Welcome to our international quarterly newsletter. This Summer 2015 edition focuses on employment, pensions and benefits legal developments which took place in the EU, Belgium, Germany, Hong Kong, Italy, Japan, the Netherlands, Russia, Spain, the UK and the US over the past 3 months.
Labour market reforms tracker 2015
The 2015 edition of our labour market reforms tracker is now available. The tracker reports on proposed and recently approved changes to labour and employment laws in a number of European jurisdictions. Most European countries have indeed introduced reforms intended to make labour markets more flexible and to stimulate employment. These reforms are in many cases a direct consequence of the Eurozone crisis but in some countries, the drivers are different. European countries are also looking at reforming their pensions regimes as the current regimes are unsustainable.
Collective redundancy – ECJ clarification on reaching the threshold for consultation in UK and Spain
Employers with operations in the UK and/or Spain will be interested in 3 recent decisions from the European Court of Justice (ECJ), which each considered how an employer should determine whether it has reached the threshold for collective redundancy consultation.
In the Woolworths and Lyttle cases, the Court confirmed that it may be possible to treat individual sites or premises as individual establishments for the purpose of determining whether there is a requirement to collectively consult and what period of collective consultation applies, rather than having to “pool” across different sites and premises (although this will remain fact-dependent), concluding – at the employers’ relief – that the UK had correctly implemented the EU Collective Redundancies Directive (98/59/EC, the Directive).
The ECJ confirmed - in the Cañas decision - that the use of the word ‘“undertaking” in Spanish collective redundancy legislation was inconsistent with the Directive and that the threshold for collective redundancy consultation should be set by reference to the number of dismissals and employees in each establishment (as provided in the Directive).
Read more on the cases and their implications in our July briefing.
Say on pay
The draft revised Shareholder Rights Directive (SRD) is expected to introduce some important changes on executive remuneration in listed companies. Under the initial proposal, shareholders were to be given a binding vote on a director’s remuneration policy by Member States. Companies were also asked to make various disclosures about directors’ pay (please see our summer 2014 edition for more information).
The European Parliament’s (EP) Legal Affairs Committee recently discussed the draft and adopted a series of controversial amendments on 7 May 2015, including an express reference to the binding nature of the vote, the submission of changes to policies to the next general meeting and the entitlement of employees to express a view, via their representatives, on the remuneration policy and report before these are submitted to the shareholders.
Negotiations are still taking place between political groups ahead of the EP plenary vote, likely to take place on or around 8 July.
In parallel, a compromise was reached between Member States in the Council, currently led by the Latvian Presidency. The Council adopted a more flexible approach than the EP Committee (eg by suggesting that for smaller companies, the remuneration report of the last financial year should be submitted to shareholders only for discussion in the annual general meeting – no vote).
Given the sensibility of the topics to be discussed and the difference in views between the Parliament, the Council and the Commission, trilogue negotiations, which will only start once the plenary vote has taken place in the EP, will most probably be quite difficult, take some time and require parties to make compromises.
Once an agreement is reached, the final text will have to be formally approved by the institutions. The Directive will enter into force on the 20th day following that of its publication in the Official Journal of the European Union. Member States will then have 18 months to implement its provisions (not before mid 2017 thus as a final text is unlikely to be agreed on by the end of 2015).
EU Commission withdraws maternity leave proposal
On 1 July 2015, the Commission decided to withdraw its draft Maternity Leave Directive, following a five-year legislative deadlock during with co-legislators were unable to come to an agreement.
The draft Maternity Leave Directive included a longer period of leave and more rights for mothers. The fact that negotiations were never endorsed, which eventually lead to the final withdrawal decision, was heavily criticised as seriously undermining women’s rights, sending a negative message to working women and generally representing a setback for gender equality in the EU.
However, the Commission declared that it wishes to take this opportunity to make a clear break from the current situations and to enact broader initiatives leading to real improvements of the lives of working parents, while it will continue to promote the objectives of the previous proposal and to provide minimum protection.
The Commission’s decision will soon be formalised in the Official Journal of the European Union. A public consultation on the Commission’s broader approach, presenting its new set of ideas, will allow stakeholders to contribute their views, with the new initiative being part of the Commission’s Work Programme for 2016.
Final series of negotiations on the new General Data Protection Regulation started
After it was first proposed in 2012, EU law makers are on track to adopt the data protection reform in 2015. The new General Data Protection Regulation will introduce a single set of data protection rules that apply to all businesses processing personal data of EU citizens (including employee data), regardless of where they are based. New requirements on the notification of data breaches and on data protection impact assessments to be carried out by companies will also be included.
