Welcome to the first issue of International News for 2014. In this issue we focus on employee benefits.
First, however, in our Features section, we consider a number of ways of mitigating risk in African investments. As Africa becomes increasingly developed, investment opportunities are becoming increasingly appealing, but investors must still act wisely.
Staying with opportunities in fast-moving markets, we take a look at recent changes made to China’s merger control regime. On 14 February this year, China’s Ministr y of Commerce promulgated a new regulation that defines the standards for “simple” merger cases that are eligible for a fast-track clearance procedure. As China’s merger clearance process has often been criticised for delaying deals, this change has been welcomed widely.
Moving then to the other end of a business’s life, we examine the benef its for distressed companies of filing for relief under Chapter 11 of the US Bankruptcy Code. Chapter 11 serves as a model for nations seeking to introduce or reform their own insolvency laws and it provides a sound structure for distressed entities seeking a court-supervised restructuring or sale. We then explain how, under French law, the termination of a long-standing commercial relationship may be qualified as abusive by French courts if insufficient notice of the termination is given to the commercial partner. Companies wishing to close facilities in France should therefore be aware of the risk of their long-time commercial partners claiming additional compensation as a result of the closure.
We turn our attention to Italy and welcome the news that, after repeated, failed attempts over the last 10 years, Italian courts have now finally entered the digital era: e-filing is becoming a reality. For the first time, Italian lawyers will be able to service their clients nationwide, wherever the client faces or initiates court action.
Finally, we take a look at why English contract law is the preferred system for governing international commercial contracts. This is largely as a result of English law’s principles of freedom of contract and caveat emptor (buyer beware), but several other factors also come into play.
Turning to our Focus section, we start with a look at some of the general challenges faced by employers when creating and implementing an employee benefits programme, regardless of their location. Examples come from France, the United Kingdom and the United States.
We then examine the potential benefits of a global employment company (GEC), which is an entity established by a multinational company to employ its internationally mobile employees (IMEs). In effect, the GEC structure serves as a leasing company that is responsible for the employment, compensation and benefits, immigration and income and social tax matters for IMEs. A GEC may be an appropriate structure for a multinational company juggling IMEs across a number of jurisdictions
Our attention turns then to Germany and an explanation of why “good and bad leaver” clauses in employment contracts are not legally enforceable. This may come as a surprise to some employers who routinely use them to incentivise management.
Shifting our attention to the United Kingdom, we examine two major developments in this market. The first is the proliferation of staff on a flexible basis using “zero hours” contracts. These have attracted considerable attention and media criticism in the last year owing to a fear that they may deprive workers of certain core employment rights. The UK Government launched a public consultation seeking further evidence of the use of zero hours contracts and inviting views on a range of potential actions. The government’s response to the consultation has the potential to affect future UK hiring practices and employment structures. The second major development is the introduction of “auto-enrolment” for employees into workplace pension schemes. The rollout has now reached a point where the vast majority of organisations will this year find themselves caught by the new regime..
Mitigating Risk in African Investments
The economic case for investment in Africa is clear. As large numbers of people move from subsistence level to lower m idd le cla ss a nd higher, a growing demand is being unleashed for energy, infrastructure, a g r i bu s i ne s s, c on s u me r go o ds, mobile telephony and much else. Governments are struggling to deliver all that is required, and privatisation is becoming more common.
The need to mitigate investment risk in Africa is equally clear. Many ways of doing so are common to all foreign markets: the careful choice of local partner, thorough commercial due diligence, a proper evaluation of local market conditions and, perhaps most importantly, an awareness of local culture and sensitivities.
The need to mitigate investment risk in Africa is equally clear. Many ways of doing so are common to all foreign markets: the careful choice of local partner, thorough commercial due diligence, a proper evaluation of local market conditions and, perhaps most importantly, an awareness of local culture and sensitivities.
The structure of the investment must take into account how it should be held and the investor objectives that need to be met.
The jurisdiction of the immediate holding company is important because it determines what double tax treaties, if any, come into play. These treaties can greatly reduce the total amount of tax payable, and therefore warrant careful attention.
The jurisdiction will also determine whether or not any bilateral investment treaties (BITs) will apply. The precise provisions of BITs vary, but in general they promise investors treatment equivalent to that enjoyed by local and other foreign investors, protection from expropriation without adequate compensation and freedom to transfer funds in and out of the host country without delay, using a market rate of exchange. Critically, BITs often provide for alternative dispute resolution, whereby an investor whose rights have been violated can have recourse to international arbitration, rather than seeking redress in the host state’s courts
The ease of enforcing different BITs varies widely. Some allow the individual investor to enforce them, whilst others put the onus on the investor’s state, which may make enforcement more difficult.
Mauritius is often a favoured jurisdiction for holding African investments. It has a good double tax treaty network with more than a dozen other African countries, plus more awaiting ratification or signature. It has entered into a number of BITs with other African countries and is a member of the Southern African Development Community (SADC). It is also a signatory to the New York Convention, which facilitates the enforcement of arbitral awards.
For the co-investment vehicle, one option is a fund, the benefits of which include market practice, limited involvement in the responsibilities of management, certainty of commitments and tax transparency. Another option is a joint venture company, which has greater influence and simplicity, and the ability to list. The choice will depend on circumstances.
It is often useful to hold local company shares by way of a dedicated external company. This can facilitate a sale of the project by way of a sale of the external company, which can mean that local consents are not required, plus it can be tax efficient.
Additional protections can be obtained via the Multilateral Investment Guarantee Agency, which provides political risk insurance guarantees to private sector investors and lenders
Many projects have been funded wholly by equity or quasi-equity funding. As more bank financing becomes available, attention is now being paid to the possibility of splitting a project into separately financeable parts. For example, a mine project that requires power could include a solar energy component that could be financed separately
Such fragmentation is also being driven by the limited investor appetite for equity investment in mining projects. Export credit agency cover by way of financial support, credit insurance or guarantees can also be used to mitigate risk.
Investors often prefer English law or French law to govern the main transaction documents, and avoid the unfamiliarity of local courts by choosing to locate arbitrations in London or Paris. Enforceability of arbitral awards is also simplified through the New York Convention, which has been signed by 32 African states.
Despite the choice of French or English law, projects must still comply with local rules. Most international advisors (not just lawyers), will work with the best local counsel in the relevant jurisdiction for specific issues, producing joint opinions and memorandums. Sensitivity and humility are, however, vital to getting the best results.
