Employment Law Review – October 2019
Welcome to our October Employment Update.
This month’s bulletin includes some short video clips giving our commentary and practical considerations on a number of developments in employment law. These cover upcoming changes in calculating holiday pay, a case relating to vegetarianism, flexible working, a case involving legal privilege and a look at IR35 and changes for the private sector.
- Change in calculating holiday pay
- Vegetarianism a lifestyle choice, not a protected characteristic, tribunal rules
- Flexible working – impact on your organisation
- Legal advice privilege: the potential limitation
- Planning for changes in IR35
One million UK workers denied statutory holiday pay
Analysis conducted by Resolution Foundation has revealed that over one million workers in the UK did not receive the statutorily guaranteed 28 days a year of paid holiday. This is the equivalent of 1 in 20 workers. The Government has made attempts to assist workers to assert their rights and has endeavoured to enhance the power of HMRC, however, it appears that individuals still bear the weight of the burden of upholding their own rights which may suggest employers are abusing individual rights.
Resolution Foundations research also found that 1 in 10 workers do not receive a payslip, compounding the difficulty of determining whether holiday pay, pension contributions and sick pay have been paid correctly. Workers under 25 and over 65 are most likely not to receive a payslip and workers under 25 are almost twice as likely to be underpaid the minimum wage.
What next for employers?
In 2020 the reference period for determining holiday pay will change. Watch our short video clip for a summary of upcoming changes.
The recent decision of Employment Judge Postle in Conisbee v Crossley Farms Ltd and others provides that vegetarianism is not a philosophical belief that requires protection under the Equality Act 2010.
Mr Conisbee was employed by Fritton Arms Hotel in Suffolk (owned by Crossley Farms Ltd) for 5 months’ before resigning. He alleged discrimination on the ground of religion or belief, his belief being vegetarianism. At a preliminary hearing, the employment tribunal held that this did not qualify for protection under the Equality Act 2010. Although his belief was worthy of respect in today’s society, it failed to meet the other legal hurdles necessary for protection:-
- it did not concern a weighty and substantial aspect of human life and behaviour. Vegetarianism is a life style choice, and Mr Conisbee’s belief was that the world would be a better place if animals were not killed for food;
- it did not attain a certain level of cogency, seriousness, cohesion and importance: the reasons for being a vegetarian are varied i.e. health, diet, lifestyle and a concern for how animals are reared for food, it may even be personal taste.
- it did not have a similar status or cogency to religious beliefs.
Only 1 in 7 job adverts offer flexible working
A study conducted by Timewise found that only 1 in 7 jobs throughout 2018 offered any kind of flexible working. More than 5 million job adverts were assessed and only 15% included a reference to flexible working as opposed to, according to Timewise, 87% of UK employees wanting some form of flexibility. Middle income jobs (with salaries between £20,000 – £59,000) had the lowest proportion of flexible jobs advertised which may suggest that those working part-time or flexibly are struggling to climb the career ladder. On the other hand, jobs offering £60,000 or more saw the highest growth in flexible offerings, increasing from 5% to 15% in four years.
The lack of flexible working options has proved to be a particular problem for working parents. A recent poll of 2,000 parents conducted by workingmums.co.uk highlighted that 80% of mothers felt ‘stuck in their current role’ as it would be difficult for them to find another job which would offer enough flexibility. Further, 57% of mothers responded that since having children, their careers had not progressed. The statistics are concerning and as expressed by diversity and inclusion adviser at the CIPD, Claire McCartney, it is clear that employers need to do more to increase their flexible working offering.