Member states agreed their negotiating brief on 15 June 2015 and trilogue negotiations began on 24 June 2015, when officials from the European Parliament, the Council and the European Commission met in Brussels to scrutinise and finalise the wording of the Regulation. Major differences in opinion – for instance divisions over the standard of consent required – will need to be reconciled during the trilogue negotiations, which will potentially continue through 2015.
In parallel, as the second element of the EU data protection reform package, a new Directive governing personal data processing by law enforcement bodies and other agencies in criminal cases is also being worked on, with trilogues likely to start in the fall.
Bankers bonuses - EBA draft Guidelines on Remuneration
The EBA held a public hearing in London on 8 May 2015 regarding the consultation paper on draft guidelines on sound remuneration policies it had issued last March. Please see our March 2015 briefing on the consultation paper for more background information.
The main area of debate at the hearing was the EBA’s view that proportionality (or neutralisation) is not compatible with the CRD IV Directive itself and that a change in EU law would be required for the principle to continue to apply. The EBA’s view is based on an exchange of letters with the EU Commission which was published shortly after the hearing.
In presenting the possibility of a change in law, the EBA suggested that any such legal change could not extend to the bonus cap, but only to deferral and payment in instruments, and that the EBA would not necessarily take a lenient approach in the period until any legal change is made.
The EBA did acknowledge that national regulators may take their own legal advice on the point and use that as a basis to “explain” their non-compliance in the implementation of the guidelines (and potentially defend that position in front of the ECJ). The national regulators may therefore be more fertile ground when voicing concern over the impact of the guidelines.
The EBA also explained that it did not see any scope to provide for more flexibility in the guidelines with respect to the prohibition on listed institutions using share-linked instruments.
The EBA further confirmed that the remuneration principles should be applied to subsidiaries within a CRD group even when those subsidiaries are not themselves CRD firms, but only to those employees who are material risk takers in the context of the consolidated group.
The draft guidelines were out for a three-month public consultation until 4 June 2015 and the EBA is now expected to issue final guidelines in fall 2015. If all goes well, the guidelines will start applying from 1 January 2016.
Pensions Schemes stress tested
The European Insurance and Occupational Pensions Authority (EIOPA) has begun the creation of a Europe-wide framework to conduct a stress test and wide-ranging quantitative assessment of the finances of pension schemes in 17 different countries.
EIOPA aims to test the resilience of defined benefit (DB) and hybrid pension schemes against adverse market scenarios and increase in life expectancy. The exercise is also intended to identify potential vulnerabilities in defined contribution (DC) schemes. Assessments will be partly based on a “holistic balance sheet” – a (disputed) methodology for harmonising measures of schemes’ assets and liabilities across Europe.
The plans have been criticised by the UK’s National Association of Pension Funds (NAPF), amongst other similar associations across Europe. The NAPF expressed its concern that using the holistic balance sheet methodology would lead in the long term to poorer pension provision for retirees and have a negative effect on the ability of pension schemes to provide capital for investment across Europe.
Can trade unions be held liable for their actions?
Under Belgian law, it was, for historical reasons, always assumed that trade unions could not be held liable for their actions because they did not have legal personality. Despite the above, the Court of Appeal of Ghent has recently ordered a trade union to pay damages to one of its affiliates. The Court of Appeal considered that the lack of legal personality does not imply the absence of legal capacity. Nor does it constitute an immunity for the mistakes made by their employees in the services rendered to the affiliates and for which the latter are charged. In the case at hand, the trade union had provided erroneous information to an affiliate, causing this affiliate to lose its unemployment allowances. The Court of Appeal decided that the trade union had breached its contractual obligations towards the affiliate and that therefore, it had to be held liable.
Action plan against social fraud and social dumping
The federal government has adopted an action plan against social fraud and social dumping. This action plan is the outcome of an intense cooperation between the government and the different inspectorates and contains no less than 85 action points for a more effective approach against fraud and dumping. The social inspectorates will implement a targeted approach to industrial sectors, striving for a better cooperation, all of which should lead to an increase in the quality of the controls conducted. The action plan also sets forth a number of priorities. First of all, a number of targeted and coordinated actions will be taken by the different social inspectorates together in the field of, inter alia, undeclared work and fictitious self-employment. Secondly, each social inspectorate will take very specific actions in its respective field of competence. And finally, specific actions will be taken in order to fight against social dumping, mainly in the field of cross-border fraud. The government is expecting an increase in revenues (ie social security contributions, taxes) as a result of the plan.