Investors don’t always anticipate the complexity of local rules. The multiplicity of competition laws in the region is a good example. The member states of the Common Market for Eastern and Southern Africa (COMESA) (which include Burundi, Democratic Republic of the Congo, Egypt, Ethiopia, Kenya, Libya, Mauritius, Rwanda, Uganda, Zambia and Zimbabwe) last year introduced a “one-stop shop” competition clearance facility for transactions that affect business in two or more COMESA states. This is a positive development and will ultimately facilitate transactions, but at present, although monetary thresholds are anticipated, none have yet been promulgated, which means all relevant transactions have to be pre- approved. In some countries, failure to comply with competition laws carries not just administrative fines and penalties, but can also result in criminal sanctions and contracts being rendered void.
Exchange controls and limitations on remittances must be studied carefully. For example, foreign investors who wish to repatriate dividends earned in Angola are required to submit an investment plan to the National Private Investment Agency (ANIP), negotiate the conditions for remittance with ANIP and, finally, obtain a licence from the Angolan national bank.
International legal protection can, however, potentially be obtained through local laws. For example, the 2010 SADC Protocol, which covers 15 southern African states, contains protections for all foreign investors in SADC similar to those contained in BITs, including the ability for investors to initiate international arbitration against member states. With South Africa phasing out its BITs, the SADC Protocol may become more important.
Resource nationalism remains on the political agenda of many African states. Mandatory local equity participation, local empowerment and local beneficiation requirements are becoming more common. Sometimes, however, these can assist a project. For example, in South Africa, the state-owned Industrial Development Corporation has a mandate to support South Africa’s beneficiation goals, and is willing to fund (by equity or loan) projects that enhance local beneficiation.
[Text Box: IN AFRICA] The US Foreign Corrupt Practices Act (FCPA) prohibits giving inducements to government officials. In 2010, the UK Bribery Act was introduced. It is much wider in scope than the FCPA and is not limited by jurisdiction or to government officials. An organisation is guilty of an offence if a person associated with it (including an employee or agent) makes a bribe, unless the organisation can show that it had adequate procedures in place to prevent bribery.
It is vital to have a real understanding of local culture and laws alongside foreign anti- corruption laws. For example, sometimes a permit application can take a long time to process. The holdup can be as simple as an official’s shortage of printer paper or a lack of transport. Is providing paper or offering transport to the official permissible? An advisor with in-depth understanding of all the ramifications can help you make the right decision.
This Is Africa
Opportunities in Africa are beckoning and although there is risk involved, no profitable investment ever comes without it
China’s Fast-Track Merger Control Regime: MOFCOM’s New Regulation on Simple Cases
O n 14 Fe b r u a r y 2 0 14 , C h i n a’s Ministry of Commerce (MOFCOM) promulgated a new regulation that defines the standards for “simple” merger cases that are eligible for a fast-track clearance procedure (Simple Case Rule). This is a positive development, as China’s merger clearance process has often been criticised for delaying deals that do not have any material impact on the Chinese market. The new regulation should help alleviate this issue.
During the period from January 2013 to October 2013, 80.7 per cent of the merger cases MOFCOM reviewed (130 out of 161 merger cases) were cleared in the second phase. Only 13 per cent of merger filings (21 cases) received clearance within the 30- day first phase. The majority of cases were cleared in the early stage of the second phase and the average review period was 10 days shorter than in 2012.
There is, however, still room for improvement. For example, in the European Union in 2 filings (252 out of 277 cases) obtained first phase decisions, while approximately 60 per cent of the notified merger cases were reviewed under simplif ied procedures. In the United States, only 3.5 per cent of transactions resulted in a second request in fiscal year 2012. Early termination was requested in 78 per cent of the transactions reported, while the percentage of requests granted out of that total was 82 per cent.
MOFCOM’s Simple Case Rule stipulates that cases will be classified as simple if they satisfy the following criteria:
Total market share of the business operators involved in the concentration accounts for less than 15 per cent in the same relevant market.
Total market share of the business operators involved in the concentration accounts for less than 25 per cent in both the upstream and downstream markets (if they do business in upstream and downstream markets).
Total market share of the business operators involved in the concentration accounts for less than 25 per cent in any market if they do not conduct business
in the same market or in upstream and downstream markets.
Business operators involved in the concentration establish a joint venture overseas, and the overseas joint venture does not operate a business in China.
In a merger case related to the acquisition of stakes or assets of an overseas enterprise, the concerned overseas enterprise does not operate a business in China.
A joint venture jointly controlled by more than two business operators comes under the control of one, or more than one, of those business operators through a concentration.
Notwithstanding these criteria, a concentration will not be treated as a simple case in the following circumstances:
A joint venture jointly controlled by more than two business operators comes under the control of one of the business operators, and the controlling business operator competes with the joint venture in the same relevant market.
The relevant market is difficult to define.
The concentration may have a negative impact on market entry and technical improvement.
The concentration may have a negative impact on consumers and other affected business operators.
The concentration may have a negative impact on national economic development.
MOFCOM determines that the concentration may have a negative impact on market competition
Furthermore, MOFCOM may revoke classification of a simple case under the following circumstances:
The notifying party conceals important facts, or provides false material or misleading information.
A third party claims the concentration may eliminate or restrict competition and provides relevant supporting evidence.
MOFCOM finds that the concentration or competitive conditions on the relevant market has changed materially.
The above criteria appear to largely mirror the European Commission’s standards for a simplified procedure under EU merger control rules, which was updated in December 2013. The Commission issued a package of measures to extend “simplified” treatment to more transactions. For instance, in markets in which two merging companies compete (horizontal overlap), the simplified procedure applies to mergers below a 20 per cent combined market share, instead of 15 per cent. In mergers where one of the companies sells an input to a market where the other company is active (vertically related markets), the simplified procedure applies to mergers below a 30 per cent combined market share, instead of 25 per cent. The main problem in the European Union is how the simplified procedure is applied in practice, leading to a data burden that is more extensive than appears on paper.
It should be noted that MOFCOM’s new regulation does not state that a summary or short review process will be applied to a simple case. It is expected that further fast-track merger control process regulations will be published soon, and will include a simplified merger notification form, with the aim that MOFCOM could clear a simple case within 30 days, i.e., within the first phase. The pre- notification negotiation may, however, take two to four weeks before MOFCOM formally accepts a completed filing, which will start the first phase timing.
In addition, it will be interesting to see how MOFCOM handles cases that are classified as simple in the first instance but have their classification revoked later, especially after the closing of a transaction. The merged firms may be subject to fines of up to RMB 1 million for providing false materials or information, e.g., inaccurate market shares. Another potential outcome is that the clearance may be withdrawn after closing, i.e., the merged entity may be required to divest its shares or assets, transfer the business or adopt other necessary measures MOFCOM may require.
