Given how events have unfolded since the Mini-Budget was announced by the then Chancellor of the Exchequer on Friday 23 September, including a new Statement from a new Chancellor on Monday 17 October, even the most ardent of employment law enthusiasts may be forgiven for having had their attention diverted elsewhere. Not us however! Whilst others have focussed on tax rates and U-turns, we have been considering the implications for employers not only of proposals contained in the Mini-Budget and Jeremy Hunt’s subsequent Statement but also those mentioned in other government announcements and commentary coming through from the Prime Minister, Liz Truss, and others. Even taking into account the reversal of various measures, the proposals as they stand currently are significant and there may be more to come although given recent changes in government policy, it will be interesting to see what approach is taken. We share our thoughts on the current proposals below:
Revocation of EU law
Unaffected by either the Mini-Budget or the new Chancellor’s statement, at the end of September 2022, the government published its Retained EU Law (Revocation and Reform) Bill in the House of Commons. If the Bill is passed (and that remains an ‘if’ given its potential ramifications and it being subject to Parliamentary approval), all EU-retained law will be revoked automatically at the end of 2023 unless it is specifically preserved before that date or the government postpones making a decision on a particular piece of law until 2026. This means that we may see large swathes of EU-retained employment law disappear. Given the extent to which many lynchpin UK employment rights are EU-derived, any significant revocation would represent the biggest change to the employment law landscape in decades.
While it seems that some significant changes to EU-retained employment law are likely to happen, there are limits to what the government can do. Under the Withdrawal Agreement, which regulates the UK’s withdrawal from the EU, the UK must not erode retained EU law in a ‘manner affecting trade or investment’ between the UK and the EU or diverge from future EU law if there is a ‘material impact on trade or investment’ – the so-called ‘level playing field’. If the UK takes such steps, then the EU may take rebalancing measures (such as the imposition of tariffs). This will inevitably have to be taken into account when the government decides what legislation to preserve. A wholesale bonfire of employment rights would surely fall foul – perhaps explaining a recent report in the Financial Times that Liz Truss may have ruled this out - but what about less draconian tweaks – for example limiting holiday pay to basic pay only or loosening collective consultation requirements in large-scale redundancy situations, or making it easier to harmonise terms and conditions after a TUPE transfer? Would the introduction of a cap on Tribunal awards for discrimination impact on trade or investment? Parental leave, protections for fixed-term employees and part-time and agency workers also all derive from EU legislation – might we see these rights go or be watered down? At this stage, we simply don’t know and we can only hope that some clarification is offered before too long to enable employers to plan accordingly.
And of course the impact for employers may go beyond what any new legislation does (or doesn’t) say. Rowing back on long-standing employment rights may be difficult to do on a practical level – for example some rights, such as paid holiday, may be enshrined in existing contractual arrangements and therefore would be difficult to remove from a legal perspective. Equally employers may find themselves continuing to offer many of the rights on a voluntary basis in order to retain talent.
One has to wonder, given the sheer scale of the task in hand (all EU-retained legislation is under review – not just employment laws) and the Parliamentary process whether the timeframes are realistic for largescale implementation and even if changes are introduced they may be short-lived should the Labour party win the next General Election.
Removal of the financial services bonus cap
The proposed removal of the cap on bonuses for employees of major banks, announced in the Mini-Budget, survives. The proposal caught many by surprise, not least because the calls within the industry for its removal were hardly louder than a polite murmur. It is a measure which for some years has been firmly embedded in the remuneration structure of all the major international banks. The cap forces banks, building societies and major international investment firms to award bonuses at a ratio against fixed pay of no more than 1:1 or in some cases 2:1. The effect of this cap has been a substantial increase in fixed pay in the banking sector, as banks were forced to take action to preserve total compensation by boosting the proportion of fixed pay.
The cap is now part and parcel of remuneration culture in banking, and the removal may have limited immediate impact. It may allow some banks to align London bonuses with other international offices, such as New York, and as a result we may see an increase in bonuses for some individuals. However, it is unlikely that removing the cap will lead to material changes to fixed pay – it will certainly be challenging for banks to push through reductions in fixed pay even with the promise of more lucrative bonuses in return. That said, the move may lead to great disparity in pay in the banking sector as fixed salaries start to diverge. That could be fertile ground for equal pay or discrimination claims.
The appetite for changes to other remuneration structures, such as deferrals and clawback, is likely to be minimal, particularly as we increasingly see those structures becoming the norm outside the financial services sector.
Where the impact might be felt, as noted briefly in our blog is chiefly outside the banking sector, if the relaxation of rules leads to a trickle-down loosening of constraints for investment firms and asset managers. Those firms may welcome a relaxation of rules, particularly those currently grappling with setting their own ratios of fixed to variable pay as part of MIFIDPRU compliance, which for many has been a challenging exercise.