The possibility for an employer to grant a single innovation premium to its employees has been designed to encourage and compensate innovations by employees in the workplace. The premium is not considered as remuneration and is therefore not subject to tax nor social security contributions. Although the possibility to grant such premium expired on 31 December 2014, a proposal to extend this regime until 31 December 2016 is currently being discussed in Parliament.
Social security contributions for commercial vehicles?
One of the proposed amendments that came out of the new government’s general policy agreement was to harmonise the concepts of remuneration in tax and social security law. A first step has now been taken, as a draft law has been submitted by the government that aims to align the position of the National Office for Social Security (NOSS) to that of the tax administration as regards the use of commercial vehicles (technically qualified as vans, which cannot be used to transport passengers and are treated differently to passenger cars for tax purposes) for work-related trips and commuting. Until today, the NOSS considers that social security contributions relating to the use of commercial vehicles by the employee are due. However, Belgian tax administration did not follow this opinion and considered that in such situation there is no benefit in kind on which tax should be levied. With its draft law, the government now seems to implement part of its general policy agreement.
Social elections 2016
The next social elections will take place between 9 and 22 May 2016. During this period of time, the employees will elect new representatives in the different employee representative bodies (works council, health and safety committee). The law organising the elections has been recently published and provides for some practical features, but does not contain any fundamental changes compared to the previous social elections.
New Collective Bargaining Law
German lawmakers approved a draft bill on exclusivity of collective agreements which is expected to come into force in July or August 2015. The new law is the answer to recent strikes conducted not only but most notably by German train drivers which have had major effects on the German infrastructure. With these strikes the fairly small trade union GDL (German Train Drivers Union) aimed not only at enforcing a pay rise and a reduction of working hours but also, and more importantly, at establishing its right to represent other rail workers (eg train attendants) who are traditionally represented by a rivalling trade union, also trying to enforce their own collective agreements.
The new Act on Exclusivity of Collective Bargaining Agreements is designed to mitigate such struggles for power between rivalling unions without restricting unions’ rights and powers in an unlawful manner. This approach adopted by the lawmaker is based on the idea that in case of overlapping scopes of applicability, the collective bargaining agreement concluded by the larger trade union (in terms of members involved) shall prevail.
What seems a straightforward idea at first glance gives rise to a multitude of practical and legal concerns and constitutional and employment law experts question the compatibility of the new law with the German constitution (Art. 9 para. 3), the ILO Conventions no. 87 and no. 98 and the European Convention of Human Rights. It is therefore likely that one of the smaller, profession-specific unions will take legal action against the Act. The result of such proceedings remains to be seen.
In-house lawyers’ exemption from compulsory statutory pension insurance
On 3 April 2014, the German Federal Social Court (BSG) restricted the right of in-house lawyers to be released from the otherwise compulsory membership in the statutory pension insurance system (gesetzliche Rentenversicherung). Such release is generally considered as favorable due to the Lawyer’s Pension Funds (Versorgungswerke der Rechtanwälte) traditionally paying considerably higher pensions. As a consequence of the new decision, in-house lawyers are now facing the dire prospect of a much reduced pension upon retirement under the regular statutory pension insurance system and increasingly turn to their employer seeking compensation. Moreover, lawyers currently enjoying a protected status under a release formerly granted run the risk of losing such protected status when they move on in their career by way of either changing employer or even taking on another position within the same employing entity. As a consequence, it is now difficult for companies to attract lawyers as employees or even assign new tasks to in-house lawyers without making up for the potential loss of membership in the Lawyer’s Pension Funds.
In response to this new regime the German government submitted a still much disputed and controversial draft bill according to which in-house attorneys shall be treated like lawyers working in a law firm if they fulfil certain requirements, thereby re-establishing the option for in-house lawyers to be released from the membership in the statutory pension insurance system.
Co-Determination on the supervisory board: District Court of Berlin on attribution of foreign employees
The German Co-Determination Act (MitbestG) grants employees of German companies the right to directly participate in company policy by being represented in the supervisory board. The scope of such employee participation is broadly speaking subject to thresholds referring to employee headcount within a company or a group of companies.
The co-determined composition of the supervisory board of an international group (TUI AG) was recently challenged as being contrary to EU law. The claimant argues that the Co-Determination Act breaches EU provisions on the free movement of workers (Art. 45 TFEU) and the prohibition of discrimination (Art. 18 TFEU), because it does not take foreign employees into account. The aim of the proceeding before the District Court of Berlin (decision of 1 June 2015 – 102 O 65/14) was to determine that the supervisory board should only consist of shareholders’ representatives due to invalidity of the Co-Determination Act.
