Employment and TUPE, important facts that General Counsel need to know - ThinkHouse foundations

Mike Reed: My name is Mike Reed.  I am a senior associate in the commercial IT & outsourcing team at Gowling WLG and I am here with my colleague Emma Hine from our employment and equalities team to do a follow-up podcast to our ThinkHouse foundation session. Emma is going to provide an employment law update from 2016 and we have got a few questions and topics to work through with her.

Firstly Emma there has been a lot of talk recently about gender pay gap reporting. Can you tell us about the requirements and who it will apply to?

Emma Hine: Well there is a requirement in Section 78 of the Equality Act 2010 for regulations to be published requiring employers in the private and voluntary sectors with 250 or more relevant employees on the relevant date to publish gender pay gap information and, although this requirement in the legislation is specific to private and voluntary sector employers, the government has also published a consultation showing its intention to extend this reporting requirement to public sector employers too. The government says it intends the obligations to be the same regardless of whether the employer is in the public or private voluntary sectors and that, it says, is to encourage consistency of approach across the board and it also then means that comparable data will become available for all major employers.

Now at the moment there are no draft regulations for relevant public sector employers, but on 6 December the government published the revised version of the draft Equality Act 2010 Gender Pay Gap Information Regulations which, subject to parliamentary approval, are expected to come into force on 6 April 2017. The revised regulations will essentially require relevant employers to take a snapshot of their relevant employees' pay on the relevant date each year. Now there was some confusion in the draft regulations and the later consultation on closing the public sector pay gap on when that relevant date would be, but the revised regulations confirm the date will be 5 April 2017 and each anniversary of that date.

Now before we go on to look at what information will need to be published, it is worth noting a couple of points. The first is that there has been some confusion on the definition of who will be a relevant employee and, whilst the draft regulations state it will apply to anyone who ordinarily works in Great Britain and whose contract of employment is governed by UK legislation, this was criticised for being unclear and not in line with what was set out in the government's original consultation on closing the gender pay gap, or in the later consultation on closing the public sector pay gap. The revised version of the regs has confirmed that it is that wider definition contained in Section 83 of the Equality Act 2010 which will apply, so that is anyone engaged under a contract of employment, a contract of apprenticeship or a contract personally to do work. However, if someone is engaged under a contract to do work, these persons do not need to be included if the relevant employer does not and cannot reasonably practicably obtain data on them. Also partners in a firm and members of an LLP are expressly excluded, and one final point to note about relevant employees is only full pay relevant employees will be counted, so that is anyone who is not during the relevant pay period being paid a reduced rate or nil as a result of being on leave.

The second point is that it would appear, although we are waiting for further guidance on this, that there is no need to aggregate relevant employees across the group companies, so you just need to look at each individual legal entity when assessing whether or not that entity has enough employees to meet the relevant requirements to publish gender pay gap information.

In terms of what information needs to be published, this will include the overall median and mean gender pay gap figures, and that is just the percentages, there is no need to publish the actual figures. Also report on the number of relevant men and women in each of the four pay quartiles and these revised regulations have confirmed that this should be calculated by listing all employees in order of hourly pay and then splitting them into four groups of equal employee size. You should then also publish mean and median gaps between bonus payments made to male and female employees in the 12 months preceding 5 April and also publish details on the proportion of male and female employees who received a bonus in the 12 months preceding 5 April. These results will then need to be signed off by a director or equivalent and be published within one year of 5 April. So the first results will need to be published on 4 April 2018. They should be published on the employers' website and remain there in a searchable format for three years and also on a specified government website.

Mike: So Emma, what should employers be thinking about in terms of next steps to prepare for gender pay gap reporting?

Emma: Well although the first gender pay gap report does not need to be published until April 2018, there are still plenty of steps which relevant employers should be taking to prepare for the new regime. There are no civil or criminal penalties for failure to comply with the regulations themselves, but the explanatory notes to the amended draft regulations do indicate that a failure to comply with the regulations will constitute an unlawful act within the meaning of Section 34 of the Equality Act 2006, which empowers the Equality and Human Rights Commission to take enforcement action. Aside from this there are also obviously reputational risks for failure to comply and the government is required under the regulations themselves to review them within five years of them coming into force.

In practical terms we would recommend that relevant employers firstly take a look at whether or not they are indeed a relevant employer now or are likely to be on 5 April 2017, as that is the date when that snapshot is going to be taken. Also have a think about allocating roles and responsibilities internally, so who is going to be responsible for what. Start to have a think about how your organisation will go about collecting the data needed to conduct gender pay gap reporting too. You may also want to have a think about carrying out an audit or a dummy run, and this will confirm if your organisation is ready to meet the regulatory requirements and will help the organisation to anticipate any gaps so it can begin to address them. Do be aware though that any documentation produced in the course of this exercise could be disclosable in any claim such as equal pay, unless they are produced for the purposes of taking legal advice, and if there are gender pay gaps have a think about what the reasons for these gaps are. For example, was pay ring-fenced for a particular reason, I do not know, maybe a TUPE transfer or perhaps there was a skill shortage resulting in higher pay for particular roles. There is an option to include a narrative when publishing the results and this is likely to be a very useful tool for those employers who do have gender pay gaps.

