Gordons Legal Employment Update – 16 February
Friday 16th February 2018
In today’s Legal Employment Update we look to the coming months and detail the changes in how termination payments will be taxed from April 2018, as well as the proposals the government has put forward in response to last year’s Taylor Review on Modern Working Practices. We also report on recent judgments from the Employment Appeal Tribunal (EAT) as well as the equal pay case brought against Tesco.
In addition, today’s update includes an informative article on consumer product safety by our new Head of Regulatory, Andrew Logan.
Termination payments and tax
Is the £30,000 tax free limit still available for employee termination payments?
This has been a frequently asked question for us ever since it was mentioned as being set to change in the 2016 budget statement. The answer is: for the payment in lieu element, not for much longer!
Indeed, the time is now upon us and employers who are planning to make termination payments to leavers on or after 6 April 2018 need to be aware of these changes.
The main and significant change is that all payments in lieu of notice (“PILONs”) will now be taxable and subject to both employer and employee National Insurance Contributions. A PILON equates to the value of a notice period which is not worked.
Currently, the taxable status of a PILON is dependent on whether there is a contractual provision in the employment contract relating to the right of the employer to make a PILON. We have been able to say up to now that where there is no contractual PILON clause in the contract then the first £30,000 of the PILON could be paid tax free – the explanation for this is that where the payment strictly flows from the termination it attracts the exemption whereas where it flows from the employment contract it must strictly be treated as remuneration and taxed accordingly. Under the new rules, there is no change to the treatment of contractual PILON payments which remain taxable as they always have been.
A downside to this change is that termination payments will look less beneficial to employees and packages may have to increase to overcome the effect of the tax charge. Additionally, employers may want to revisit their decisions not to include PILON clauses in contracts: some employers have historically chosen not to do so because of the tax. We have generally advised against such an approach because by having a PILON clause you can maintain the enforceability of your post termination restrictive covenants.
The new rules require employers to work out specifically how much of the termination payment is deemed to be subject to tax and NICs taking into account basic pay, plus the value of any salary sacrifice arrangements. This is known as “post-employment notice pay” or PENP. Anything over and above that sum (which is not otherwise chargeable to tax) will be subject to the £30,000 tax free exemption. This does represent a slight change because many contracts refer only to basic pay but the new rules require the value of any salary sacrifice to be added on which, of course, may result in an additional tax and NIC liability.
Government response to the Taylor Review of Modern Working Practices
The government has announced its eagerly awaited response to last year’s Taylor Review of Modern Working Practices, which addressed the impact of modern working practices on the workforce and in the workplace.
Proposals in the Government’s ‘Good Work’ plan include:
- To ensure all workers, including casual workers and zero-hour workers are aware of their rights including holiday and sick pay entitlements from day one;
- To extend the right to written particulars of employment to all workers;
- To increase the holiday pay reference period from 12 weeks to 52 weeks to help ensure ‘atypical workers’ (e.g. casual workers, zero-hours workers) receive the holiday pay they are entitled to;
- To increase the length of time which constitutes a break in continuity of employment;
- To define ‘working time’ for flexible workers who find jobs through the internet, so that they know when they should be paid;
- To ensure vulnerable workers’ rights to holiday and sick pay are enforced;
- To increase aggravated breach penalties against employers from £5,000 to £20,000; and
- To introduce a new naming scheme for employers who fail to pay tribunal awards within a reasonable period.
The government will consult on issues such as employment status and the enforcement of employment rights to flesh out how it will implement many of its proposals.
Comment: The Government announcement focusses on the enforcement of existing workers’ rights and on increasing workers’ awareness of the rights to which they are entitled. This can be seen as good news for employers and workers alike as it should help to provide certainty and decrease the chance of workplace disputes; however, those expecting an overhaul of employment law and a raft of new rights for workers will be disappointed.
Tesco facing equal pay claim
Following the commencement of equal pay claims against Sainsbury’s and Asda, Tesco now finds itself on the receiving end of an equal pay claim which could potentially cost the retail giant up to £4 billion in compensation.
The claim against Tesco centres on mainly female shop workers earning as much as £3 less per hour than male warehouse workers, and will hinge on whether the work undertaken by shop workers and warehouse workers is of ‘equal value’ in terms of effort, skill and decision-making. Up to 200,000 staff could be affected by the claim.
Comment: The right to equal pay is implied into all employment contracts, meaning that any breach of equal pay provisions is a contractual breach which can give rise to a claim in the ET, or in the civil courts for a longer period of up to 6 years after the breach occurred. Employers who fail to ensure equal pay for their male and female staff could be liable for backdated pay dating back 6 years. Employers should also note that, unlike in Employment Tribunals, the losing party in the civil courts is usually liable for a proportion of the winning party’s legal costs.
When should an employer be held to have ‘knowledge’ of an employee’s disability?
We reported in the last Legal Employment Update that the Court of Appeal’s Judgment in Donelien v Liberata UK Ltd, which was expected to provide clarification for employers as to the lengths to which they must go to ascertain whether an individual has a disability, was to be published imminently. The Court’s Judgment was published on 8 February and confirms that an employer’s efforts need not be perfect, though following Gallop v Newport City Council, it is not enough for an employer to simply ‘rubber stamp’ a medical adviser’s opinion.