Chapter 11 of the US Bankruptcy Code: An Instrument for International Businesses
In the past decade, the increasingly integrated nature of global commerce h a s r e s u lt e d i n i nt e r n a t i o n a l companies being routinely involved i n c r oss-bor de r i n solvenc ies a s debtors, creditors and acquirers of distressed assets.
Many foreign companies rely on the US legal system to adjudicate their issues. This includes filings for relief under the US Bankruptcy Code (the Code) to restructure their operations, pursue a sale of some or all of their assets, or both. Chapter 11 of the Code, which generally applies to entities opting to reorganise rather than liquidate, is widely recognised as the most effective and comprehensive bankruptcy law in the world. It serves as a model for nations seeking to introduce or reform their own insolvency laws and it provides a sound structure for distressed entities seeking a court-supervised restructuring or sale.
It is this established model, predictability- and commercially oriented system that foreign corporations and their investors often f i nd more appea l i ng t ha n less predictable foreign insolvency laws, which often favour liquidation over restructuring. Once certain broad jurisdictional threshold requirements are satisfied, a foreign debtor may be able to access US courts for its restructuring needs.
For an entity to be eligible to file a Chapter 11 proceeding in the United States, it must first meet certain minimum requirements that apply to all entities, both foreign and domestic. Section 109 (a) of the Code permits a Chapter 11 filing by an entity “that resides or has a domicile, a place of business, or property in the United States.” Courts considering the “property” requirement with respect to foreign entities have found that a minimal amount of property located in the United States is sufficient. For example, even a bank account with a small balance and unearned portions of retainers provided to local counsel has satisfied the property requirement. The more numerous a foreign entity’s and its creditors’ US property and contacts are, however, the more likely it will be able to establish that the United States is a viable jurisdiction for its bankruptcy filing. An additional benefit to having major creditors with a US presence is that those creditors will be far more likely to abide by the orders of a US court than to risk repercussions.
A lthough US eligibility standards are relatively broad for international entities, a US bankruptcy court has the power to dismiss a case if it determines the case was not properly filed in the United States. Sections 305(a) and (b) of the Code, for example, allow a court to dismiss or suspend all proceedings in a Chapter 11 case in certain circumstances.
Despite potential challenges to a foreign entity’s Chapter 11 filing, US bankruptcy courts will typically be hesitant to remove or dismiss a case where a debtor has strong jurisdictional arguments. Any international ent it y consider i ng a US ban k r uptcy filing should, however, always consult a restructuring lawyer on these issues.
After an entity has filed its Chapter 11 proceeding and has satisfied jurisdictional requirements, numerous benefits become available to it under the Code
Benefits of Chapter 11
Chapter 11 is replete with benefits for foreign entities seeking an efficient restructuring or asset sale.
A major benefit is the debtor-in-possession (DIP) concept, which allows management, in most circumstances, to retain control of the company after the bankruptcy filing. In contrast, many international insolvency laws require the appointment of a trustee or administrator, or simply require liquidation altogether. Although it may seem counterintuitive to leave management of a bankrupt company in place, in many cases leaving management with intimate operational knowledge and industry contacts in control increases the probability that a debtor will emerge from Chapter 11 as a more profitable, leaner, reorganised entity.
In most large Chapter 11 cases, a debtor will obtain DIP financing to address immediate cash needs and provide working capital during the case. DIP financing is attractive to debtors and lenders alike. It allows a debtor to fund its operations and restores market confidence in the debtor’s ability to maintain liquidity. In exchange for the risk of lending to a bankrupt entity, DIP lenders may be afforded numerous protections they would not otherwise receive outside of bankruptcy, including first-priority priming liens (senior to pre-bankruptcy secured creditors), a claim with super-priority status over all other claims, roll-ups of prepetition debt and restrictive default provisions.
Another important advantage of a US bankruptcy filing is the automatic stay provided under Section 362 of the Code. The automatic stay operates as an injunction that comes into effect immediately upon the filing of a bankruptcy petition, barring any party from pursuing or enforcing claims against the debtor or property of t he estate outside t he bank r uptcy proceeding. Its effect is worldwide and, although the ability of a bankruptcy court to enforce its orders extends only as far as its jurisdiction, a violation of the stay by an international entity may result in significant consequences. Indeed, foreign creditors that maintain a presence in the United States would take a tremendous risk in falling afoul of the stay.
To fortify their operations and ensure stability, Chapter 11 debtors may also file motions to
Assume or reject executory contracts (allowing a debtor to eliminate unfavourable contracts and keep those that are favourable)
Use cash collateral
Pay utilities Pay the prepetition wages of employees Each is a powerful device designed to
provide a debtor with the time, resources
and flexibility necessary to effectuate a successful reorganisation or sale.
Although the purpose of Chapter 11 is generally to allow a debtor to reorganise, a Chapter 11 filing is also a valuable tool for entities seeking an orderly asset sale or liquidation. An increasingly popular and efficient way for a debtor to preserve value for its estate is to sell some or all of its assets utilising Section 363 of the Code. Such sales are attractive to potential purchasers, as they are typically consummated free and clear of secured and unsecured claims without any necessity for creditor approval. These sales may be consummated even if there are creditor disputes over the priority of liens on the assets being sold. Following a Section 363 sale, Section 363(m) of the Code essentially moots appeals of the sale, thereby providing finality to the parties involved.
[Text Box: FILINGS] Additional Options
The points raised here merely scratch the surface of the benef its available to international companies f iling under Chapter 11. While other nations seek to develop and reform their own insolvency laws, the Code remains the most efficient and effective restructuring option for many foreign companies that meet its relatively broad eligibility requirements.
Accordingly, international companies contemplating a bankruptcy filing should always consult a restructuring professional to undertake an analysis of all relevant factors, including the option to utilise the United States as a filing venue.
Mitigating the Risk of Terminating Commercial Relationships Under French Law
Under French law, the termination of a lon g- s t a nd i n g c o m me r c i a l relationship may be qualif ied as abusive by French courts if insufficient notice of the termination is given to the commercial partner. Companies wishing to close facilities in France should therefore be aware of the risk of their long-time commercial partners claiming additional compensation as a result of the closure, and mitigate that risk accordingly.
Scope of the French Commercial Code
In a bid to limit acts of bad faith where a relationship of trust has been forged between two commercial partners, Article L.442- 6-I-5 of the French Commercial Code provides that the termination, whether total or partial, of any long-standing commercial relationship is considered to be abusive when insufficient written notice is given to the contractual partner.
The scope of the law is wide: as long as they are stable, all commercial relationships are included, regardless of whether or not they are realised by a written agreement or the relationship results from a succession of renewable fixed-term contracts or a single open-ended agreement and, more notably, regardless of any existing contractual provisions relating to termination.