On a similar note, the District Court of Frankfurt a.M. ruled in March 2015 (decision of 16 February 2015 – 3-16 O 1/14, see the German chapter of our Spring 2015 edition here) that - in assessing the headcount of the supervisory board - not only German based employees, but rather all EU based employees of Deutsche Börse AG group had to be taken into account for the thresholds relevant to the co-determination status.
In the decision of the District Court of Berlin, the difference is that TUI AG – employing more than 10,000 employees in Germany – already indisputably falls in the scope of the Co-Determination Act. However, the Berlin Court did not decide that the supervisory board is to be composed only by shareholders’ representatives. The Berlin Court’s view is that supervisory board elections are a national process and that employee co-determination does not belong to the areas of law harmonised under EU law, therefore different member states can have different co-determination regimes in place and are not bound to treat all workers equally regardless of where they are employed.
Even though the Berlin Court decision reflects the overwhelmingly predominant view in the legal doctrine and supports the practice to apply co-determination on a purely national basis as compliant with EU law, the opposite position has authoritative support. Therefore, companies should carry out a risk analysis tailored to the specific circumstances, and consider to implement mitigation strategies if necessary.
2015 looks poised to bring a new set of challenges to employers
Whilst Hong Kong has traditionally been known as an “employer-friendly” jurisdiction, in recent years there have been efforts to level the playing field, most notably with the introduction of the Minimum Wage Ordinance.
In 2014 we saw a number of amendments to the employment law regime being proposed or considered in the Legislative Council which could further enhance the protection of employees. The introduction of statutory paternity leave came into effect on 27 February 2015. A number of other changes are being enacted in 2015, such as:
- the power for the Labour Tribunal to make compulsory orders for re-instatement and re-engagement of employees where the employee has been unfairly dismissed or had his/her contract unreasonably varied (currently the Labour Tribunal can only make an order for re-instatement or re-engagement with the consent of the employer); and
- the expansion of discrimination legislations – there are numerous changes being considered in relation to the discrimination legislations in Hong Kong, but the key proposed changes for employers to take note of are:
- a proposal to introduce a statutory duty of reasonable accommodation on employers in relation to employees with a disability;
- whether the burden of proof should shift to the respondent to prove no discrimination once the claimant establishes that facts from which discrimination can be inferred; and
- whether the law should provide protection from sexual harassment in common workplaces even if outside of the employment relationship (currently the Sex Discrimination Ordinance does not cover situations where, for example, different employers share one workplace, and a person is harassed by someone other than his/her employer).
Employers are advised to understand these impending changes to the employment and anti-discrimination law regime, how they may impact employees’ existing employment terms and conditions and whether any changes need to be made to future employment terms or employment practices to address these amendments to the law.
More labour reforms
The Council of Ministers approved on 11 June four draft Framework Legislative Decrees, implementing additional labour reforms. These are:
National Labour Inspectorate
The first decree establishes the National Labour Inspectorate so as to rationalize and simplify the current system of controls on labour and social legislation. The Inspectorate is likely to be constituted next year and will perform inspection activities previously allocated to the Ministry of Labour and Social Policies as well as to the National Social Security Institute (INPS) and the National Institute for Insurance against Accidents at Work (INAIL), while enjoying organizational and budgetary autonomy.
The main function of the Inspectorate resides in the coordination – under the guidance of the Ministry of Labour and Social Policy - of all supervision activities in the areas of employment, contributions and compulsory insurance.
National Service Network for Labour Policies
The second decree creates a national network composed of labour policy institutions aimed at promoting the effectiveness of the rights to work, training and a professional career. The Network shall be coordinated by the National Agency for Labour Policies (ANPAL). In particular, ANPAL will take measures to increase cooperation between public and private bodies and to support job-matching services.
Regulations regarding Working Relationships
The third decree simplifies the execution, management and possible termination of working relationships via electronic means. In addition, the decree discusses the simplification of procedures regarding the integration of disabled workers within the working environment and the communication between INAIL and employers concerning occupational health and safety.
Moreover, it enables the more feasible utilisation of surveillance devices for the indirect monitoring of employees and allows for the exchange of vacation days for the medical needs of dependents.
