There are a number of changes in U.K. employment law which employers will face in the next 18 months. In this article, we highlight two of the more significant changes: the new gender pay gap reporting obligations, and the changes to the taxation of termination payments. We also provide an update on the latest cases dealing with the increasing trend of individuals challenging their work status in the growing so-called "gig economy."
Gender Pay Gap Reporting Obligations
Mandatory gender pay gap reporting obligations for large employers in the U.K. (those with 250 or more employees in the private and voluntary sectors) are now due to come into force in April 2017. The current draft regulations require employers to publish:
- overall gender pay gap figures using both the mean and median gross average hourly pay;
- numbers of men and women in each of four pay bands, based on the employer's overall pay range;
- details of the proportion of men and women who receive bonus pay; and
- the percentage difference in mean bonus pay between men and women.
Employers subject to these reporting obligations will be required to analyse their gender pay gap each April, publish their gender pay gap report on their websites within 12 months (the first reporting date for publishing such information being no later than 4 April 2018 and annually thereafter), and keep the information there for three years. The information must also be uploaded to a government website. The draft regulations do not contain any civil or criminal penalties for noncompliance, although the U.K. government has stated that it will monitor non-compliance and publish employers' reported gender pay gaps, as well as possibly naming and shaming those employers who do not comply. Therefore, there may be significant consequences for employers who do not comply, in the form of adverse publicity and damage to their reputations both as employers for recruitment purposes and in their overall business dealings.
[T]here may be significant consequences for employers who do not comply [with gender pay gap reporting obligations] in the form of adverse publicity and damage to their reputations both as employers for recruitment purposes and in their overall business dealings.
At present, there is still a degree of uncertainty in certain areas of the regulations including which "employees" will be covered by the regulations. The current understanding is that it is the U.K. government's intention that a wider definition of employee will apply, which is likely to extend to workers which will include, for instance, fixed share LLP members and possibly some self-employed contractors. A further area of uncertainty is the definition of "pay." Currently, pay will include most remuneration paid through payroll including bonuses, shift premiums and other allowances. However, overtime will be excluded.
Practical Tips for Employers
UK employers likely to fall within scope of the regulations should start to take steps now in order to ensure that they are able to comply with these obligations. Ideas to consider include:
- Trialling the implementation of systems and procedures to gather, analyse and process pay data in order to prepare gender pay gap reports.
- Although any communications and analysis of the gender pay gap report with lawyers will be subject to legal privilege, employers should be aware that any preliminary or draft version of the report itself may be disclosable.
- Assemble and update employee records to ensure that all employees, such as casual workers, are within scope for the purposes of the gender pay gap report.
- Senior management should be involved as early as possible in the process, to provide input and oversight, as they will be required to sign off on the report.
- Senior management should also work closely with Human Resources to manage and address any internal employee concerns following publication of the gender pay gap report.
- It will be important to involve the company's marketing and public relation officers in preparing and managing external communications with the media addressing any disparities in pay revealed by the gender pay gap report.
Taxation of Termination Payments
In July 2015, the U.K. government published a consultation on the tax and National Insurance contributions (NICs) treatment of termination payments. The U.K. government has now published its response and draft legislation for further consultation, with the new rules due to apply from April 2018.
The changes proposed to come into force are as follows:
A. Termination Payments: Certain payments relating to the termination of employment will continue to have a 30,000 income tax and NICs exemption up to this threshold. There will also continue to be an unlimited employee NICs exemption on the entirety of the termination payment (i.e. even when the termination payment is over 30,000). However, in an effort to simplify the system and "prevent manipulation" by employers, the employer NICs exemption where the termination payment is over 30,000 will no longer apply. Therefore, this will increase costs for employers who agree to termination payments with employees in excess of 30,000, as they will be required to pay employer's NICs at 13.8% on any amounts above 30,000.
B. Notice Periods: Currently, a payment in lieu of notice (PILON) made to an employee pursuant to a clause in their employment contract that entitles an employer to make such a payment would be subject to tax and NICs in full, whilst similar payments made by an employer where there is no such PILON clause in the employment contract may be paid free of income tax up to the first 30,000, aggregated with other termination payments, and entirely free of NICs deductions. This distinction between a contractual and noncontractual PILON will be removed, which will mean that all such payments will be taxable and subject to NICs in full.
C. Payments for Injury to Feelings. Employment Tribunals can award successful claimants who bring discrimination claims and certain types of whistleblowing claims, compensation for "injury to feelings," as well as for financial loss. The intention is for the claimant to be compensated for the upset, hurt and distress the discrimination has caused them. In settlement negotiations, lawyers for claimants often attempt to apportion a specific sum of any settlement as compensation for injury to feelings in the belief that this sum will not be subject to tax due to an exemption for payments for disability or injury. However, as a result of conflicting case law, there is currently uncertainty as to whether payments for injury to feelings are subject to tax. Consequently, the U.K. government has decided to clarify the position to make it clear that the exemption does not apply in cases of injured feelings unless this relates to an injury or disability of a physical or psychiatric nature which is serious enough to prevent an employee from performing his or her job.
D. Foreign Service Relief. Currently, foreign service relief allows termination payments for qualifying U.K. resident employees to be exempt from U.K. tax if they relate to periods spent working outside the UK. This exemption will now be removed, save for seafarers.
Uber, Deliveroo, Hermes and City Sprint Workers or Self-Employed?
The last few years has seen the emergence of the so-called "gig economy," which has seen a growing tendency for companies to use self-employed workers instead of employees, particularly in low-skilled roles in service-based industries. The benefits for employers are significant, as they obtain the use of a large volume of workers on a flexible or part-time basis without the associated costs of permanent employees, e.g. sick pay, holiday pay, employer's NICs, etc. However, the backlash against this practice is gathering pace with companies such as Uber, Deliveroo, Hermes and City Sprint in the firing line. A number of high profile cases have been brought with individuals arguing that the terms and conditions of their work mean that they are not self-employed but rather are workers entitled to a range of benefits they currently do not receive, as well as greater statutory protection such as, for example, the right to the national minimum wage and benefits under the Working Time Regulations, such as minimum period rest breaks.
One of the most high profile cases is the case against the ride-hailing app, Uber, which has 30,000 drivers in London who are treated as classified as selfemployed. Two test cases have been brought by drivers who are challenging their self-employed status claiming they are in fact workers. Lawyers for the drivers argue that Uber exerts significant control over its drivers, including control over drivers' routes and penalising drivers who refuse too many jobs over a period, and that this level of control is sufficient to extend worker status to such individuals. If successful, this will have an effect not only the thousands of Uber drivers, but may also have wider ramifications for workers in other industry sectors where the status of the workforce may have been misclassified. A decision is expected in October 2016.