As a result, companies cannot rely on the contract defining the duration of the notice period. They must take into account the criteria developed by French courts, which include mainly the entire duration of the business relationship, the extent to which the terminated party depended financially on the terminating party and its reasonable expectations as to the continuation of the relationship or the possibilities at its disposal for the reorganisation of its business, depending, for example, on the current state of the business sector or the specificity of supplied products.
Even in international contracts, this legislation cannot always be avoided by electing a governing law other than French law. Several French Courts of Appeals have considered that Article L.442-6-I-5 is a “loi de police” that applies regardless of the governing law if the contract is closely connected with France. While it has not yet been validated by the French Supreme Court (Cour de cassation), this position is also held by the majority of legal academics and practitioners.
Calculation of Damages
Based on the facts of each case, French judges will decide on the duration of what should have constituted a “reasonable” notice and, accordingly, determine the adequate compensation for the terminated party.
In the absence of a defined calculation method, established case law provides a rule of thumb on the required duration of notice periods and the amounts of damages awarded.
In relation to t he duration of notice periods, the courts find that a notice period of three months is usually acceptable when the commercial relationship has lasted between two and three years; for longer relationships, a six-month notice is generally required. Where the terminated party is financially dependent on its partner, however, and consequently needs to adapt its business to its change in circumstances, judges have systematically set notice periods exceeding 12 months.
French courts will assess the damages based on the loss of profit that the terminated party should have made over the missing months of the “reasonable” notice period. For sales of products, courts therefore take into account the loss of gross margin; for the provision of services, damages are based on a percentage of the expected remuneration (fixed and variable).
Mitigating the Risk of Contractual Terminations Being Abusive Due to a Closure
Where possible, companies should try to ma nage t he ex pect at ions of t hei r commercial partners and inform them of a potential total or partial closure of their facilities, in writing and as soon as possible. Even if this information cannot be considered as a formal notice and does not officially start the notice period, the early information will serve to weaken arguments that the commercial partner was legitimately counting on the continuation of the relationship.
The timing of such information is, however, necessarily limited by employment law requirements, which provide that it is mandatory to obtain the opinion of employee representatives before a decision to close can be made by the management. A commercial partner therefore cannot be informed of the closure before the employees are consulted
Once the termination of the relationship has been decided officially, companies should send a carefully drafted notice letter to their commercial partners, ensuring it leaves no doubt in the partners’ minds as to the outcome of the relationship. Termination notices should be sent by registered post with acknowledgment of receipt, thereby firmly establishing the start of the notice period.
It should be noted that the French Supreme Court nevertheless seems to be increasingly aware that companies that are terminating relationships with their French partners are not necessarily motivated by greed and a desire to relocate to a more “cost-efficient” forum. In a 12 February 2013 decision, the court ruled that a substantial decrease in the volume of orders does not constitute a partial termination when it is due to a drop in the terminating party’s own activity, and was therefore not intentionally decided by that party.
Terminating parties must, however, be able to provide sufficient evidence of their diminished activity and of the externality of its cause.
For example, in 2013, Ikea was sentenced by the Paris Court of Appeals to pay almost €5 million in damages to a furniture manufacturer on the grounds of a partial termination of their 17-year relationship (CA Paris, 23 May 2013, n°12/01166, JurisData n°2013-010560). Ikea was the manufacturer’s main client and Ikea’s reduction of its orders led ultimately to the insolvency of the manufacturer. Ikea tried to invoke the economic climate and an alleged, unexpected decrease in the purchase of sofas by its customers, but was unable to back its claims with sufficient evidence. In addition to the damages awarded to the manufacturer, in a rare twist, Ikea was fined a further €50,000 for the disturbance it caused to the public economy (trouble à l’ordre public économique) in a region already devastated by the financial crisis.
When drafting the termination letter, companies that are suffering from external pressures should therefore make clear that they are not responsible for the termination and they have no choice other than to put an end to this activity and, consequently, to the commercial relationship. In other words, they should make it clear that the closure of the facility and, potentially, the dissolution of their France-based company is not driven by a deliberate intention to opt out of contracts without complying with French legislation, but rather that it was made necessary by external economic circumstances
The IT Era Comes to Italian Courts
The Italian courts have never accepted submissions by any method other than physical delivery to the hands of a court official. Faxed submissions, submissions by mail, delivery to automatic 24-hour date- and time- stamping mailboxes and e-mails have all, historically, been unacceptable
After repeated, failed attempts over the last 10 years Italian courts have now finally entered the digital era: e-filing is becoming a reality. In comparison with other jurisdictions, this is happening:
In a relatively technologically
sophisticated way, through the combined use of two statutorily regulated systems of electronic identification: (1) a certified, asymmetric digital signature system and (2) a certified e-mail system, both of which are based on standardised technical rules and requirements for the certification of the service providers.
Comprehensively, with secure, electronic channels of communications between parties and the courts, not just for filing, but also for process-serving
Certified, Asymmetric Digital Signature System
A certified, asymmetric digital signature system allows verification of an electronic document’s authenticity by allowing the recipient to use a publicly available key to decrypt a document encrypted with a secret, private key entrusted to the sender that is kept on a card or USB device, is password-protected and cannot be copied.
The technology protects the electronic document from hacking, as any addition or alteration to any detail of the electronic document will cause the verification process to fail. It is even more secure than a paper document, as graphology is not an exact science and it is possible to insert text or modify a hard copy document.
Certified E-Mail System
A certified e-mail system is only activated for specif ic individuals. Messages sent between certified e-mail addresses certify the time of delivery to the recipient’s certified mailbox of the message itself and its content and attachments
The technology provides more certainty than a normal e-mail read or open receipt because the delivery receipt is almost instantaneous and the recipient doesn’t have the option not to send it. In addition, the system bars any addition or alteration to any detail of the e-mail sent initially as the text, in contrast with a normal receipt, is repeated in the delivery confirmation
In Italy, most judicial proceedings are started by serving process on the defendant rather than by a court filing. Lawyers started to take over process-serving from public marshals in the mid-1990s through a statute that authorised them to serve defendants by post.
Since 2013, this has been extended to certified e-mail. To ensure the documents served are valid, they need to abide by certain formatting rules and be signed though a certified, asymmetric signature system
A process cannot, however, be served on just any certified e-mail address; it needs to be served on the certified e-mail address the individual has officially designated to receive such e-mails.
The courts have been prov ided w ith certified e-mail accounts that are linked to an automatic system that allocates a ny i ncom i ng cer t i f ied e -ma i l s a nd their attachments to the corresponding electronic docket, and automatically gives formal notice of the change to the docket through certified e-mail to all lawyers on file for the case.
