The UK Enterprise and Regulatory Reform Bill1 (the Bill), which sets out a number of proposed reforms to UK laws relating to employment, executive pay, copyright, green investment and competition, was published and laid before the UK parliament on May 23, 2012. The Bill is the latest in the UK coalition government’s attempt to cut back the “red tape,” which is viewed as limiting the flexibility of businesses operating in the UK. Since then, the government has announced two additional proposals relating to the ability of employers to have “protected conversations” with employees with immunity from unfair dismissal allegations and potential dramatic reforms to the UK “say on pay” rules. This article examines the Bill’s proposals to reform UK employment law and executive pay rules and compares such proposals to a more extensive government report2 published in the fall of 2011 that covers many of the same issues.
Proposed Executive Pay Reforms
The Bill proposes one seemingly innocuous amendment to the UK Companies Act 2006 that could have a significant impact on the existing “say on pay” rules for UK listed companies. The proposed amendment would remove the statutory provision that prevents an executive director’s entitlement to remuneration from being conditional upon the company’s shareholders approving the director remuneration report at their annual general meeting. This would permit listed companies to make executive director remuneration packages conditional upon shareholder approval. This change is seen as paving the way for more far-reaching amendments to the UK “say on pay” rules as detailed in “Recent Developments in Say-on- Pay in the US and the UK” in The Working World, Issue 14.3 Indeed, a note in the government’s press release that accompanied publication of the Bill states that the government aims to bring forward at a later stage further detail of how its proposals to give shareholders binding votes on executive director pay will work in practice.4
On June 20, 2012, the UK business secretary, Vince Cable, announced that the government is considering introducing a requirement for listed companies to publish total annual pay for executive directors in the companies’ annual remuneration reports and hold a binding shareholder vote on their executive remuneration proposals every three years. The government envisages that such reforms will begin to be implemented in October 2013. Clearly, further detail will be required before the impact of these reforms may be properly understood — in particular, guidance will be needed on how longterm remuneration awards should be disclosed in the annual remuneration reports and how companies may vary their executive directors’ contractual entitlements if the shareholders vote down their proposed remuneration packages. Some commentators are predicting that the proposed amendment could simply lead to a further escalation in executive director pay as it becomes easier for companies to benchmark their remuneration packages against their competitors.
Proposed Employment Law Reforms
The Bill proposes a number of reforms to the rules relating to Employment Tribunal proceedings. These reforms are intended to improve the efficiency of the tribunal system, encourage early resolution of disputes and reduce the cost to employers of litigating employee claims. In particular, the Bill proposes:
- A requirement for a potential claimant (i.e., an employee or former employee) to send ACAS5 certain information about his or her claim before issuing tribunal proceedings. ACAS has the power to help parties conciliate certain proceedings if the parties choose to accept ACAS’s involvement. The proposal would essentially require the parties to attempt ACAS conciliation before issuing proceedings. This is designed to ensure a mandatory period of ACAS conciliation with a view to promoting settlement and encouraging early conciliation of employment disputes.
- An extension of employment claim limitation periods to allow for ACAS conciliation.
- The introduction of “legal officers” who are empowered to make decisions in certain cases, without a tribunal hearing, provided that all parties agree in writing to submit to this process. The Bill does not yet specify which types of claims may be subject to this process.
- A relaxation of the rule that the Employment Appeals Tribunal must be comprised of an employment judge and two laypeople. In certain cases, the employment judge may sit alone.
- A new Secretary of State power to increase or decrease the limit on the compensatory award for unfair dismissal (currently £72,300). The Bill contains three alternative proposals: (1) the amount of an unfair dismissal award would be capped at one year’s earnings; (2) the amount of the award would be no less than the national median annual earnings and no more than three times the national median annual earnings (the government’s Department of Business, Innovation and Skills anticipates that this would result in awards being capped in the range of £26,000 (one year’s earnings) to £78,000 (three years’ earnings)) and (3) the amount of the award would be capped at the lower of the amounts in (1) and (2). The Bill also states that different limits may be specified “in relation to employers of different descriptions,” but no guidance has been provided as to what this might mean (e.g., size, sector, corporate status or some other criteria). However, there has been extensive pressure from industry groups representing employers to relax certain employment laws for smaller employers, so this could be one method used to differentiate employers if these rules are introduced.
- A power for Employment Tribunals to impose a penalty on employers where there are “aggravating features” relevant to a case. These so-called aggravating features have not yet been defined. The amount of the penalty would be 50 percent of any financial award, subject to a minimum of £100 and maximum of £5,000, with a 50 percent discount if payment is made within 21 days of the imposition of the penalty.
The Bill also calls for “Compromise Agreements”6 to be renamed “Settlement Agreements,” a change the government believes will help avoid circumstances in which a party refuses to sign an agreement on the grounds that the party does not want to be seen as “compromising.”
