy’, the government detailed three areas of employment law which it intends to reform in order to reduce red tape for businesses. We take a closer look at those proposed reforms below.
Limits on non-compete clauses
One of the most significant proposed reforms relates to non-compete clauses which are not in fact covered by any EU-retained laws. Although not strictly related to Brexit, reform of non-compete clauses has been in the pipeline for some time - the government consultation on measures to reform post-termination non-compete clauses in contracts of employment closed in February 2021 and a response has been awaited ever since.
Broadly speaking, a non-compete clause prevents an employee from working for, or setting up, a competing business for a period of time after the termination of their employment with the relevant employer. To combat concerns that such clauses are a barrier to economic growth, the government intends to introduce a statutory limit on the length of these clauses of three months. The aim of this proposed statutory limit, which relates to employment and worker contracts only, is to boost competition and innovation by making it easier for workers to move to a competitor or start a competing business.
Following the announcement of this change on 10 May 2023, the government also issued its response to the 2021 consultation. The response, which can be found here, details why the government has rejected other measures it consulted on (in particular an outright ban on non-compete clauses and mandatory compensation during the life of a non-compete) and instead opted for a statutory limit.
Employers will be keen to understand how the statutory limit will operate in practice. Relatively limited details have been released at this stage, although we do know that the statutory limit:
- would only apply to non-compete clauses so other types of post-termination restriction (such as non-solicitation and non-poaching clauses) would be unaffected;
- would apply equally to employees and workers, albeit non-compete clauses are more commonly found in employment contracts than worker contracts;
- would not apply to other types of workplace contract which often contain non-complete clauses (such as partnership agreements or shareholder agreements); and
- would apply in England, Wales and Scotland.
It is likely that the statutory limit, if ultimately enforced, will have a significant impact. Three months is significantly shorter than the typical non-compete clause used in certain sectors and for many senior or specialist roles, which often rely on a non-compete clause of six or twelve months. In many cases a lengthy non-compete clause is often negotiated as part of a broader package of benefits and obligations, with the employee receiving more beneficial terms as a quid pro quo for more onerous non-compete provisions. It is not clear at this stage whether the statutory limit will apply to non-compete clauses in current employee contracts and, if it does, how it would apply (for example, would existing non-compete longer than three months be void or only enforceable up to a maximum of three months).
Given the fact that other post-termination restrictions would be unaffected by the statutory limit, employers will almost certainly place more emphasis on other protections and may wish to consider extending the length of notice periods and reinforcing garden leave provisions for key employees. The government acknowledges that a limit on non-competes could lead to longer notice periods and increase use of garden leave but it notes that under this option the individual continues to receive pay.
Legislation detailing the statutory limit will be published ‘when parliamentary time allows’. Given some of the complexities that need to be worked through, it may be some time before this change takes effect. Whilst this uncertainty remains, employers who rely on non-compete clauses may wish to review their options, particularly for key individuals with specialist knowledge.
Consultation on changes to EU-retained employment law
The two pieces of retained EU employment law that the government has targeted in its package of proposed reforms are, as widely expected, the Working Time Regulations 1998 (WTR) and the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). The government published a consultation paper on 12 May 2023 providing more details on the proposed reforms of these two pieces of legislation. That consultation closes on 7 July 2023 and can be accessed here.
1. Working time changes
Record keeping
The government proposes to amend the WTR to clarify that businesses do not have to keep a record of workers’ daily working hours. There has been increasing pressure in this area following a European judgment in 2019 which found that employers should have an objective, reliable and accessible system to record the daily working time of each worker to comply with the European Working Time Directive. The government’s proposal would remove that pressure and reduce the administrative burden on those employers who implemented such systems.
Holiday entitlement and pay
The most significant proposed changes to the WTR relate to holiday entitlement and holiday pay. Under its proposals, the government does not intend to remove the holiday-based rights and instead intends to simplify how those rights operate. The proposed changes are:
- A single annual leave entitlement - The merger of the two annual leave entitlements that currently exist under the WTR to create a single annual leave entitlement. Currently Regulation 13 (which implements the leave entitlement provided for under the European Working Time Directive) provides for 4 weeks’ leave per year and Regulation 13A provides for 1.6 weeks’ leave per year. Instead of these two separate pots of leave, a worker would be entitled to one single leave entitlement of 5.6 weeks per year.
