Compliance in 2020 and a post-Brexit world

2020 is a big year of significant change in employment law. Most noteworthy are the changes to the off-payroll working rules, due to come into force in April 2020, but there are other changes for employers to think about under the Good Work Plan (which we recently commented on here).

With a Conservative majority and Brexit having taken place on 31 January 2020, we expect that there may well be further change on the horizon.

We deal first with the changes we know of now, and then speculate on those we anticipate may occur in a post-Brexit world.

Changes from April 2020

IR35

What is it?

The IR35 rules were introduced to ensure that any individual who would otherwise be considered an employee pays the same taxes as other employees.

They were intended to promote fairness between individuals who work in a similar way, by making sure that those who would be considered employees, but for the fact that they operate through an intermediary (such as a personal service company) pay the same income tax and National Insurance Contributions (NICs) as employees. Currently, the personal service company is required to determine whether or not the individual providing services through it would have been an employee of the end-user, but for the personal service company. If the individual would have been, the personal service company must make deductions and account to HMRC for income tax and NICs.

There was perceived to be widespread non-compliance with the rules, which led to the Government introducing anti-avoidance rules in 2017 in the public sector. These rules resulted in a shift of responsibility, so public sector organisations which take on contractors operating through personal service companies are now responsible for ensuring that the correct taxes are paid, and bear the liability if this does not happen.

What is changing?

Based on the success of this change, which resulted in lower levels of non-compliance and an estimated £550 million in income tax and NICs for the UK state, from April 2020 medium and large companies in the private sector that contract with personal service companies for individuals' services will have to account for tax and NICs through PAYE in the same way that public sector companies are currently required to do.

This means that companies to whom a contractor provides their services must make an assessment as to whether their arrangements with that contractor are inside or outside IR35 and, if the arrangements are inside, the entity which pays fees to the contractor (the fee-payer) must deduct income tax and employee’s NICs from the fees paid to the contractor and pay employer’s NICs. Liability for non-compliance will generally lie with the fee-payer and end client rather than the personal service company.

In January, the Government launched a review into the proposed changes to IR35. This doesn't mean that the changes will be stopped: the stated purpose of the review is to ensure the successful implementation of the reforms.

Issue for foreign headquartered organisations

The new rules apply to medium and large organisations, but small companies which meet certain criteria are exempt from the changes. However, parent companies are also considered, so even if a subsidiary is "small", if the parent company is large or medium (even if it is based abroad) the subsidiary will not be small for the purposes of IR35. This can catch groups which are headquartered outside the UK and have a small presence in the UK.

Fallout

Some large companies (mainly banks, including HSBC, Barclays and Lloyds) have decided to no longer use contractors who operate through personal service companies, and instead will put all contractors through payroll or require them to use umbrella companies. This means that providing services as a contractor will be a less appealing prospect for individuals in the UK, as they will have to pay the same taxes as employees but will not have the same rights (for example, they would not be entitled to sick leave or holiday pay). Similarly, for organisations which are not taking this approach, the consequences of getting the assessment wrong are significant and will now directly affect them rather than the individual. This is likely to open up opportunities for alternative models.

One of these alternatives is intermediary umbrella companies. Under this structure, individuals sign up to a company (the umbrella company) which then takes them on as an employee and deducts income tax and national insurance contributions in respect of them, and offers their services to a number of end clients as contractors to work on particular projects.

Another more novel structure is the professional employer organisations (PEOs) that have been popular in the US. PEOs hire an employee directly on behalf of a particular client to alleviate the burden of HR compliance, and are involved in providing on-boarding documentation for these employees, overseeing employment processes and other services, for a fee. These pose interesting employment law challenges, including the difficulty of trying to enforce any post-termination restrictions and the involvement of the PEO in everyday employment processes, such as disciplinary and grievance procedures and performance appraisals, but we expect to see an increase in the demand for PEO services going forward.

It remains to be see how exactly the changes to the off-payroll working legislation will play out post-April 2020, but the changes will give rise to a host of new challenges for those organisations which currently take on individuals operating through personal service companies.

To do

• check your use of contractors
• make status determination statements as needed
• negotiate new terms
• consider alternative solutions
• ensure the right payroll taxes are deducted from payments to contractors and accounted for.

For those who wish to know more about IR35, our recent webinar provides more information about the new rules.

Right to a written statement of terms

Currently, all employees must receive a written statement of terms within two months of them starting employment. From 6 April 2020, this will be a 'day-one' entitlement, so written terms must be given on or before the employment starting.

The rules will cover employees, but also the broader category of workers. The information which must be provided is also set to increase, to include information on notice periods, the length of time a job is expected to last, sick leave and pay eligibility, other rights to leave, probationary periods, all pay and benefits, and specific days and times of work.

To do

For all employees and workers starting on or after 6 April 2020, you will need to issue employment contracts which reflect these changes.

