Introduction to UK Employment Laws for U.S. Employers

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1 Ogletree Deakins International LLP Fourth Floor, Thavies Inn House 3-4 Holborn Circus London EC1N 2HA United Kingdom Tel: +44 (0) Introduction to UK Employment Laws for U.S. Employers This brief overview of employment laws in the United Kingdom summarizes the key issues to consider when engaging staff in the United Kingdom. The purpose of this guide is to introduce U.S. employers to key concepts of UK employment law, which may be unfamiliar to them. It is not intended to be comprehensive and employers must seek specific legal advice in relation to individual cases. Basic Principles The following general principles should be noted: 1. A number of UK employment laws are mandatory and apply to employees who work in the United Kingdom, regardless of the employee s nationality or the employer s place of registration. Generally, there is no distinction between executive and junior employees and UK employment laws apply to both. 2. These mandatory laws provide minimum rights for employees that override any lesser contractual provisions that may be in place. 3. There are three main categories of staff recognized under UK laws: (1) employees, (2) self-employed individuals (often referred to as contractors or consultants), and (3) workers. A worker is a broadly defined statutory concept that includes those who contract to provide work or services personally even if not an employee. 4. An individual s employment status determines which employment laws apply and what the employer s obligations are in relation to income tax and national insurance contributions (social security) on earnings. Treating an individual as self-employed when he or she is, in reality, an employee can have significant financial consequences for the employer. 5. There is no concept of employment at will. All employees have some rights, even if it is just the right to paid vacation time or to receive notice of termination.

2 Employment Contract Employers must set out in writing the principal terms of employment, within two months of an employee starting work. This information is usually contained in a written contract of employment and will be important in determining an employee s rights. Therefore, employers should draft the document carefully. The statement must include the following information: the name of the employer and employee; the place of work; salary; hours of work; paid holiday and vacation entitlements; sick leave and pay entitlements; the length of notice required to terminate the employment; disciplinary and grievance procedures; provisions for a pension if available; and whether a collective agreement applies to the employment. Minimum Benefits and Rights National Minimum Wage Most workers who work in the United Kingdom are entitled to be paid at least the National Minimum Wage. For workers aged 21 and over, the minimum rate is currently 6.19 per hour. Different rates apply for workers under the age of 21 and apprentices. There are complex rules covering overtime, accommodation offsets, and on-call time. The rate usually increases by the level of inflation in October of each year. Hours of work Employees and employers are free to agree upon any hours of work they choose up to a maximum of 48 hours per week. It is possible for employees to opt out of this limit. Generally, only those who genuinely have the right to choose what hours they work are exempted from this rule. Holiday and Vacation Full-time employees are entitled to 28 days of paid holiday and vacation time per year (based on a fiveday workweek). This entitlement can include public and bank holidays (which currently total eight in England and Wales). Sick pay and sick leave Employees are entitled to receive a statutory sick pay entitlement, currently at the rate of per week, for up to 28 weeks. There is usually an inflationary increase to the rate in April of each year.

3 Pension UK pension laws are in the process of changing. Generally, depending on the number of employees, employers must designate a private pension scheme or enroll employees onto a workplace pension scheme to which employees can contribute. The employer need not contribute to the pension scheme on the employee s behalf but new rules are coming into effect over the next four years that will require employers to make a contribution towards an employee s pension. Although this may change, current guidance issued by the UK government provides that employers will have to contribute up to 3 percent of the employee s earnings that are between 5,564 and 42,475. Family rights Employees are entitled to maternity, paternity, and adoption leave with pay. They are also entitled to parental leave and time off for domestic emergencies without pay. They can make requests for flexible working arrangements to care for a child who is less than 17 years of age (less than 18 years of age if the child is disabled) or an older dependent. Other Rights Protection from discrimination Under UK law employees have the right not to be discriminated against on the grounds of: age; disability; gender reassignment; marriage or civil partnership; pregnancy or maternity; race, ethnicity, or national origin; religion or belief; sex; or sexual orientation. This protection applies throughout the employment relationship, from the process of recruitment to the end of employment. There is no minimum service requirement and it is therefore possible for an unsuccessful job applicant to bring a claim that he or she was not hired because of a discriminatory reason. Compensation for violation of UK discrimination laws is not subject to a maximum, although it is essentially based on a calculation of loss of earnings. Transfer of undertakings The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) may apply if a business or undertaking is transferred from one owner to another. This includes the transfer or outsourcing of a service. Broadly, if TUPE applies, the employees within the business or undertaking may automatically transfer to the new owner or service provider. If such a transfer occurs, the employees rights will be preserved and they will be protected from dismissal or certain changes to their contracts of employment. This European Union (EU)-derived legislation often comes as a shock to our U.S. clients!