State Salary Support granted during the employment relationship
The fourth decree introduces common rules regarding temporary layoff allowances, both ordinary (CIGO) and extraordinary (CIGS). Employees, including trainees from this point forward, are eligible for temporary layoff allowances and may receive a compensation equal to 80% of the full salary they would have received from the lost hours of work.
An employer may request temporary layoff allowances for a maximum of 24 months within a five-year period. However, with respect to contributions paid by companies, the Decree introduces a mechanism to discourage companies from soliciting more allowances, ie the more a company makes use of the state salary support, the more it needs to pay as a contribution.
Regulators show stricter attitude towards “black” enterprises
With the growing recognition in Japanese society of the concept of “black” enterprises (in Japan the term generally refers to companies that exploit and/or impose oppressive working conditions on their employees), recently the Ministry of Health, Labour and Welfare (the Ministry) has been actively implementing its policy to protect employees from overwork, taking several specific measures (eg special investigations focusing on overwork issues). As part of the policy, the Ministry announced that, effective as of 18 May 2015, the competent labour offices would make public the names of companies that have a strong influence on society and impose unlawful overtime work on a considerable number of employees, if such imposition is repeated within a certain period of time at multiple workplaces. More specifically, the Ministry set the following criteria to determine whether a case falls within such a situation:
- “Companies that have a strong influence on society” means companies that (a) have their workplaces in multiple prefectures in Japan; and (b) do not fall under “small and medium-sized enterprises” (eg manufacturing companies with 300 or fewer employees or service providers with 100 or fewer employees);
- “Unlawful overtime work” means any overtime/holiday work that (a) breaches the rules relating to working time, holidays or overtime allowances; and (b) exceeds 100 hours per month;
- “Considerable number of employees” means, per workplace, (a) 10 or more employees; or (b) one fourth or more of the total number of employees at the workplace; and
- “Repeated within a certain period of time at multiple workplaces” means that the above “unlawful overtime work” is undertaken at three or more workplaces within a period of approximately one year.
Given that the company names had previously been made public only when the relevant cases were sent to prosecutors, this change indicates that the Ministry has introduced a new standard for making public the names of offending companies.
Potential amendments to certain labour legislation are under discussion
Bills to amend certain labour legislation, such as the Labour Standards Act (including the introduction of “white collar” exemptions and the promotion of a compulsory annual leave system) and the Worker Dispatching Act (including the removal of the upper limit of the period during which the employer can utilise a dispatched worker) have been submitted to the Diet and are currently under discussion (or will be discussed during the remainder of the parliamentary session). As mentioned in the last edition of this newsletter, the amendments contemplated under these bills are influential and therefore it will be important to closely follow the outcome of the discussions in the Diet.
The Labour Market Fraud Act
Recently, the Labour Market Fraud (Bogus Schemes) Act (Wet Aanpak Schijnconstructies) was adopted. The aim of this Act is to counter sham arrangements that are being used by principals, main contractors and subcontractors to avoid complying with employment law requirements, leading to underpayment and exploitation of (foreign) employees and unfair competition on the labour market. These sham structures are mainly applied within the construction, horticulture and transport sector. The Act will enter into force on a phased basis and its main features are as follows:
- A broader civil liability (ketenaansprakelijkheid) system for wage payments, as of 1 July 2015. Based on this system, an employee working for an employer that is part of a chain of principals and contractors can, subject to the observance of certain procedural requirements, not only hold his own employer liable for the payment of his wage, but also the principal(s) and contractor(s) higher up or lower down the chain (in a specific order).
- As of 1 January 2016, employers must pay the legal minimum wage without the possibility to deduct or set off certain other benefits provided, eg expense allowances or housing. Furthermore, this minimum wage must be paid into a bank account (ie not in cash or in kind) and the employee must be provided with a transparent and specified payslip, for instance including a specification of any (expense) allowances granted.
Salary threshold for highly qualified specialists
A new procedure for determining the minimum salary that must be paid to a foreign highly qualified specialist (HQS) came into legal force on 24 April 2015. The new rules specify a minimum monthly salary and not an annual amount as it was the case before. As a general rule, the monthly salary of an HQS should be at least RUB 167,000 (approx. USD 3,040). The annual salary threshold, therefore, is RUB 2,004,000 (approx. USD 36,440), a little higher than the minimum annual salary which was previously set at RUB 2,000,000 (approx. USD 36,360).
The amendments in relation to HQS salary also provide that an employee’s quarterly salary should be at least RUB 501,000 (approx. USD 9,824), even if the employee was absent due to illness, unpaid leave or did not receive his/her full salary for other reasons.