Potential advantages and disadvantages of flexible working
|Employees||· Flexibility to meet family and personal needs
· Reduce commuting time and travel expenses
· Greater control over working environment
· Work during hours which are suitable for them
|· Difficult for office-based staff who must be present in the office to carry out their role
· Family members may perceive working from home as being available to deal with personal matters and household chores
· A lack of balance between work and home life
|Employers||· Boosts employee morale
· Reduces tardiness and absenteeism
· Increases staff retention rates
· Enhances the reputation of the company
|· Feelings of unfairness amongst staff as some employees will not be able to work flexibly
· A shorter working week may result in client’s not being dealt with in a timely manner
· Quality of work may be affected due to distractions at home
NOTE: all UK employees have the right to make a flexible working request once they have completed 26 weeks service.
Listen to our short commentary on the key issues employers should consider when it comes to flexible working:
Legal advice privilege: the potential limitation
The recent case of Kasongo v Humanscale UK Ltd provides that where employers choose to share legally privileged information with their employees, they may lose their right to argue that additional correspondence with their solicitor is subject to the same privilege.
Ms Tracey Kasongo (“Kasongo”) was dismissed from Humanscale UK Ltd (“the Respondent”) after 11 months’ service. She argued that her dismissal was as a result of informing the Respondent that she was pregnant, however such allegations were denied by the Respondent, who maintained that the reason for her dismissal was ‘due to poor performance, attendance and lateness’.
In the course of disclosure, the Respondent disclosed to Kasongo:
- A note regarding Kasongo’s dismissal which detailed advice given to the HR Manager from the company’s external solicitor;
- An email from the HR Manager to the company’s in-house counsel providing a summary of the advice and highlighting the reasons why the company wanted to terminate Kasongo’s employment (this email confirmed that the reason for dismissal had nothing to do with Kasongo being pregnant);
- A draft dismissal letter which contained redacted comments from the company’s external solicitor.
It was the draft dismissal letter which resulted in Kasongo bringing a claim to the Employment Tribunal. Although the comments had been redacted by the Respondent, Kasongo was able to make out what the solicitor’s comments were. One particular comment relating to the reason for dismissal stated “please double check I have this correct factually and that you are not uncomfortable with us saying any of this. The idea is to do enough to show that we’ve not dismissed her for any discriminatory reason”.
The Employment Tribunal
The employment judge found in favour of the Respondent, maintaining that as the solicitor’s comments within the letter were redacted, Kasongo should not have been able to read them and therefore they were covered by legal advice privilege. The judge also found that the email from the HR Manager to the in-house counsel was not covered by legal advice privilege but made no comment in respect of the attendance note.
The Employment Appeal Tribunal
Kasongo appealed the decision of the employment tribunal, questioning whether the Respondent had waived legal privilege by disclosing the other two documents (as they also contained communications with the Respondent’s legal representatives).
The Respondent argued that regardless of the other two letters being disclosed to the employee, the draft dismissal letter would not be discloseable as it was not part of the same transaction.
Her Honour Judge Stacey rejected the Respondent’s argument and held that all three documents were part of the same transaction. She explained that “given the nature and purpose of the disclosure, fairness required that the redacted part of the letter concerning the reason for the Claimant’s dismissal also be disclosed, since it would be unfair to allow the Respondent who had waived privilege in relation to the other two documents not to reveal those redacted parts of the dismissal letter which related to the reason for dismissal. It would be impermissible cherry picking as the cliché goes.”
First introduced in 2000, IR35 is tax legislation designed to reduce tax avoidance by contractors who HMRC believe to be “disguised employees” – people who work in a similar way to full time employees but invoice for their services via their personal service company (PSC). Known as IR35 as it was the 35th Press Release issued by the Inland Revenue for the 1999 Budget, it is sometimes also referred to as “intermediaries legislation” or “off-payroll working”.
Commonly a PSC is a company where there is only one employee and the purpose of the PSC is to supply that individuals services to a business. The fee for those services is then paid by the business/end user to the PSC. The majority of these transactional relationships are genuine, there are plenty of sole trader limited companies operating in the UK, also using a PSC can be beneficial to both the contractor (limited liability protection and tax savings) and the end user (flexibility, especially for a sector with fluctuating labour demands). However HMRC introduced IR35 to catch businesses that are using a PSC in a way to avoid paying employers National Insurance contributions or providing employee benefits. If the contractor is deemed to be doing the same work as an employee, HMRC will ensure that the PSC pays broadly the same tax as it would as an employee. An inspector will determine this by applying an employment status test to each case, which is based on the actual workings rather than any contract.
