OUTSOURCING LOCKING HORNS OVER EMPLOYMENT AND PENSIONS UPDATE

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1 EMPLOYMENT AND PENSIONS UPDATE Recent key developments in UK employment and pensions law - March 2007 INSIDE: UPDATE ON THE COMPANIES BILL - CHANGES TO IMMIGRATION LAW - SCHEME ABANDONMENT - PERSONAL ACCOUNTS - IN THE SPOTLIGHT: DISCIPLINARY PROCEDURES LOCKING HORNS OVER OUTSOURCING If you are a company who has outsourced or is considering outsourcing, the following case will be of particular interest to you: the two advertising giants McCann Erickson and Euro RSCG are disputing whether Regulation 3 of TUPE applies to their situation and that employees transferred automatically when there was a change of provider. The new Transfer of Undertakings (Protection of Employment) Regulations (TUPE) came into force on 6 April 2006 and this case is the first high profile dispute about to be considered by an Employment Tribunal.

2 LOCKING HORNS OVER OUTSOURCING CONTINUED IN FORCE Back to basics - so what is Regulation 3? Regulation 3 extends the definition of relevant transfer to cover a service provision change. Essentially this means that it is now explicitly set out in legislation that TUPE applies to an outsourcing or insourcing of services or a change of service provider. There still has to be a transfer of an organised group of employees dedicated to carrying out the activities for a TUPE transfer to take place. Under the old TUPE, an identifiable economic entity was not transferring in case a company replaced a contractor which took no employees or other assets from the old contractor and carried out the services in a different way. Therefore that would not be considered a relevant transfer. The rationale for the extension of the definition in the new TUPE was that the UK Government wanted to cover situations which circumvented TUPE by, for example, changing the way the work was carried out after the transfer so that they could rely on the argument that TUPE did not apply. The test case - McCann Erickson and Euro RSCG In 2006, McCann Erickson lost the Boots Healthcare advertising account to Euro RSCG. McCann Erickson informed its employees who were dedicated to the Boots advertising account that, as a result of the change of service provider, they would be entitled to transfer to Euro RSCG. However, Euro RSCG disagreed with this interpretation and these employees are now trying to clarify this through the employment tribunal to ascertain if there was a transfer of their employment. Key points to remember from TUPE 2006 Aside from trying to clarify the outsourcing issue, the new TUPE introduced other important changes which are worth considering again, particularly as we now have case law on some of the changes. Changing terms and conditions employers can lawfully vary the terms and conditions of employment on a TUPE transfer provided the sole reason for the change is connected to the transfer. The reason must be an economic, technical or organisational (ETO) reason which entails a change in the workforce. The EAT decided, in London Metropolitan University v Sackur 2006, that the change of terms and conditions must also involve a reduction in the number of professionals employed or an entire change in their job functions. If there is no reduction in the workforce and the employer simply makes the changes to harmonise terms and conditions, then that will not be an ETO reason entailing a change in the workforce. Also the change to the terms and conditions would not be a permitted change based on TUPE More recently in Power v Regent Security Services (January 2007), the EAT held that post-transfer contractual variations are legally enforceable where they benefit the employee. Any changes which are to the detriment of an employee are void; on the other hand changes which are to the benefit of the employee are enforceable. The employee is in a strong position because he/she can seek to rely on the terms of their previous contract, if they wish, otherwise they can hold the new employer to a new agreed term if they consider it to be more favourable. Interestingly, this is not an objective test: it means that if the employee perceives that it would be beneficial to rely on an original term instead of a newly agreed term, he/she can do so even if objectively the newly agreed term is better than the previous term. The question of how benefits should be treated under a varied contract cannot be answered with any certainty because the employee could subsequently choose to retain original terms, or potentially cherry-pick new terms which would be considered more favourable. Obligation to supply employee liability information TUPE 2006 imposes a duty on the transferor to provide certain information to the transferee about the employees about to move. This includes the identity and age of employees, statements of terms and conditions of employment, information on any disciplinary proceedings or grievances, details of any court or tribunal cases brought in the preceding two years and any collective agreements. It is not possible for the parties to contract out of this obligation. An employment tribunal can award compensation starting at a minimum of 500 per employee having regard to what would be just and equitable in the circumstances. Joint and several liability TUPE 2006 also introduced joint and several liability, for a failure to inform and consult employees about the transfer. A commercial agreement could be reached between the parties regarding liability but both are now liable for the significant financial awards that may have to be paid to the employees who were not properly consulted. The maximum compensation payable to each employee is 13 weeks pay without any cap on pay. There still has to be a transfer of an organised group of employees dedicated to carrying out the activities for a TUPE transfer to take place. 1 October 2006 The Employment Equality (Age) Regulations 2006 Age discrimination in employment and training is now unlawful. The new legislation prohibits direct or indirect discrimination on the grounds of age. An employer is under an obligation not to discriminate on the grounds of age and the employer may be held accountable for any discriminatory acts of their employees. Employers should ensure that all existing and prospective contracts and policies comply with the new regulations. 4 December 2006 Disability Discrimination Act 2006 The Act requires public authorities to work towards providing equality of opportunity for all disabled people and to eliminate all unlawful disability discrimination and disability-related harassment. DID YOU KNOW? In 2006, two million people were suffering from an illness they believed was caused or made worse by their current or past employment. Around three quarters of these cases were musculoskeletal disorders or stress, depression or anxiety. 30 million days were lost overall (1.3 days per worker) in 2006, 24 million due to workrelated ill health and six million were due to workplace injury. (HSE Latest statistics). Nearly 1 in 5 people of working age (seven million, or 19%) in Great Britain are disabled. Almost half (46%) of the disabled population of working age in Britain are economically inactive i.e. outside of the labour force. (Shaw Trust Disability statistics). Average earnings, excluding bonuses or regular pay, rose by 3.8 per cent in the year to October 2006, up from 3.5 per cent in September 2005.