Reforms to IR35
The proposed removal of the recent (ish) reforms to IR35, put forward in the Mini-Budget, was a casualty of the new Chancellor’s Statement on 17 October with Jeremy Hunt confirming that the repeal of the reforms will no longer go ahead. As a result, end user clients will need to continue to carry out status assessments for contractors engaged through personal service companies and fee payers (often the end users) will remain responsible for accounting to HMRC for any income tax, National Insurance Contributions (employer and employee) and Apprenticeship Levy sums payable where the contractor is determined to be “inside” the off payroll working rules.
Other potential changes to UK employment law
As well as the above, there has been additional commentary on further potential reforms to UK employment law including at the Conservative party conference. Given how events have unfolded since that conference and the apparent policy changes, it is not clear what direction the government will take – radical reforms to employment rights may no longer be on the cards although talk remains of introducing supply-side reforms which could include changes to workers’ rights.
The Business Secretary, Jacob Rees-Mogg, is keen to reduce business red tape and announced a range of radical proposals (including the removal of employment rights for higher earning employees and repealing the 48 hour working week) albeit Liz Truss’ reported comments ruling out a bonfire of workers’ rights may temper his enthusiasm.
As an initial step, a government press release on 2 October 2022 has announced that more businesses will be categorised as small businesses and will be exempt from ‘reporting requirements and other regulations’. The press release explains that the government’s starting assumption when developing policy was that businesses with fewer than 50 employees should be exempt from certain regulations. Instead, with effect from 3 October 2022, that starting assumption is amended to cover businesses with fewer than 500 employees. It remains to be seen to which reporting requirements and other regulations this extended exemption will apply – further details will doubtless be announced. Could it, for example, mean that businesses with fewer than 500 employees will no longer have to report on their gender pay gap? And it doesn’t stop there - the press release goes on to say that the government will consult on whether to extend the small business exemption to businesses with fewer than 1000 employees once the impact of the current extension is known.
Immigration changes on the horizon?
At the end of September 2022, it was reported that the Prime Minister was reviewing the immigration rules to make it easier for foreign nationals to come and work in the UK to fill labour shortages.
The primary route for UK employers to employ foreign nationals is using a Skilled Worker visa which requires the role to be at a certain skill level, paid at a prescribed amount and for the holder to have a certain level of competence in English. Even if these requirements are met, there are significant fees that need to be paid to obtain the visa.
In a bid to boost growth by making immigration to the UK easier, it has also been reported in the press that Liz Truss may look at loosening the English language requirement in certain sectors and increasing the number of roles on the Shortage Occupation list (where a lower salary is required and lower fees are payable). No doubt we will hear more in due course. Meantime if you do not currently employ overseas nationals under the Skilled Worker visa but may want to if there is a loosening of immigration requirements, you should consider registering with the Home Office as a sponsor ahead of time as this process can take time.
Industrial action
Trade unions can be liable for claims for compensation where workers take industrial action if that action is unlawful. Before the Mini-Budget, in July 2022, the cap on that compensation for the largest unions, was increased from £250,000 to £1,000,000. This means the penalty for inducing unlawful industrial action is significant. For action to be lawful, union members must be balloted on the action proposed, 50% must vote and a simple majority of votes cast must be in favour (in ballots for industrial action in important public services the required level of support is at least 40% of those entitled to vote). If industrial action is approved then the ballot lasts for 6 months, though at least 14 days’ notice must be given of each day of action.
In the Mini-Budget the then Chancellor announced a proposal to require all pay offers to be put to union members in a ballot before industrial action is taken. The intention being to ensure that industrial action is taken only after negotiations have truly broken down.
As those following the recent rail strikes will be aware, pay discussions often involve much more than just headline percentage pay increases – often these are accompanied by discussions about changes to working practices. It will not be straightforward to draft rules which ensure union members do have a say on any final pay offer without creating an incentive for employers facing industrial action, to make incremental changes to pay offers to prolong pay discussions so that no final offer is achieved, thus preventing industrial action from happening at all. Employers will also need to bear in mind that, under section 145 of the Trade Union and Labour Relations (Consolidation) Act 1992 bypassing a recognised trade union and making offers direct to workers, can lead to mandatory awards of damages of (currently) £4,341 per worker per inducement, unless any agreed collective bargaining procedure has been exhausted.
During her leadership campaign, Liz Truss indicated that she also plans to require any ballot for industrial action to be supported by 50% of all union members, rather than by 50% of those who voted – a much more difficult threshold for unions to achieve.
In July 2022 the then Johnson government repealed the rules which banned employment agencies from providing workers to employers to backfill striker’s roles. That has been the subject of vigorous union challenge, with the government having been reported to the International Labour Organisation (ILO) and being challenged in the UK courts by way of judicial review. ILO can censure the government but cannot interfere in UK laws. Judicial review can result in a law being quashed and remitted for re-consideration.
There has been much talk in the media of a “winter of discontent” and it may be that the new proposals, if they go ahead, are intended to reduce union capacity to disrupt business and public services. However, it must be assumed that these proposals will not be welcomed by the unions and are likely to face similar legal challenges to those made to the July 2022 changes.
Next steps
These are, without doubt, wide-ranging announcements with very significant ramification for employers. We are currently in a position of ‘wait and see’ of course – however 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.