This technology and new procedural rules have the potential for major social and professional change. Lawyers can now receive updates from any court, even if their office is not located in that court’s district.
For the first time, Italian lawyers will be able to service their clients nationwide, wherever the client faces or initiates court action, freed from the burdensome obligation to personally submit documents to court.
The Benefits of English Contract Law
W hen negot iat i ng i nte r nat iona l commercial contracts, it is important that the parties carefully consider their choice of governing law. When both, or ma ny, pa r ties a re f rom dif ferent jurisdictions it is often desirable to specif y the law of a neutral jurisdiction.
In a recent survey conducted by the School of International Arbitration, Queen Mary University of London, 40 per cent of international corporations surveyed selected English law as the governing law for their commercial contracts, followed by 17 per cent that used New York law.
There are a number of factors that can explain why English law is the preferred system for governing international commercial contracts. The key factors are English law’s principles of freedom of contract and caveat emptor (buyer beware). Central to these concepts is the English courts’ reluctance to imply terms in a contract.
The tradition of English courts upholding the freedom of the parties to contract as they see fit is demonstrated by the criteria that the courts will apply to the interpretation of a contract in the event of a dispute. The English courts will not “make” a contract for parties. They will give life to undrafted clauses in one of only two circumstances: (1) where the inclusion of a clause is necessary for the contract to function, or (2) where the implied term represents the obvious but undrafted intention of the parties
Why Not a Civil Law System?
In an international context, this tradition of the English courts can be contrasted with the approaches in civil jurisdictions and the United States, where freedom of contract and caveat emptor are not at the heart of the contractual system.
The United States’ Uniform Commercial C o d e ( UC C ) , a mo d e l c om mer c i a l code that has been enacted (with local variations) in all 50 states, leans more towards a civil law approach to contractual interpretation. It can be said to align with the regimes of, among others, France and Germany. W hereas English law steadfastly endeavours to honour the parties’ intentions, the UCC and civil law systems in general aim to ascertain the good faith intentions of the parties.
I n doi n g s o, a l l appr opr i at e f a c t s , documentation and circumstances are subject to review, including earlier drafts of execution-form contracts, trade practices and prevailing customs. Civil law systems even allow for parole evidence to be considered, although the UCC stops short of permitting this.
This contrasts starkly with the view of English courts, where no good faith intention is expected, implied or legally required. The net result is that, as long as a contract functions in whole and is legal, effect will be given to its terms, even where they may be unfairly against one of the parties’ interests.
This independent and largely unfettered autonomy granted to parties to negotiate, draft and conclude contracts as they see fit remains one of the key reasons for the selection of English law as the governing law in a large percentage of international commercial contracts
The Challenge of Employee Benefits
Employee benefits are intended to ensure employees’ economic stability du r i ng u ncer ta i n t i mes such a s retirement, incapacity or disability, which affect not only employees and their families’ living standards, but also the country’s economy in general. I n add it ion, generous employee benef its policies are a signif icant recruitment and retention tool.
Some employee benefits are considered to be best practices and are provided by employers on a voluntary basis. These are occasionally supported by the government through favourable tax treatments or even exemptions. In France, for example, such voluntary benefits include supplementary pension plans, additional employee and dependents’ health insurance, dental and vision plans, educational assistance and child care
Other employee benef its, however, are considered so fundamenta l t hat it is mandatory for employers to contribute to the f inancing of state-level schemes: unemployment insurance; basic health care insurance covering illness, maternity, disability and death; occupational health care insurance covering occupational accidents and diseases; and pension insurance. The idea is to show the state’s interest in providing income security and access to medical care services, not only to those who are currently employed, but also to those who are no longer working, such as those who have been made redundant or are retired, disabled and to their families
What is considered by governments to be vital to employees’ well-being is constantly changing. In the United Kingdom, for example, new legislation requires companies to automatically enroll eligible employees in a pension scheme (see p. 22). This new legislation recognises that the majority of current employees are underprepared financially for retirement. Other governments
will identify dif ferent challenges and employers will have to respond.
In France, the following employee benefits are mandatory (up to a certain level) and state-covered (up to a certain level):
Retirement and pension plans
Profit-sharing plans (for employers with at least 50 employees)
Reimbursement of 50 per cent of travelling to work expenses
Social and cultural activities (free or reduced tickets to the cinema, theatre or sports events) financed by the employer through the Works Council
Some of these benefits would probably be considered “perks” (from perquisite) in other countries where they are considered discretionary rather than mandatory.
Benefits in Kind
Benefits in kind (avantages en nature) are common in France. These are goods and/ or services provided by the employer for the personal use of the employee either free of charge or under favourable financial terms. Examples include:
Use by the employee of the company mobile phone, laptop and vehicle for personal purposes
Preferential prices on goods and services produced by the company or by another business
Additional time off, such as extra paid vacation time, extra paid sick leave, extra parental leave, etc.
Social Security Treatment of Employee Benefits
The treatment of employee benefits for social security purposes is in principle the same as the treatment of financial compensations (base salary and bonuses): these benefits are subject to social security contributions. The employer’s contribution is around 40 to 50 per cent of the gross value of the benefit; the employees’ is around 20 to 25 per cent. The employer is also free to assume 100 per cent of certain employee benefits, such as health insurance and dental and vision plans.
Favourable social security and tax regimes may also apply to certain employee benefits, such as profit-sharing schemes
Given that most employers offer the same nature and level of employee benef its (particularly in France where generous mandatory benefits are taken for granted by employees), ambitious employers have to develop new and original employee benefits packages to distinguish themselves from competitors and help them not only to attract new talent, but also to keep their most valued employees.
The most significant challenge is the ability to move with the times. Most benefits packages were introduced to suit the needs of Baby Boomers (people born between 1946 and 1964). They tend to cover benefits related to retirement, because for Baby Boomers, who used to spend their whole careers with just one company, the objective was to secure their future.
The current generation of economically active individuals (Generation X, generally considered by demographers, historians and commentators to be those born between the early 1960s and the early 1980s), however, is more interested in benefits that promote work/life balance and can be enjoyed now, during their employment relationship. One common example is the ability to take an unpaid sabbatical, with the security of a job to come back to, or the opportunity to play sport on the company’s premises. France is now catching up with the United States and the United Kingdom in that a number of companies now offer a wide range of employee benefits such as on-site fitness sessions, healthy lunches, child-care centres, company outings or retreats and personal coaching sessions.
E m p loye r s w i l l s o on ne e d t o s t a r t considering the priorities of Generation Y, also known as the Millennial Generation, as those born in the early 1980s and later become economically active. This generation is probably more attracted than the previous ones to employee benefit packages related to working remotely, new technologies and social responsibility (including “green” initiatives, such as subsidised access to green transportation).