Passport expiration dates for foreign citizens applying for Russian work permits
On 16 March 2015, the Federal Migration Service started applying new rules regarding the procedure for issuing work permits to engage foreign employees. These rules establish, among other things, new requirements relating to the identification documents of foreign citizens applying for work permits.
As a general rule, identification documents should expire at least one year after the date of application for a work permit.
However, the identification document of a foreign national applying to work as an HQS or of a foreign citizen working in a foreign company in Russia should expire at least three years after the date of application for the work permit.
The amount of a CEO’s severance package may be limited by a court
On 2 June 2015, the Supreme Court of the Russian Federation adopted a Resolution on certain issues arising from employment-related disputes between CEOs or members of collective executive bodies and their employers. Among other things, the Supreme Court ruled that, when handling a dispute over the amount of severance pay, if a court finds that payment of a severance package may infringe the rights of other employees, the company itself or its shareholders, the court may limit the amount of the severance package payable to the CEO or even dismiss the CEO’s claims in full.
Coke bottler's judgment
A collective redundancy implemented by Coca Cola Iberian Partners, S.A. (the group of bottlers of Coca Cola in Spain) in January 2013 was finally declared null and void by the Supreme Court in April 2015. This shows that, even after the 2012 reform, collective redundancies are not easy, and any restructuring exercise has to be planned carefully.
The claimants were asking for the collective redundancy to be null and void or, secondarily, non-compliant with the law. Given that the court upheld the first argument, it did not go into the discussion of the grounds.
Before starting the restructuring process, various legal entities decided - upon request from the Coca Cola Company - to operate as a single entity to be more efficient.
However, once the reorganisation began, it was decided to proceed with only one negotiation for the various entities. From a legal point of view, all were “independent” entities. There is a case-law construction under Spanish employment law that various “independent” entities may be considered as a single employer vis-à-vis the employees, if certain requirements are met. In this case, all the companies together called for one only collective redundancy negotiation, arguing that they were a “single employer”, and being this the first time they were appearing before the employees as such.
The employees were claiming, amongst other things, that the negotiation was not valid because there should have been one negotiation per entity, that the negotiation had not been duly conducted as not sufficient information had been shared, and that there had been a breach of strike rights.
Judgment of first instance
The court of first instance stated that the “single employer” situation is a fraudulent construction to protect employees’ rights, but cannot be used by the employer for its advantage. Accordingly, the court found that the negotiation had not been duly carried out, also because the company failed to present all relevant information for the consultation and to provide a detailed plan of the reorganisation to the union negotiating committee. The court also considered that the right to strike had been breached (by serving clients form other factories during the strike, its impact on production was significantly reduced if not completely frustrated), all of this leading to the collective redundancy being null and void.
The company lodged an appeal against the judgment of first instance, asking for the Supreme Court to confirm that the collective redundancy had been duly carried out, and was compliant with the law.
The Supreme Court issued its judgment on 20 April 2015, rejecting the firm's appeal and confirming the verdict of first instance that the collective redundancies were null and void, due to a breach of the right to strike, which is a fundamental right.
Coca Cola Iberian Partners, S.A. has stated that they assume the judgment, and it is expected that further negotiation might take place between the company and the unions, to try to solve the issue.
Holiday pay and commission
On 25 March 2015, Leicester Employment Tribunal released its judgment in the case of Lock v British Gas Trading (pleasesee our client briefing here). The case of Lock concerned the question of whether contractual commission should be taken into account when calculating holiday pay and, if it should, how employers should calculate holiday pay in these circumstances.
The Tribunal’s ruling follows the judgment by the ECJ in Lock in May 2014 which held that if a worker’s pay includes contractual commission determined by reference to sales achieved, an employer must take commission into account when calculating holiday pay. The ECJ then referred Lock back to the UK Employment Tribunal to determine (i) whether UK law (the Working Time Regulations 1998) could be interpreted as consistent with EU law on this point and (ii) what the correct reference period is when calculating the amount of commission to be included in holiday pay.
In summary, the Employment Tribunal decided:
- UK law could be interpreted as consistent with EU law.
- Commission determined by reference to sales achieved must be included in holiday pay using the same calculation method as applies to workers with normal working hours whose pay varies with the amount of work done – ie “a week’s pay” will be calculated as the amount of remuneration for the number of normal working hours in a week calculated at the average hourly rate of remuneration payable in respect of the previous 12 week period.