3 UPDATE ON THE COMPANIES BILL The Companies Bill received royal assent on 8 November The Act contains a number of provisions relating to directors and introduces a statutory statement of duty owed by directors to their company. These codified duties will be owed to the company and only the company will be able to enforce them. The proposed duties include (1) duty to act within powers; (2) duty to promote the success of the company for the benefit of its members; (3) duty to exercise independent judgment; (4) duty to exercise reasonable care, skill and diligence; (5) duty to avoid conflicts of interest; (6) duty not to accept benefits from third parties; and (7) duty to declare interests in proposed transactions or arrangements with the company. The Act is due to come into force in stages. CHANGES TO IMMIGRATION LAW The Immigration Minister has announced changes to the Highly Skilled Migrant Programme (HSMP) which applies to highly skilled workers who wish to work in the UK. A new points-based immigration system will be introduced in the UK. This will be the first step in the implementation process of a five year plan. The points system will be based on five criteria being: qualifications; previous earnings; prior UK experience as a student or employee; age; and participation in an MBA scheme. Professionals will have to comply with the criteria and also meet a mandatory English language requirement. For those of you whose alarm bells were ringing at the mention of the age-based criterion, age discrimination legislation only relates to employment protection and the immigration office does not employ the individuals seeking to enter the UK.

4 SCHEME ABANDONMENT The Pensions Regulator has become aware of methods being used by companies to manage or remove risks usually arising from deficits in occupational defined benefit pension schemes. The Pensions Regulator has announced that while it is not averse to sponsoring employers decreasing the risks to themselves and members of the pension scheme, the proposal should not expose the members of the pension scheme to increased risk. The Pensions Regulator is concerned about corporate transactions involving pension schemes where the main incentive behind the transaction is for the employer to abandon the pension scheme without paying the Section 75 debt. Such transactions are designed to transfer pension schemes to new vehicles effectively leaving the pension scheme without the support of a substantive ongoing employer. The Pensions Regulator is encouraging early discussions between parties involved in any potential abandonment cases. Abandonment could prompt the Pensions Regulator to use its regulatory powers which include the power to prohibit, suspend and appoint trustees of pension schemes, to issue contribution notices and financial support directions. PERSONAL ACCOUNTS The Government has produced a White Paper which introduces a new Personal Accounts Scheme from 2012 and requires employers to enrol employees into an existing occupational pension scheme or into a new Personal Account. The Personal Accounts will require employers to make contributions of 3% of salary unless employees opt out. The Government will be phasing in the introduction of employer contributions until The aim is to provide access to low cost pensions through employer contributions to an extensive number of people for the first time. It is estimated that these new Personal Accounts will bring 8-10 million new savers into the pension market generating up to 8 billion worth of new savings. Employers should review their pensions schemes to decide if they want to seek exemption from Personal Accounts, if the current schemes they operate are equivalent to Personal Account schemes. The likely outcome is that employers will close their existing pension schemes and opt for the Personal Account Scheme which will enable the employers to benefit from one harmonised scheme offering a lower overall contribution.