A benefits package that covers both mandatory government requirements and employee expectations is a moving target: no company can afford to become complacent but must stay agile enough to make changes quickly.
This agility comes at a price. One of the main challenges for employers is to balance employee satisfaction with the cost of benefit packages. The financial cost may, however, far outweigh the time and opportunity cost of losing and recruiting staff, or even worse, having unmotivated staff within the company..
Global Employment Company: Is It the Right Fit for Your Organisation?
Multinational companies increasingly have internationally mobile employees (IMEs) who perform services in more than one country, other than their country of citizenship, during a single taxable year.
It can be quite challenging to manage legal com pliance and tax risks with a globally mobile workforce using a typical secondment (usually the place of citizenship) employer
arrangement. Under this arrangement,
an IME is employed by the home country
and is then assigned or seconded to work in a host country. This approach can result in several entities within a multinational company’s controlled group having multiple assignment letters for each IME, without having any common administration.
A global employment company, or GEC, is an entity established by a multinational
company to employ its IMEs. In effect, the GEC serves as a leasing company that is responsible for the employment, compensation and benefits, immigration and income and social tax matters for IMEs.
The GEC provides the assignment letter to the IME, pays—or arranges with a third party to pay—compensation and benefits, and handles all required administrative support for the assignment. The GEC in turn charges a service fee to each entity that uses the IME’s services.
Key Advantages of a GEC
GECs provide several potential advantages for multinational companies. Having a single human resources group supporting IMEs allows for continuous employment with one entity, while providing uniform global compensation and benefits for IMEs moving through numerous locations. This addresses the lack of consistency that tends to occur when several entities in different home countries assign employees to host countries
GECs can also better protect the parent company from myriad local employment laws and suits, and can achieve employment taxes in the GEC home country that are more predictable—and sometimes lower— than those in many other locations. Wit h respect to ta xes, multinationa l companies are continuing to focus on improving control, reducing compliance risk and controlling cost. A GEC can serve to protect members of a controlled group from being subject to tax in a foreign jurisdiction if an IME’s activities were to create a corporate taxable presence or permanent establishment in the host country. GECs also facilitate coordination of payroll tax withholding and reporting from a single location, as opposed to relying on several groups in each host country to manage those activities.
Using a US and a Non-US GEC
It is not uncommon for there to be a separate GEC for those IMEs who are subject to US tax, such as US citizens, resident aliens and non-resident aliens providing services in the United States, and another GEC for all other IMEs.
US citizens who are IMEs often retire in the United States and usually prefer to remain on US retirement and other benefits for ease of administration and tax planning. These individuals may also wish to remain on the US Social Security system to avoid a reduced benefit resulting from ineligible employment. US Social Security coverage is also a relatively inexpensive state system compared to other countries and is easier to provide through a US employer.
This structure can protect against significant tax liability under Section 409A of the Internal Revenue Code, which can apply to non-US citizens with respect to their non-US pension and deferred compensation plans. Coverage of a non-US citizen under a covered plan that does not comply with Section 409A can result in 20 per cent or higher penalty taxes in the United States on amounts earned that are attributable to US service.
Local Tax Considerations
Establishing a GEC requires careful pla n n i ng to ensu re t he employ ment arrangement will be respected by local authorities. For example, an IME’s activities may create a permanent establishment in the host country. If that occurs, local tax authorities will typically seek to impose a tax on the entity employing the IME, which raises the question as to who is the employer
Whether or not the local government will respect the GEC as the employer will depend upon whether the arrangements are determined to be bona fide, i.e., the GEC can show that it is more than a shell existing only on paper. Critical factors that will determine whether or not the GEC will be respected as the employer of IMEs include, but are not limited to
Establishing a reasonable service fee for the IME’s services
Having an individual(s) employed to operate the GEC
Drafting appropriate legal documentation of the employment and assignment of the IME
Operating the GEC in a manner consistent with the GEC’s legal documentation
Having the GEC be responsible for core employment functions
Taxes that the GEC may be required to pay on profits earned in the host country due to the IME’s activities may be well worth the cost of protecting another entity within the controlled group from foreign income taxes.
Local Employment Laws
Another matter to carefully consider is whether or not adjustments to the GEC employment arrangement will be necessary in order to meet legal requirements for an IME in the host country.
A classic example is participation in the host country’s social security program, which may require the presence of a local employer in that country. This local employer requirement may also apply in order to comply with host country regulations regarding payment of salary and other
payroll-related benefits. A solution that may be available to address the need for having a local employer is for the GEC to establish a “branch” within the host country.
It is reasonable to expect that IMEs will continue to increase in order to achieve growth of global business. Greater focus by foreign governments on collecting more revenue from individuals who provide services within their borders, and an increasingly complex and changing regulatory environment, magnify the need for careful planning and compliance.
A GEC may be an appropriate structure for a multinational company to address these challenges depending upon the costs to establish and operate the GEC, the number of IMEs, the countries where services will be provided, current assignment practices and the potential for risk mitigation
[Text Box: FoCUS oN] Good and Bad Leaver Clauses in German Managers’ Employment Contracts
Good a nd bad leaver prov isions i n s h a r e holde r a g r e e me nt s a r e common in the corporate world and are increasingly being included in employ ment cont racts. In most c a s e s , t he y a r e n ot , h o we v e r, le g a l ly e n f o r c e a ble i n G e r m a n employment contracts
What Are Good and Bad Leavers?
Good and bad leaver provisions were invented for and widely implemented in employee shareholder agreements in order to protect corporate property when employees or, more importantly, managing directors or board members (collectively managers) own shares in the company.
Companies have a real interest in their managers participating as shareholders and ultimately sharing in the company’s success. Managers have a personal incentive to foster the company’s business because they are rewarded for the company’s good performance not only with recognition, a warm handshake and their contractual salary (which they would be entitled to in any event), but directly with dividends.
Conversely, such management participation can cause problems in times of discord and contract termination. In order to protect other shareholders and the company, management shareholder plans usually contain rules that require managers to return their portion of the company’s shares once their employment ends, even though their legal statuses as employee and shareholder are generally independent from each other. It has also become customary in these termination scenarios to distinguish between “good leavers” and “bad leavers”.
Employee shareholder agreements define when a leaving manager is to be considered a bad leaver or a good leaver as well as the consequences. In good leaver scenarios, i.e., when the parties separate from each other amicably or due to retirement, the former manager is still required to give back his or her shares, but is compensated with their current market value and thus benefits from the success the business has achieved during his or her tenure, and probably owing to his or her ability and skills. This has two effects. Not only will the manager try hard to be successful in order to increase the company’s share value, but he or she will be content to separate from the company as a good leaver. At the same time, this mutually beneficial situation can prevent expensive lawsuits and lengthy struggles over the termination of the employment relationship.