- This approach only applies to the four weeks holiday to which a worker is entitled under EU law and not the additional 1.6 weeks holiday to which an employee is entitled under UK Working Time Regulations (or any additional contractual entitlement over and above this). This is consistent with the EAT’s determination on a similar point in Bear Scotland v Fulton, the case on holiday pay and overtime which was reported on in the Winter 2014 edition of ILLB.
It has been confirmed that British Gas is appealing the decision of the Leicester Employment Tribunal. The appeal is likely to be heard by the end of 2015.
UK financial industry regulators issue new remuneration rules
On 23 June 2015, the PRA and FRA published a new policy statement, “Strengthening the alignment of risk and reward: new remuneration rules”. The statement contains the final remuneration rules and guidance to implement the proposals set out in the PRA/FCA’s consultation paper “Strengthening the alignment of risk and reward: new remuneration rules” issued in July 2014.
The new remuneration rules apply to banks, building societies, and PRA-designated investment firms, including UK branches of non-EEA headquartered firms, and add to the CRD IV provisions on bankers bonuses. The deferral and new FCA clawback rules set out in the new rules will apply to awards for performance periods beginning on or after 1 January 2016, with all other requirements applying from 1 July 2015.
Key points are as follows:
- Amongst other things, the final rules:
- Extend the length of deferral periods to:
- seven years for Senior Managers, with no vesting before the 3rd anniversary of the award and vesting no faster than on a pro rata basis;
- five years for risk managers with senior, managerial or supervisory roles at PRA-regulated firms, with vesting no faster than pro rata from year one; and
- three to five years for material risk takers, with vesting no faster than pro rata from year one.
- Require FCA-regulated firms to apply clawback for seven years from award of variable remuneration for all material risk takers (this is already the case for PRA-regulated firms).
- Extend the clawback period by up to three years on top of the seven years (ie potentially 10 years in total) for Senior Managers where there are outstanding internal or regulatory investigations at the end of the normal seven year clawback period.
- Prohibit the award of variable pay to Non-Executive Directors.
- Strengthen the PRA requirements on dual-regulated firms to apply more effective risk adjustment to variable remuneration.
- Extend the length of deferral periods to:
- In relation to buy outs, the PRA and FCA state that they will explore further the option of requiring buy-out awards to be held in a form that permits them to be subject to malus by the previous employer and will consider whether more detailed proposals in relation to this should be brought forward.
Bradbury v BBC and IBM v Dalgleish
Employers in the UK often look to change the nature and level of pension benefits offered to their employees. Such changes can raise a variety of legal issues. In two recent cases, IBM v Dalgleish and BBC v Bradbury, the main issue was whether the changes proposed by the employer were valid or could be challenged by an employee.
In both cases, the employer consulted with employees and then looked to act unilaterally in reducing benefits without employee consent or the consent of the pension scheme trustees – in IBM by using an “exclusion rule” and limiting the pensionability of future pay rises and in BBC by giving options to employees to elect for other benefits, with a unilateral limit on future pay rises if they did not agree.
These changes were challenged on various legal grounds, the main one being that they were in breach of the implied duty of trust and confidence implied into employment contracts. Both cases went to the High Court and were heard by Warren J.
In IBM, Warren J held that on the facts, the changes were in breach of the implied duty, in particular because of the “reasonable expectations” that had been engendered by the employer in previous years (and previous pension changes).
Conversely, in BBC, Warren J held that the non-pensionable pays rises were not in breach of the implied duty (although employees may have had a reasonable expectation that all pay rises would be pensionable, this was not one “engendered” by the employer).
This outcome is clearly very dependent on the facts of the case and, in particular, what expectations have previously arisen. IBM may be seen as an outlier – in BBC, Warren J referred to IBM as being a case involving “special factors”.
UK Pensions Regulator issues final DB to DC transfer guidance
The UK Pensions Regulator (TPR) has published the final version of its guidance for trustees regarding DB to DC transfers and conversions. The guidance clarifies the proper role of a trustee when effecting transfers (including partial transfers) under scheme rules and when effecting conversions of safeguarded benefits within schemes. Key points are as follows:
- Trustees should check that appropriate independent advice has been received by the member before they carry out the transfer or conversion. However, if the member’s cash equivalent value of safeguarded benefits is £30,000 or less, the member is exempt from the requirement to obtain independent advice.
- If scheme rules allow the (potentially partial) transfer of safeguarded or flexible benefits where a member does not have a statutory right to transfer, TPR would generally expect the trustee to apply an approach which is consistent with the approach followed where there is such a statutory right in the interests of enhancing member understanding.