- Rolled-up holiday pay - The introduction of rolled-up holiday pay as an option for employers, to enable employers to pay an additional enhancement on every payslip a worker receives to cover holiday pay (rather than paying holiday pay only when the worker is on annual leave).
Single annual leave entitlement
The government has acknowledged that there is an unhelpful divide under the WTR as different rules apply to the two pots of leave provided for under Regulations 13 and 13A of the WTR. In particular, the position is different when it comes to the calculation of holiday pay and the rules governing carry-over of leave. This creates payroll complexities and can be confusing for both employers and workers.
Under the government’s proposals, a new regulation would set out the single statutory annual leave entitlement and the minimum rate that holiday pay should be paid at for all of that leave. The consultation document seeks views on what the minimum rate of holiday pay should be and how that could be defined in any amended WTR – this could be the trickiest part of consolidating the two pots of leave as currently Regulation 13 leave should be paid at the rate of a worker’s ‘normal remuneration’ (including for example regular overtime and commission payments) whilst Regulation 13A leave is usually paid at basic pay rate only. The government acknowledges the difficulty of defining ‘normal remuneration’ in legislation whilst also recognising the financial impact on workers if the new single annual leave entitlement were only paid at basic pay rate. The rate of holiday pay could be the biggest area for debate in the consultation and ensuing response.
Consolidating the two pots of leave would also require the government to set out new rules on carrying over leave into the following leave year. For the most part, the position on carry over would be unchanged. However, the proposed exception referenced in the consultation allowing workers on long-term sick leave to carry over all 5.6 weeks of statutory annual leave appears to go further than the current requirement which (in some circumstances) allows carry-over of 4 weeks’ annual leave only for such workers.
Rolled-up holiday pay
The government has acknowledged that rolled-up holiday pay is already relied on in some sectors despite the fact it is unlawful. It notes that the WTR rules on holiday pay and entitlement do not ‘fully align with the current realities experienced by employers and workers’, citing the increase in atypical working and the emergence of the gig economy as examples of the way in which the world of work has moved on since the WTR came into force.
Under the proposed reforms, an employer could pay an additional amount of 12.07% of a worker’s pay on every payslip to cover holiday pay, rather than having to pay it to the worker when they take annual leave. The 12.07% percentage reflects the proportion of the working year that statutory annual leave represents. Administratively a much simpler approach for certain types of worker, this proposal is likely to be welcomed by many employers. It does, however, represent a significant shift in approach so further details on how an employer can opt to use rolled-up holiday pay and how this will fit with the separate consultation on holiday entitlement for part year and irregular hours workers will be eagerly awaited.
2. TUPE consultation exception
The final proposed reform is limited and relates to the information and consultation obligations under TUPE. Ordinarily information and consultation should take place with appropriate representatives of the employees affected by the transfer. There is currently an exception which allows micro-businesses with fewer than 10 employees to opt to instead inform and consult directly with the affected employees. The government’s proposal would in effect extend this flexibility to all businesses with fewer than 50 employees and all businesses where the number of employees transferring under TUPE is fewer than 10. The exception would not apply where existing representatives are already in place.
Providing more businesses with flexibility to consult directly with affected employees is a positive move as it would reduce the number of representative elections required. However, in practice there are likely to be many employers who have already taken this approach for small transfers where affected employees have consented to direct information and consultation. It remains to be seen whether further aspects of TUPE (for example, restrictions on the harmonisation of terms and conditions) come under review at a later date.
Next steps
There remain a number of unanswered questions relating to this proposed package of reforms. Employers will, therefore, want to keep a close eye on developments in the coming months so as to be ready to react as required.
If you would like to discuss any of the potential implications for your organisation, please feel free to get in touch with Luke Bowery or your usual employment team contact.
Disclaimer
This briefing gives general information only and is not intended to be an exhaustive statement of the law. Although we have taken care over the information, you should not rely on it as legal advice. We do not accept any liability to anyone who does rely on its content.