A bad leaver is often defined as a manager whose position and contract has been terminated by the company due to loss of trust or the manager’s misconduct, or when the manager terminates his contract and corporate office without “good reason”, t hereby qua l i f y i ng as a ter mi nat ion with immediate effect (außerordentlicher Kündigungsgrund). When leaving the company, the bad leaver has to return the shares for compensation that equals, for example, the value of the shares at the time he or she received them
The highest German civil court has upheld these contracts among shareholders, within the limits set by the German Civil Code (Sittenwidrigkeit) in Section 138.
Applying Good and Bad Leaver Clauses to Bonus Payments
Recently there have been attempts to transfer this corporate principle into managers’ bonus agreements. This development mainly stems from what has been perceived as a general and worldwide endeavour to change, i.e., regulate, the capital markets in recent years. This includes exerting some kind of influence on managers’ variable remuneration, which is why German legislation has implemented Section 87 para. 1, sentences 2 and 3 of the Stock Corporation Act (Aktiengesetz):
The remuneration system of listed companies shall be aimed at the company’s sustainable development. The calculation basis of variable remuneration components should therefore be several years long … .
There are two common ways in which good and bad leaver clauses are applied to bonus payments.
Example 1: Bonus Deferrment—Payout for Good Leavers Only
Section 87 para. 1, sentences 2 and 3 of the Aktiengesetz prompted and required companies to make a bonus for a given year— at least partially—dependent on the business figures of the following year(s).
By applying such a mechanism, managers are encouraged to pursue a long-term, sustainable and positive development of the company, instead of aiming for quick, short-term success. For example, a manager achieves 100 per cent of his or her goals in a relevant year (year 1). A 50 per cent payment of this bonus is made in year 1, while the payment of the next 25 per cent of that same bonus is dependent on reaching certain financial goals
in the following year (year 2) and payment of the remaining 25 per cent is dependent on achieving the goals of the next year (year 3).
Many bonus plans and/or employment contracts contain a stipulation that—in addition to the fulfilment of the economic prerequisites for years 2 and 3—the remaining pro rata payment of the bonus achieved in year 1 is dependent on the manager still being employed with the company throughout years 2 and 3 or, in case of termination of employment, departing as a good leaver. Unfortunately, this additional requirement for the manager to still be with the company in years 2 and 3 or, in case of termination, to be a good leaver, is not enforceable in Germany.
Example 2: Exit Bonuses for Good Leavers Only In some situations, the “exit bonus” is dependent on the manager still being employed with the company at the time the company is sold, or having left the company as a good leaver within the year preceding the sale.
If a company is made profitable while the manager is in post and sold shortly after he or she left, it seems appropriate while the manager is in post to promise him or her a generous bonus, calculated on the increase of the business’ value between the time he or she started in the management position and the time the company is sold. It is equally appropriate that the company would not want to pay a large exit bonus to a manager who left the company as a bad leaver just before the sale was achieved.
As sensible as this might be from an economic standpoint, again, withholding the bonus from a bad leaver when he or she has achieved the required economic goals is not permitted in Germany.
Mandatory German Employment Law Principles
The highest German employment court has held for decades that it is a substantial principle of German employment law that what has been promised by the employer and earned by the employee cannot be unilaterally withdrawn retroactively. This means, if the employer offers a bonus for a specific performance or performance-related goal, the employee can reasonably rely on that promise and on the granting of the bonus if he or she achieves that goal or successfully renders the performance.
[Text Box: EMPLOYEE BENEFITS] This principle remains unaffected by contract termination, whatever the reason. This means that, even if the manager’s employment contract was terminated by the company as a result of bad behaviour (e.g., for persistently being late) that qualifies the manager as a bad leaver, this does not entitle the employer to cut the manager’s bonus if he or she achieved the performance-related goals.
In relation to Example 1, this means that the percentage payments of the bonus in years 2 and 3 cannot be denied to a manager who left the company during these years but had already met the economic goals. Likewise, in relation to Example 2, if the manager made the business successful and profitable, leading to its sale, the promised exit bonus cannot be denied “just” because the manager’s contract was terminated for persistently being late.
In both scenarios, the manager achieved the performance-related (economic) goal and therefore earned the bonus, regardless of whether or not he or she was persistently late or considered a bad leaver for any other reason
Applying these principles, a German employment court will (most likely) hold the bad leaver clause to be invalid. The consequence of which is that the company cannot deny the departing manager an already earned bonus, even if the manager is considered to be a bad leaver.
UK Government Reviews Flexible Employment Practices
Worke r c l a s s i f ic at ion h a s be e n attracting increased attention in the United Kingdom following a perceived increase in the number of employers engaging staff on a f lexible basis using “zero hours” contracts. There are concerns that such arrangements may deprive workers of certain core employment rights, or are otherwise exploitative.
Media coverage in 2013 culminated in the UK press identifying a number of large businesses that use these types of contractual arrangements, and calls for the UK Government to outlaw their use. A test case was also launched by a staff member engaged on a zero hours contract at one of the United Kingdom’s most well-known sportswear retailers, challenging the legality of that company’s treatment of its part-time workforce.
The UK Government’s response to the heightened attention was to launch a public consultation seeking further evidence of the use
of zero hours contracts and inviting views on a range of potential actions. The consultation concluded on 13 March 2014 and the issue has the potential to affect future UK hiring practices and employment structures.
The Importance of Employment Status
Employment relationships in the United Kingdom, as throughout much of Europe, are, in comparison with the United States, heavily regulated.
The precise extent of an individual’s employment rights in the United Kingdom depends, however, on his or her employment status. There are three broad categories: employee, worker and employed on own account or “self-employed”.
In short, “employees” have a wide range of statutory employment rights, including protection against unreasonable termination or “unfair dismissal”, maternit y pay and entitlement to certain termination
indemnities. “Workers” have some, but a lesser range of, “core” statutory employment protections, including the right to a national minimum wage and working time rights. The self-employed have very limited rights.
The Relevance of Contractual Terms
An “employee” in the United Kingdom is an individual who works under a “contract of service”.
A “worker”, on the other hand, is an individual who does not satisfy the requirements for being an employee, but works under another form of contract or arrangement that requires them to do work or perform services personally for a reward. This category includes agency workers who are engaged via third-party agencies.
Any written terms will be the starting point for determining employee status, but the UK courts will look at all aspects of the employment relationship and can disregard
written terms if they do not ref lect the practical reality of the relationship. Any labels applied by the parties themselves are not determinative.