Employment status test
There is no precise legal test to determine whether an individual is an employee, rather the test has been developed through court decisions and based on a number of factors which usually include:
- Mutuality of obligation – the PSC is obliged to accept work when offered, also exclusivity and preventing working for others;
- Substitution – can the PSC send another contractor to complete the services or is personal service required? and
- Supervision/direction/control – contractors must have control as to how they complete their work to fall outside of IR35.
HMRC has also developed guidance on when it considers an employment relationship exists, https://www.gov.uk/guidance/check-employment-status-for-tax (CEST Tool). However even HMRC themselves have acknowledged that the CEST Tool is limited and fails to give a correct answer in 15 to 20% of cases. HMRC have lost 5 out of 6 IR35 tribunals since 2018, some of these being high profile celebrities (Lorraine Kelly and Kaye Adams) where the tax implications for been caught by IR35 were extremely significant sums.
How the IR35 rules work
Currently where the private sector business engages with a PSC, liability to decide if IR35 applies and to pay any employment related tax rests with the PSC.
Since 2017 this has been different for the public sector, the public authority which engages the PSC is now responsible for determining if the IR35 rules apply and paying any subsequent tax and national insurance if the contractor would be regarded as an employee. This led to blanket decisions being made by public sector bodies not to engage with PSC’s and saw contractors leaving the public sector in droves.
Changes in the private sector – April 2020
At the autumn budget in October 2018, the government confirmed it would extend the changes to IR35 in the public sector to the private sector from April 2020. It will not apply to small businesses and the rules will not apply retrospectively. The Companies Act 2006 and its associated regulations set out several criteria for a company to qualify as small. To qualify as a small company, at least two of the following conditions must be met:
- The company’s annual turnover doesn’t exceed £6.5 million
- The balance sheet total (meaning, the total of the fixed and current assets) doesn’t exceed GBP 3.26 million
- The company employs no more than 50 personnel over an average of two years.
Consequently, once the new rules are in place the engaging business, not the PSC is liable for the PAYE and the employer’s national insurance contributions. CEST (which HMRC already confirm is not accurate) will be reviewed in an attempt to increase accuracy. However it is going to be difficult to assess where liability should sit in complex supply chains including agencies.
The risk for businesses is not only limited to a tax liability if their contractors are caught by IR35, it could also find itself subject to an employment status claim from the individual engaging via the PSC which could also include payment for sickness pay and holiday pay claim. This was exactly what happened in the case of Susan Winchester, who brought such claims against HMRC directly whom she had been engaging with HMRC (ironically). She felt it was unfair that she should be classed as employed “for tax purposes only” – there is no redress/appeal to HMRC regarding their assessment of IR35 status and therefore she brought her claim at Employment Tribunal. The claim settled for an undisclosed sum but she waived her right to confidentiality regarding the case.
What should businesses be doing now?
Private sector businesses who engage with contractors through PSCs will from next year be exposed to significant tax risks and we recommend that they start to prepare for this. The consultation details actions that businesses should be undertaking now to prepare for the reforms, these include:
- Reviewing and identifying current engagements with intermediaries including PSCs and labour supply agencies;
- Undertaking a comprehensive employment status test for each contractor;
- Undertaking reviews of internal systems including payroll software, HR and an-boarding policies to see if they need to make changes
By including a section in the consultation to the new legislation which details what businesses should be doing now to prepare for the reforms tends to indicate that HMRC expect businesses to be compliant from day one and comply with the legislation as soon as it becomes law. Starting to risk assess your business exposure if any should be a priority especially for businesses that rely on such flexible supply of labour.
Watch our video giving key steps for businesses to take now:
The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.
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