5 IN THE SPOTLIGHT DISCIPLINARY PROCEDURES The Employment Act 2002 introduced compulsory procedures aimed at improving disputes in the workplace. The Act introduced a statutory dismissal and disciplinary procedure (DDP) and grievance procedure (GP) as well as modified procedures for specific scenarios. If an employer fails to comply with a DDP then a dismissal will be rendered automatically unfair. The standard DDP involves three steps: Step one the employer issues a statement of the circumstances which led it to contemplate dismissing or taking disciplinary action against the employee and an invitation to a meeting; Step two the meeting and decision; and Step three the appeal against the decision. Case law is only now beginning to shed light on how these procedures are being interpreted in practice. Lesson one Lessons to be learnt. Employers should ensure their disciplinary procedures cover the minimum safeguards provided by the statutory procedures. Simply having a disciplinary procedure in place may not be sufficient if the company has not met the minimum statutory conditions. This will leave the company open to claims based on a flawed procedure. This case highlights this. The employer s procedure required the employee to produce written grounds of appeal in order to proceed with an appeal of a disciplinary decision. The EAT considered the procedural fairness of the dismissal and decided that the effect of the employer s procedure deprived the employee of his right to appeal if he failed to submit written grounds of appeal. The requirement to provide written grounds of appeal goes beyond the requirements of the statutory procedure and is not necessary to satisfy the standard DDP requirements. The employee s dismissal was therefore automatically unfair. Lesson two - A correct procedure is one where the information is provided at the correct stage This is highlighted in the case below, which considered what information ought to be provided to an employee by the employer in order for the employer to comply with its statutory obligations. The employees argued that they should have been provided with their own assessment Alexander v The Bridgend Enterprises Limited (2006) The case involved redundancies where the employer failed to specify the grounds for dismissal and the reasons why it was relying on those grounds. This is a requirement of Step two of the DDP which requires an explanation of the reasons why the employer is contemplating dismissing the employee. The employees argued that they should have been provided with their own assessment so that they could make a considered response to the information. The EAT said that this information should have been provided and it should have been provided at the correct stage of the process, in this case when the Step two letter was sent. Therefore timing is essential. Lesson three - Employers read between the lines! There is no requirement for excessive technicality or detail when an employee makes a grievance. Indeed the use of the word grievance is not necessary for an employee to comply with the statutory requirements. Shergold v Fieldway Medical Centre (2006) This is highlighted in this case where an employee handed in a resignation letter which referred to two incidents which she felt had left her with no option but to resign. As the Employment Act 2002 simply requires an employee to set out a grievance in writing to the employer, the fact that it was mentioned in a resignation letter does not alter the fact the letter was raising a grievance and that the employer had written notice of it. The employee is not required to set out the technical details of her grievance and the employee does not even have to make it clear that the grievance procedure is being invoked. In this particular case, the resignation letter was also a written grievance where the employee was setting out her complaint that she could not continue to work as a result of the way she was being treated. This satisfied the statutory requirements for the standard grievance procedure.

6 KEY FUTURE DATES 6 APRIL INFORMATION AND CONSULTATION OF EMPLOYEES REGULATIONS JULY HEALTH ACT 2006 Employers with more than 100 employees will be under an obligation to formally consult and potentially share bonus information with employees. Employers who manage smoking prohibited areas will be under an obligation to enforce a no-smoking policy or face the possibility of fines and/or criminal sanctions. LONDON 99 City Road London EC1Y 1AX Tel: Fax: PARIS 65-67, avenue des Champs Elysées Paris Tel: Fax: APRIL WORKS AND FAMILIES ACT 2006 COMES INTO FORCE 6 APRIL GENDER EQUALITY DUTY COMES INTO FORCE 24 OCTOBER DATA PROTECTION ACT OCTOBER COMMISSION FOR EQUALITY AND HUMAN RIGHTS This extends paid maternity leave from six to nine months and provides for the introduction of legislation to allow fathers to take up to six months' additional paternity leave. The Bill also extends the right to request flexible working to employees who care for sick or elderly relatives. The duty to promote gender equality is incorporated into the Equality Act All public authorities in Great Britain will be under a general duty, as employers and service providers, to have "due regard" to the need to eliminate unlawful discrimination and harassment and to promote equality of opportunity between women and men. This general duty will apply to all public bodies and bodies which carry out public functions. The full provisions of the Act will apply from 24 October This mainly affects manual filing systems in existence before 24 October The Equality Bill provides for the establishment of a single equality body, called the Commission for Equality and Human Rights (CEHR). The body will merge the Commission for Racial Equality (CRE) the Equal Opportunities Commission (EOC) and the Disability Rights Commission (DRC), and will take responsibility for discrimination on the grounds of race, gender, disability, religion or belief and sexual orientation and age. It will also be responsible for promoting human rights. The EOC will be incorporated in October 2007, but the Commission for Racial Equality will remain separate until October FRANKFURT Taunusanlage Frankfurt am Main Tel: Fax: NEW YORK One New York Plaza New York, NY Tel: Fax: WASHINGTON, DC 1001 Pennsylvania Avenue, NW Washington, DC Tel: Fax: HONG KONG in association with Huen Wong & Co. 11th Floor, Gloucester Tower The Landmark 15 Queen s Road Central, Hong Kong Tel: Fax: FRIED FRANK S EMPLOYMENT AND PENSION UPDATE IS EDITED BY PAM LOCH IN LONDON WITH CONTRIBUTIONS FROM NISHA MARWAHA AND IS INTENDED FOR GENERAL INFORMATION PURPOSES ONLY. NEWS ITEMS ARE COMPILED FROM PUBLIC SOURCES. THIS UPDATE DOES NOT SUBSTITUTE FOR SPECIFIC ADVICE IN INDIVIDUAL SITUATIONS NOR PURPORTS TO ADVISE ON LAWS IN JURISDICTIONS WHERE FRIED FRANK IS NOT LICENSED TO PRACTICE. PLEASE CONTACT US IF YOU SEEK ANY ADDITIONAL INFORMATION.