Implementation of the Bill
The Bill has begun its passage through both houses of the Parliament where it should come under further scrutiny and is likely to be amended. We can only hope that some of the unclear details will be filled in as part of this process so that employers know where they stand under the new rules. In particular, we anticipate that the requirement for an ACAS conciliation period and the impact this will have on claim time-limits may inadvertently add more red-tape to the already complex process of dealing with an employee dispute. Employers will be looking for more clarity on their obligations in this respect.
The “Beecroft Report”
Separately, a more radical report prepared by Adrian Beecroft (the Beecroft Report),7 a venture capitalist commissioned by the government to suggest employment law reforms, was leaked and then published around the same time as the Bill was laid before parliament. The purpose of Beecroft’s task was to identify areas of employment law that could be improved or simplified in order to help UK businesses create jobs. The Beecroft Report sets out significantly more far-reaching proposals on how to remove the “red tape” to allow employers more flexibility in how they employ their staff.
Amongst the Beecroft Report’s proposals, the following have sparked the most public debate:
- Reforming or removing the existing “unfair dismissal” rules. The Beecroft Report sets forth a number of alternate proposals designed to free employers from the risk of unfair dismissal claims. These proposals include removing the entire concept of an “unfair dismissal,” raising the qualifying service period for an employee to bring an unfair dismissal claim (recently increased from one year to two years), simplifying the dismissal procedures recommended by the ACAS Code of Practice, changing the burden of proof rules in unfair dismissal cases and introducing the concept of a “compensated no-fault dismissal” whereby a dismissal would be deemed fair if the employer had given the employee his or her full contractual notice plus a statutory redundancy payment.
Beecroft’s view is that making it easier for employers to dismiss employees will ultimately lead to a decrease in unemployment as underperforming employees will be replaced by more competent employees; therefore, businesses will thrive and be in a position to recruit more staff.
- Small business exemptions. The Beecroft Report suggests introducing a number of “opt-outs” or exemptions for small businesses so that companies employing fewer than five or 10 employees are not required to comply with certain UK employment laws, including, but not limited to, laws relating to unfair dismissal, the new pension autoenrollment regime, flexible parental leave and equal pay audits.
- Harassment. The Beecroft Report calls for the third party harassment provisions of the Equality Act 2010 to be rescinded. These rules, which have applied to sex discrimination since April 2009 and all other protected characteristics since October 2010, cause an employer to be liable where an employee has suffered harassment on the grounds of a protected characteristic by a third party in certain employment-related circumstances. In Beecroft’s view, the rules may tempt employees to conspire with each other or with customers to create a harassment situation resulting in a lucrative claim against the employer.
- Retirement. The Beecroft Report recommends a review of the recent decision to abolish the default retirement age. In Beecroft’s view the abolition of mandatory retirement will reduce employers’ willingness to recruit older workers.
- Redundancy consultation. The Beecroft Report suggests slashing the statutory redundancy consultation period by two thirds from 90 days (where 100 or more employees are affected) to 30 days, bringing it into line with the current requirement of 30 days where fewer than 100 employees are affected.
- TUPE reform. The Beecroft Report recommends a watering down of the current Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) — the UK implementing legislation of the European Acquired Rights Directive. In particular, Beecroft recommends scrapping the provisions that mean that TUPE applies to a service provision changes (such as an outsourcing or insourcing). These provisions have long been criticized by employer groups as an example of UK legislation unnecessarily “gold-plating” the European directive at the expense of UK employers. Beecroft also recommends disapplying TUPE to businesses that are in administration.
When the Beecroft Report was published, the UK government announced that it would be calling for evidence on the proposals concerning TUPE, collective redundancy consultation, simplified dismissal procedures and compensated no-fault dismissal. Although the government has tried to distance itself from some of the more controversial elements of the Beecroft Report (in particular the “no-fault dismissal” proposal), the Beecroft Report may provide insight into the government’s next wave of employment law reform, and it will be interesting to see whether any of these proposals make their way into the amended Bill as it passes through the parliamentary process.
On June 19, 2012, the government tabled the amendment to the Bill that was intended to allow an employer to have “protected conversations” with its employees that would not be taken into account by an Employment Tribunal in deciding whether a dismissal was unfair. While this concept of a “protected conversation” has been under debate for several months, it is surprising that the government’s proposal would have only applied to potential unfair dismissal claims and not other employment claims (e.g., breach of contract, discrimination or whistleblowing claims). It remains to be seen whether this proposal will be implemented and, if so, how it will work in practice. In particular, it’s not clear how the proposal will sit alongside an employee’s right to resign and claim “constructive dismissal” in response to an employer’s breach of contract, as this could arise in the context of a difficult conversation with the employer.