Who are your UK workers?

One of the cornerstones of the new workplace pension reform regime (including the duty to automatically enrol eligible jobholders) is the Government's intention that employers ensure a very wide proportion of the UK workforce is involved and engaged with workplace pension savings, particularly low earners.

This is evident from the wording of the legislation, which intends the new duties to apply in respect of "workers", rather than "employees". In employment law terms, "workers" embody a much wider category of individuals than employees.

In addition, such workers must "work or ordinarily work in the UK under their contract". In other words, they must be UK workers.

Most employers should be able to conclude relatively easily that the vast majority, if not all, of its workforce are UK workers, and therefore the duties will apply. This becomes a more difficult assessment where businesses have staff with complex working arrangements. Classic examples of this (from the employment case law on UK working) include senior executives, sales people, oil workers, airline pilots and seafarers. But with an increasingly fluid working environment and growing numbers of workers commuting across countries - with their home in one country and their working base somewhere else - the position for many will be less clear-cut.

What does the contract of employment say?

When establishing whether an individual is a UK worker, the first port of call (no pun intended) will be their contract of employment. Is there a stated place of work? If this is the UK, and the location stated reflects the reality, it is likely that they will be a UK worker.

However, if the contract is not clear (some contracts we have seen indicate the place of work is "global"), or there is a concern that it does not reflect the reality, more thought will be required.

What happens in practice?

The Pensions Regulator's detailed guidance no. 3 "assessing the workforce" is a good starting point for employers who need to look more closely at their workforce when assessing UK worker status. The guidance stresses that the key determining factor in cases of doubt is whether the individual's base is in the UK. This approach is consistent with comparable employment case law, looking at whether a worker has rights to bring employment-related claims under UK legislation. How does an employer determine what an individual's base is? The answer is akin to a pick and mix selection from a sweet shop - the answers will be indicative of their UK worker status, taken in the round. Questions to ask will include:

  • Where is the base intended to be as indicated by the employment contract? Does the conduct of the parties reflect what happens in reality?
  • Where do an individual's duties start and end?
  • Where is his/her private residence (or where is it intended to be)?
  • What currency is the individual paid in?
  • Where do they pay tax? Do they make national insurance contributions in the UK?

The Regulator's examples in its detailed guidance no. 3 highlight the potential complexities involved in assessing whether an individual would be deemed a UK worker. They provide a good starting point. But some of the examples, where there are very few differences on the facts, also show that the answers will not be black and white.

Casting a wider net?

Our previous alert on offshore workers highlighted the inclusion of offshore workers and seafarers in the new workplace pension reforms.

The Government's decision to include offshore workers and seafarers is just another example of how widely the Government intends the legislation to bite: offshore workers and seafarers have, historically, lacked the employment law protections afforded to land-based workers. Now, both offshore workers and seafarers are brought into the frame - again, depending on an assessment that takes into account the "base" indicators set out above.

Cross border implications - can we rely on the exemption for European employers?

An obligation to automatically enrol employees who have an international working arrangement is likely to be a headache for many employers. This will be particularly true where the employer is based abroad and has no obvious UK pension scheme that it is willing to offer for automatic enrolment purposes.

The Government has introduced legislation (2 July 2012) that exempts European employers from enrolling "dual status" workers into an automatic enrolment pension scheme. This is a welcome relaxation and is designed to ensure that UK occupational pension schemes do not have to accept the automatic enrolment of individuals where this would result in the scheme having to comply with onerous cross-border requirements.

Broadly, a "European employer" is a person who employs individuals who are subject to the social and labour laws of another European Economic Area (EEA) state and who makes/proposes to make contributions to a UK occupational pension scheme in relation to that individual.

The exemption is not a catch-all solution for European employers: it does not extend as far as the offer of employer payments into a personal pension scheme. It also doesn't assist employers with non-EEA workers who may nonetheless be "UK workers", and so should be automatically enrolled into a qualifying pension scheme where no UK occupational pension provision is currently in place.

What about cross-border schemes more generally?

If an employer cannot rely on the exemption, it could, alternatively, use a non-UK based scheme to satisfy its workplace pension reform duties.  

It can firstly do this by making use of an existing pension scheme offered to employees - as long as it is a qualifying scheme. Overseas based pension schemes can be qualifying schemes. The Government has introduced a relaxation for overseas arrangements (including non-EEA schemes). This means that good quality non-UK schemes can qualify, including certain American (including 401(k) plans), Canadian, Australian and New Zealand pension schemes.  

To use a non-EEA scheme in relation to an individual, that individual must already be a member of that scheme when the employer duty starts, with employer contributions being made to the scheme.  

However, in order to meet its automatic enrolment requirements, an employer must make use of an EEA-based scheme. Non-EEA schemes may be qualifying schemes, but they will not be automatic enrolment schemes (as they are not subject to the European regulatory requirements).  

We think this area will continue to provide headaches for some employers.

Tax treatment?

Taxation creates another complexity. Internationally mobile employers might be automatically enrolled into a pension scheme that is not in their best interests (including, for example, for tax reasons). The Government intends that where adverse tax consequences are likely, such individuals should simply exercise their right to opt out of any such auto-enrolment within the statutory one month opt out period.  

This depends on a degree of awareness among workers and their employers where such tax thresholds might be hit. From 1 July 2012 all employers (regardless of individual staging dates) are prohibited from inducing workers to opt out or cease membership of a qualifying pension scheme.  

Employers will need to ensure they highlight the potential adverse tax implications for certain international employees, without giving rise to allegations of "inducement". Assistance is expected from HMRC, which plans to contact individuals who have taken enhanced protection in relation to their tax savings. The Department for Work and Pensions is also working with the Pensions Regulator to provide example communications to deal with this issue.  

Wragge & Co's pensions experts provide some guidance for employers on what to do next.