There are, however, three fundamental requirements that need to be satisfied to establish employee status:
Personal service—An obligation on the individual to provide services personally and not to be able to send a substitute to work in their place.
Control—An ability on the part of the putative employer to exercise a degree of control over the individual and the way in which he or she undertakes their work.
Mutuality of obligation—An obligation on the part of the putative employer to provide work, and on the individual to undertake it in return for a wage.
Businesses engaging staff in the United Kingdom often pay close attention to these requirements. The third one is particularly relevant to zero hours contracts.
Zero Hours Contracts
Zero hours contracts have been used in the United Kingdom for many years and have been subject to various challenges before the UK courts as to their efficacy.
UK law provides no set definition of what a zero hours contract is. In general terms, however, under a zero hours contract, an “employer” is obliged to pay an individual only for any work that is actually carried out, but gives no guarantee to make work available. Reciprocally, the individual is not obliged to accept any work that is offered.
The absence of these mutual obligations makes it less likely that an individual will attract employee status, particularly during the periods when no work is offered. At best, they are only likely to be considered an employee during the periods they actually work. Any significant periods when they are not provided with work will prevent those individuals from accruing sufficient continuity of service as an employee to gain meaningful employment protections.
Also, under UK (and EU) law, it is unlawful for an employer to treat an employee who is engaged on a reduced-time basis less favourably than a full-time counterpart. This protection from discrimination does not
extend to those individuals engaged on zero hours contracts who classify only as workers.
Historically, zero hour arrangements have proven attractive to organisations (particularly in the retail, hospitality and health care sectors) that need a more flexible workforce, capable of meeting short-term peaks in demand and seasonal staffing needs, without needing to commit to the headcount and f ixed costs associated with a more traditional employment relationship.
Businesses have seen zero hours contracts as a more practical option and more palatable publically than other legal options available, e.g., paid layoffs, short time working or repeated “firing and rehiring”, which involve explicit acknowledgement of falls in demand and can trigger mandatory payments.
The UK Government recognises that zero hours contracts, if freely entered into, are a legitimate form of contract between an individual and his or her “employer”. It appears reluctant, therefore, to outlaw their use entirely. Two main concerns have, however, been identified about their current use:
Exclusivity clauses—Some employers include provisions in their zero hours contracts that prevent individuals from working for other businesses, even if that employer is not offering work currently.
Lack of transparency—Some employers are not doing enough, when advertising or interviewing for jobs, or in the contract terms themselves (perhaps
by not labelling them as a zero hours contract), to make individuals aware that there is a possibility they could, at any point, be offered no work and therefore receive no pay.
The government has also indicated concern at the amount of advance warning that zero hours staff are given of additional or reduced hours, the training opportunities they are afforded and their rates of pay in comparison to permanent staff.
A number of possibilities as to how the UK Government may respond to the consultation have been suggested:
New legislation banning the use of exclusivity clauses where no work is guaranteed
Government-issued guidance on the fair use of exclusivity clauses in zero hours contracts and advice to employees on the nature of zero hours relationships
The development of an employer-led Code of Practice
The introduction of model contractual clauses to be used in zero hours contracts
With a general election due no later than Spring 2015, however, it is unlikely that there will be major movement on this issue before then
Notwithstanding the UK Government’s review, zero hours contracts are likely to remain a viable legal option for businesses engaging staff in the United Kingdom. Those businesses that use zero hours contracts should, however, be aware that they may need to comply with additional requirements in the future, and presume that any employment practices designed to manage costs by adopting elements of flexibility will continue to come under scrutiny.
More generally, the public furore concerning zero hours contracts has placed a wider spotlight on the flexible employment practices of organisations operating in the United Kingdom, with a consequent increase in associated reputational risk. It would be worthwhile therefore for all businesses to review their UK hiring practices and employment structures with this in mind.
UK Pensions Auto- Enrolment Scheme
A rad ica l cha nge to U K pension law is expected to a f fect tens of thousa nds of orga nisations w ith U K - b a s e d e m p lo y e e s i n 2 0 14 . T h i s f o l lo w s t h e i m p o s i t i o n of a n u np r e ce de nt e d obl ig at ion on employer s to “autom at ica l ly enrol” eligible employees in, and to contribute financially to, a pension scheme that meets specific, carefully defined criteria.
Each organisation has been allocated a “staging date” by which it must comply with the new regime. The largest employers were targeted first, but it will apply to all organisations with UK-based employees by 2018. Indeed, the rollout has now reached a point where the vast majority of organisations will this year find themselves caught by the new regime.
Planning for the implementation of auto- enrolment should begin well in advance of an organisation’s staging date. Relevant considerations include not only pension law but finance, compensation and benefit structures, employee relations, training for relevant staff, the identification of a suitable scheme provider, payroll issues and on-going legal compliance.
When Is Your Staging Date?
It is vital to identify your staging date as early as possible and to plan accordingly. The staging date for each employer is determined by the number of employees registered on 1 April 2012 in its pay as you earn (PAYE) scheme. Employers who, on 1 April 2012 had 500 or more employees in their PAYE scheme are already subject to the auto-enrolment regime but, on various dates during 2014, this will be extended to capture all employers who had between 59 and 499 employees in their PAYE scheme on 1 April 2012.
Who Are You Required to Auto-Enrol?
Employers are only required to auto-enrol “eligible jobholders”. An eligible jobholder is someone who is at least 22 years old who works (or ordinarily works) in Great Britain under a contract and who earns at least
£9,440 per year.
Finding a Suitable Pension Scheme for Your Business
Eligible jobholders must be enrolled in a scheme that meets minimum qualitative criteria. The different types of schemes available can vary quite significantly, and careful consideration should be given to the right scheme for your business. Employers should also review the existing pension arrangements they have in place for their UK employees. If those schemes meet the statutory criteria there is no need to set up a new scheme, although certain information requirements may need to be complied with.
Getting It Right from Day One
Setting up a compliant scheme can require significant effort. The Department for Work and Pensions has estimated that employers will need to spend more than 100 man hours in preparing for and implementing auto-enrolment. Getting to grips with auto-enrolment, and identifying the legal, logistical and financial issues in advance is essential to ensure compliance on your staging date.
Employers have an ongoing obligation to ensure they remain compliant with their new duties. This requires, for example, continual monitoring of the workforce prof ile to ensure any employees who become eligible jobholders are automatically enrolled, and to ensure employees who have opted out of the scheme are re-enrolled after a certain period of time. Failure to achieve and maintain legal compliance could be costly; the Pensions Regulator has the power to impose a fine of up to £10,000 per day for large employers.