Mike: I understand there have been a couple of interesting cases this year on the service provision change test in TUPE. Can you tell us a bit more about those cases and the impact they have had?

Emma: The service provision change test covers outsourcing retenders and insourcing and was introduced into the UK in 2006. It was introduced to try and provide more certainty in outsourcing situations, but in actual fact where we have ended up is it has generated a lot more case law as a result. The test to determine if there has been a relevant transfer in an outsourcing retender or insourcing arrangement, such as the outsourcing of cleaning services for example, is where there is an organised grouping of employees in Great Britain whose principal purpose is carrying out activities on behalf of a client and the client intends that fundamentally the same activities will continue after the transfer.

Now we have had two interesting cases this year, the first on the organised grouping of employees requirement and the second on the requirement for activities to be fundamentally the same. The case of Amaryllis v McLeod looked at the question of an organised grouping of employees. As we know from previous case law, in order to demonstrate the existence of an organised grouping more than happenstance or an accidental grouping is required and the employees will need to also be assigned to that organised grouping.

Briefly the facts of the Amaryllis case are that the claimant, who was a Mr McLeod, worked for Millbrook Furnishing Limited who had a contract with the Ministry of Defence amongst other clients to undertake specific work, namely the renovation of furniture. Now Millbrook lost that contract between 2003 to 2008 but won it back in 2008, then lost it again to Amaryllis in 2014. In the six months leading up to the transfer the Claimant spent nearly 70%25 of his time working on the Ministry of Defence furniture restoration contract and so he claims that he TUPE transferred to Amaryllis. Although the ET held that there was an organised grouping of employees the EAT reversed this decision, because whilst historically it might have been the case that Millbrook chose to organise its employees to provide furniture restoration services to the Ministry of Defence, at the time of the relevant transfer this historical grouping had changed, so now the furniture restoration department as a whole was working across a number of contracts rather than in any identifiable client teams. The key point to note about this case is the importance of focussing on the correct point in time, namely looking at the organised grouping immediately before the transfer.

A second noteworthy case was that of Arch Initiatives and Greater Manchester West Mental Health NHS Foundation Trust. Here Bolton Council contracted out drug and alcohol services to the Foundation Trust which is split along functional lines, and those were the case management and delivery of interventions functions. Now on the termination of the contract with the Foundation Trust it was decided that the contract would be split along those functional lines, with Arch Initiatives taking on the case management functions and Lifeline Project for delivery of intervention functions. The point to note from this case was that it concerned the division of existing activities along functional lines, where it was possible to see the link between each employee and the activities performed by the new service providers. It did not involve a redesign of the activities where the tendered activities pre and post transfer were different. To that end the EAT held that the activities were fundamentally the same. A note also in this case is that the EAT also confirmed that it is possible to have a transfer under the service provision change test for part of services.

Mike: There has been a lot of case law over recent years on what elements of pay should be included when calculating holiday pay.  Are we any closer to knowing what elements of pay should be included in those calculations?

Emma: In the UK all workers are entitled to receive 28 days annual leave and to be paid whilst on statutory leave. Now this requirement stems from both European and domestic law. We are required under European legislation to give workers 20 days annual leave and sometimes that is referred to as Regulation 13 leave, and in the UK we have gold plated this minimum requirement and increased it by 8 days and that sometimes is referred to as Regulation 13A leave. Whilst this basic entitlement is not in dispute, there has been much case law on how to calculate holiday pay in terms of what elements should be included. As Regulation 13A is a UK law concept, the UK can determine what elements should be included in holiday pay and it is determined that it should be the workers' normal working hours fixed under their contract.

What has been a hot topic and the subject of much case law is whether other payments, such as commission and overtime, should be included in respect of Regulation 13 leave and this is because European case law has concluded that employees should be entitled to receive their normal remuneration whilst on holiday. Recent case law has now established that in respect of Regulation 13 this means that non-guaranteed overtime which is paid regularly enough to amount to a normal payment should be included in the holiday pay calculation, as opposed to payments which are irregular or erratic. Secondly, voluntary overtime to the extent that it cannot be unreasonably refused should also be included in the calculation. Commission to the extent that it is regularly earned but not that which is irregular or erratic should be included, although the case which decided this is currently subject to appeal to the Supreme Court. Lastly standby and callout payments should be included.

Unfortunately, whilst what should be included is now getting clearer, the calculation is in practice still proving tricky and that is because we still don't know how regular is regular for the purposes of calculating holiday pay and also what's an appropriate reference period? Should it be 12 weeks for instance or would 12 months be more appropriate? Can employers use commission rates which take account of holiday periods, so in other words can an element of rolled up holiday pay be included within those commission rates?

And lastly, as the inclusion of commission and overtime only applies to the first four weeks of annual leave, that Regulation 13 aspect, how do you identify annual leave which is taken as Regulation 13 leave? Is it the date that that leave is reserved or the date the leave is taken?

Mike: If you have an questions in relation to the topics discussed in this employment law update then do feel free to contact either Emma or myself, and do please listen out for further podcasts from our ThinkHouse Foundation sessions and if you are interested in signing up to our mailing list then do please get in touch.