- The guidance states that statutory transfer provisions would not apply if members wish to exercise a right to take an internal transfer or convert their safeguarded benefits into flexible benefits. The guidance does, however, confirm that the conversion of benefits in this way is likely to constitute a ‘protected modification’ under section 67A of the Pensions Act 1995, requiring the member’s informed consent.
Guidance on dealing with bankrupts and pensions not yet in payment
The Insolvency Service has summarised its guidance explaining how official receivers and debt relief order (DRO) intermediaries should deal with undrawn pension entitlements.
Key points are as follows:
- Official receivers must not include an undrawn pension fund in any calculation for an Income Payments Order/Agreement – only pensions that are in payment at the date of the bankruptcy order may be taken into account.
- DRO intermediaries should not take into account an undrawn pension when calculating income – only funds which are in payment as income should be included.
- When the debtor is over 55 and has access to an undrawn personal pension fund, it should be confirmed that the debtor is unable to meet their debts at the date of bankruptcy application or petition.
- Official receivers should continue to challenge payments made into a pension scheme where such payments are to the detriment of creditors. This applies particularly where the bankrupt holds a self-invested personal pension (SIPP) and the main asset of that SIPP is property.
SEC attacks employer confidentiality restrictions and highlights continued focus on employee whistleblowing
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111-203), enacted on 21 July 2010, amended the Securities Exchange Act of 1934 by adding Section 21F (Whistleblower Incentives and Protection) to encourage individuals to report possible violations of securities laws and to prohibit employer retaliation. In furtherance of the objectives of Section 21F, the U.S. Securities and Exchange Commission (SEC) adopted Rule 21F-17, effective 12 August 2011, which prohibits companies from impeding whistleblowers from reporting possible securities violations to the SEC.
On 1 April 2015, the SEC announced its first enforcement action targeted at employer confidentiality agreements that it viewed as inhibiting potential whistleblowers from reporting securities law violations, when it filed a cease-and-desist order against global technology and engineering firm KBR, Inc. (In re KBR, Inc., Exch. Act Release No. 74619 (1 April 2015)).
Following the SEC enforcement action against KBR, Sean McKessy of the SEC’s Office of the Whistleblower commented stating that this enforcement initiative remains a priority and that the SEC is continuing to take affirmative steps to identify agreements that violate Rule 21F-17.
In light of the SEC’s recent enforcement action and statements, companies are advised to undertake a review of the confidentiality provisions in their employment, separation and other agreements and policies, and of their standard practices when conducting internal investigations, to determine whether any modifications are needed to such agreements, policies and practices to ensure that they do not prevent individuals from reporting violations of securities laws. Any such review and modifications, however, should carefully balance the applicable legal compliance requirements with the business imperative of maintaining strong confidentiality restrictions for the protection of sensitive proprietary information.
If you wish to find out more on this subject, please read our full briefing.
SEC proposes disclosure rules on pay for performance
The Securities and Exchange Commission recently issued proposed rules that would implement Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which requires disclosure of the relationship between executive compensation actually paid by a company and the company’s financial performance. The proposed rules would add new Item 402(v) to Regulation S-K and would generally apply to all reporting companies. However, the new requirement would not apply to foreign private issuers, registered investment companies and emerging growth companies (companies with less than $1bn of gross revenue in their latest fiscal year).
Companies would initially be required to provide disclosure for the last three fiscal years, with four fiscal years of disclosure to be provided in the following annual filing, and five fiscal years of disclosure to be provided thereafter. Newly reporting companies would only be required to provide the disclosure for one year in the first year as a reporting company and for two years in its second year as a reporting company.
The disclosure would be required only in a company’s proxy or information statement, and would not be required in Securities Act registration statements or in a company’s annual report on Form 10-K. It would also not be deemed to be incorporated by reference into any other SEC filings, except to the extent that a company specifically incorporated it by reference.
The proposed rules were open for public comment until 6 July 2015 and will not become effective unless and until the SEC adopts final rules, but it is possible that the final rules will be issued in time for the 2016 proxy season.
Companies that would be subject to the new disclosure requirement may wish to make preliminary determinations of the additional information that would be disclosed, as well as the relationship between their executive compensation actually paid and total shareholder return of the company and its peer group. Companies may also want to revisit the composition of their peer group, given the focus on the new potential disclosure requirement. Once the new requirement is adopted, companies may also wish to consider whether to provide additional information or discussion with the new disclosure in order to help shareholders better understand it. Please read our client briefing, which goes into more detail on the proposed disclosure rules.