Changes to rules on termination payments

Currently, termination payments of over £30,000 are subject to income tax on the balance of the payment that exceeds £30,000. Payments in lieu of notice are still fully taxable. However, following a consultation which ended in mid-January, with effect from 6 April 2020, the amount exceeding £30,000 will also be subject to Class 1A employer's NICs (a rate of about 13.8%).

To do

As the new tax is likely to make settlement agreements more expensive for employers, businesses may wish to consider ensuring that any terminations expected to take place in the near future are dealt with in advance of 6 April 2020 and termination payments are paid before then.

Parental Bereavement Leave

Following a consultation in 2018, from 6 April 2020 parents who lose a child will be entitled to take Parental Bereavement Leave. This leave will entitle parents to take two weeks' leave on the death of their child under eighteen. Where certain eligibility requirements are met, parental bereavement leave will be paid at a rate of £151.60 per week or 90% of weekly earnings if lower, and it can be taken at any time up to 56 weeks after the child's death, to allow parents flexibility to take the leave when they most need it.

To do

Consider updating your staff handbook and policies.

Holiday pay

The pay reference period for determining an average week's pay is set to increase from 12 weeks to 52 weeks or, if the employee has been employed for less than 52 weeks, the length of time for which they have been employed.

This change is designed to ensure that workers who do not have a consistent working pattern throughout the year, for example, workers who work in peak holiday seasons, are not disadvantaged by having to take their holiday at a quieter time of the year, in say winter, when their weekly pay might be lower. This was considered unfair for the many workers whose pay reference for holiday pay was in a period when they may have only worked a small number of shifts.

To do

Correct your holiday pay calculation system.

Agency workers

Currently, agency workers have the right to pay parity with ordinary employees after they have worked for a hirer for 12 weeks. However, the Swedish derogation provides an exemption from this right where an agency worker is employed by a Temporary Work Agency (a business which supplies workers to hirers) under a permanent contract and is paid a minimum amount during periods when they are not working for a hirer.

From 6 April 2020, the Swedish derogation will be abolished, as the Government considers that agencies are using it simply to reduce pay for agency workers. Therefore, all agency workers will have the right to pay parity with employees after 12 weeks, and by 30 April 2020 any agency worker whose contract contained a Swedish derogation must be notified that it no longer applies. Given that, according to the Department for Business, Energy and Industrial Strategy, an estimated eight to ten per cent of UK agency workers are currently on Swedish derogation contracts, the abolition of the derogation will have a significant impact.

To do

Diarise the 12 week trigger point and devise employee notifications.

Brexit and employment law

In the Queen's Speech in late December, the UK Government announced plans to protect and enhance workers' rights through the creation of a new Employment Bill. The main elements of this Bill will be to create a new single enforcement body offering greater protections for workers, introducing a new right for workers to request a more predictable contract and extending redundancy protections to prevent pregnancy and maternity discrimination.

On the other hand, the Government was criticised for removing provisions protecting workers' rights derived from the EU post-Brexit from the Brexit Withdrawal Agreement Bill in December 2019. With a strong Conservative majority and a business-favoured cabinet, there is a possibility that the Government could relax employment law post-Brexit, particularly if this assists with the negotiation of any trade agreement.

Many areas of UK employment law are domestic in origin (such as protection from unfair dismissal) and in other areas UK rights are more generous than EU law requires (such as entitlements to maternity leave and pay). It is unlikely that the Government would make changes to these laws, as to do so would be politically controversial; however other areas are based primarily on EU law, and it is here we could see changes following Brexit.

Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE)

Whilst TUPE is often perceived negatively, the principle that employees should transfer with a business when the business is transferred is often very useful, and saves businesses time and administration costs. TUPE is a widely accepted, embedded feature of UK employment law, and the UK actually extended TUPE beyond EU requirements to cover service provision changes.

But, the restriction in TUPE on harmonising the terms and conditions between transferring employees and existing employees presents problems for businesses, so the Government could change this aspect of TUPE.

Holiday Pay and the Working Time Regulations 1998 (WTR)

One aspect of EU employment law which has proven very unpopular in the UK is the cap on maximum weekly working hours under the WTR, which UK businesses are notorious for opting out of. It is possible this cap could be removed following Brexit.

In addition, the Government may want to make the rules surrounding holiday pay more business friendly, by ending the right to accrue holiday while on sick leave and by restricting holiday pay to basic pay only, rather than all remuneration (which can cause complications with employees who earn commission, for example).

Agency workers

The Agency Workers Regulations 2010 are disliked by businesses, complicated and, unlike TUPE, have not yet become embedded in UK employment law, and would therefore be one of the easier rights for the Government to remove. However, thus far the Government have not shown any intention to do so; indeed they have shown a commitment to improving agency workers' rights, as demonstrated by their removal of the Swedish derogation (discussed above). It remains to be seen whether the Government might ultimately decide to change the Regulations to demonstrate the advantages of Brexit to businesses.

To think

We can't tell you what to think. But keep an eye on the impact of the trade negotiations between the UK and EU for the extent to which the UK may seek – or be allowed – to diverge from existing and future UK employment laws.