4 Data privacy EU-wide data privacy rights apply to employees in the workplace. Employers need to comply with detailed rules on what data they collect and keep and how they use it. Consent to data use is usually obtained through an appropriate provision in the employment contract. In addition, special rules apply to transferring data to a country that is not in the European Economic Area (EEA), such as the United States. Transferring in this sense includes accessing data contained on a global human resources intranet from the United States and a company must ensure it complies with data protection rules before doing so even in the case of an intra-company transfer of data. An employer s ability to monitor employees s and Internet use is also more restricted in the United Kingdom compared to the United States Termination of Employment Notice on termination After continuous service of one month, employees are entitled to receive a minimum of one week s notice to terminate their contract of employment. Employees are then entitled to one additional week for each complete year worked, up to a maximum of 12 weeks. Dismissal There is no concept of at-will employment under UK law. As a minimum, in the absence of gross misconduct, notice of termination has to be given. Generally, once an employee has completed two years of service (one year if the employment started before April 6, 2012), he or she can only be dismissed for one of five potentially fair reasons: redundancy (e.g., a reduction in force); illegality (e.g., no work visa); misconduct (e.g., persistent lateness); capability (e.g., poor performance); or some other substantial reason (e.g., reorganization) The process followed by an employer is critical. Failing to follow a fair procedure before deciding to dismiss am employee or terminating employment for a reason other than one of the reasons listed above, could lead to a claim for unfair dismissal. The maximum compensation for unfair dismissal is approximately 80,000 in most cases or, if less, one year s gross pay. However, for certain dismissals, such as those in connection with discrimination or whistleblowing, there is no limit on compensation. Redundancy Redundancy is similar to the U.S. term reduction in force and broadly occurs when there are fewer employees required to do particular work or to do that work in a particular place. UK legislation entitles employees with at least two years of service to a statutory redundancy payment. This payment is calculated on the basis of the employee s age, length of service, and weekly pay. Employers need to comply with certain rules concerning the information and consultation process during a redundancy. Additional rules apply where 20 or more employees are being made redundant.

5 Tax and National Insurance Under the UK s Pay-As-You-Earn (PAYE) withholding system, employees are required to have income tax and social security contributions (known as employees National Insurance Contributions (NICs)) deducted by the employer from their earnings, at source, before their receipt of pay. In contrast, selfemployed individuals are paid gross earnings and account for their own tax and NICs. Additionally, employers must pay employers NICs of 13.8 percent of all earnings above 7,696 per year and on the value of other benefits. The United Kingdom has tax treaties and reciprocal agreements on social security benefits with several countries, including the United States, which may limit the amount to be paid or may exempt foreign nationals from paying income tax or NICs. Tax authorities in the United States or the individual s country of origin will be able to advise on whether any exemptions apply. Right to Work in the United Kingdom It is a criminal offense to knowingly employ someone who does not have the right to work in the United Kingdom or who is working in breach of their conditions of stay in the United Kingdom. Employers can be fined up to 10,000 per employee if they negligently employ anyone who does not have permission to work. A defense may exist if photocopies of certain documents are taken prior to commencement of employment (or periodically where permission to remain is not indefinite.) Citizens of most E.U. countries have an unrestricted right to work in the United Kingdom. Those from outside the EEA, including the United States, generally require permission (a visa or entry clearance) to work in the United Kingdom. The type of visa or entry clearance required will depend on the type and duration of the stay as well as the foreign national's country of citizenship. Individuals usually must obtain permission before they travel to the United Kingdom. The United Kingdom has a points-based immigration system that provides for five immigration classifications or tiers. The tiers that are likely to be most relevant are tier 1 (highly skilled individuals, entrepreneurs, graduate entrepreneurs, investors, and exceptionally talented individuals) and tier 2 (skilled workers with a job offer that meets certain requirements, e.g., salary level, shortage occupation, or resident labor market test). Each immigration tier has different criteria and points that are awarded for satisfying the criteria. Additional Information If you have any questions on UK employment law or would like us to provide you with advice or draft employment contracts, policies, or other employment-related documents, please contact Richard Linskell at or [email protected].