Ms Donelien was employed by Liberata since 1999. From 2008 she suffered from various ailments, taking increasing amounts of time off work until her eventual dismissal in September 2009. Her subsequent claim for disability discrimination turned on whether her employer should have known she was disabled (which the ET found her to be for the last two months of her employment) and therefore have made reasonable adjustments. In assessing Ms Donelien, her employer had relied on an occupational health report and GP letters, all of which failed to identify her as disabled. The ET found that in the circumstances the employer could not have known Ms Donelien was disabled and was therefore not under a duty to make reasonable adjustments and the EAT agreed.
Ms Donelien appealed to the Court of Appeal partly on the basis that she had given permission to her employer to obtain further information on her condition, at a time when she was disabled, but that the employer had not done so. The Court however, in finding for the employer, held that it was reasonable for it to take the decision that it did, which was to communicate with the GP through the employer’s occupational health consultants.
Comment: This case shows that employers should be wary of basing a decision on whether an employee is disabled on information from one source. In this case the employer based its opinion on an occupational health report, GP letters and its own ‘return to work’ interviews with Ms Donelien; the Court held that this approach was sufficient.
Breach of Immigration Rules and the illegality defence
It fell to the EAT in the recent case of Okedina v Chikale to consider whether a Respondent employer could rely on the defence of illegality in circumstances where the Claimant employee was working in breach of Immigration Rules.
Miss Chikale, a Malawian national, came to the UK in 2013 to work for Mrs Okedina as a domestic worker. Her immigration status meant that after 6 months she was working illegally. When her employment ended in June 2015 she brought claims including unfair and wrongful dismissal against Mrs Okedina, who sought to argue that the claims must fail because the employment contract was in breach of immigration law and was thus unenforceable. The ET rejected this argument on the basis that Miss Chikale did not knowingly participate in the illegal performance of her contract, knowledge being one of three potential reasons identified in Hall v Woolston Hall Leisure Ltd as to why a contract would be unlawful and consequently unenforceable.
Mrs Okedina appealed on the basis that the contract of employment was unlawful when it was formed because its effect was either expressly or implicitly prohibited by statute, such prohibition being an alternative cause of illegality identified in Hall. The EAT rejected the appeal, finding that the contract itself did not breach immigration law because even though it did not expressly limit Ms Chikale’s employment to 6 months, it did provide for termination of employment by either party with 6 weeks’ notice. The EAT further found that despite the Immigration Asylum and Nationality Act 2006 providing for a potential criminal offence on the part of the employer, breach of that Act does not automatically invalidate a contract entered into by the employer.
Comment: This case serves as a warning to employers who may seek to avoid their duty to dismiss fairly, even in circumstances where the employee being dismissed is working illegally. Employers should also note that employing illegal workers could potentially result in criminal sanctions including fines and/or imprisonment.
Injury to feelings in working time rights cases
In the recent case of South Yorkshire Fire and Rescue Service v Mansell and others the EAT considered whether an award for injury to feelings can be made in a claim of detriment for asserting working time rights.
A new shift system was implemented by South Yorkshire Fire and Rescue Service whereby firefighters were required to work a 6-day pattern made up of 2 consecutive 24-hour shifts followed by 4 days off. The shifts were divided into a 12-hour day shift, and 12 hours ‘on call’ at night. In the absence of a variation of the collective agreement between the Fire Service and the Fire Brigades Union, the new shift system breached the Working Time Regulations due to the length of night work and inadequacy of daily rest. Firefighters who did not consent to these breaches were consequently compulsorily transferred to other fire stations
A number of firefighters brought claims against the Fire Service on the basis that their transfer to alternative fire stations constituted an unlawful detriment which they were subjected to as a result of their refusal to opt out of the Working Time Regulations. The ET upheld the claims and upheld the availability of an award for injury to feelings. The Fire Service appealed to the EAT on the basis that compensation for injury to feelings was not an available remedy in a working time detriment claim.
In dismissing the appeal the EAT held that the ET was correct to conclude that a claim for detriment for asserting working time rights amounted to a claim of discrimination and victimisation, and that the remedy for such a claim (as with other detriment claims) may include compensation for injury to feelings.
Comment: The judgment of the EAT should caution employers against taking any action which may be construed as detrimental to its workers when working time rights are in issue, particularly as injury to feelings awards are uncapped. However, the availability of the remedy does not necessarily mean it will be awarded in every case; whether it is appropriate will depend on the circumstances.
‘Conduct extending over a period’ in discrimination claims
In assessing whether a discrimination claim was presented to the Tribunal in time, the EAT in Hale v Brighton and Sussex University Hospitals NHS Trust considered whether a decision which led to the commencement of disciplinary proceedings could amount to the start of ‘conduct extending over a period’, the effect of which being that the time limit to bring the claim would run from the end of that period.
Mr Hale worked as a Consultant in General Surgery for the Respondent Trust from June 1995. Following an ill-tempered meeting in December 2013 four junior doctors raised grievances against Mr Hale and the Trust informed Mr Hale on 14 July 2014 of its decision to commence an investigation under the auspices of its MHPS (Maintaining High Professional Standards) framework. The MHPS investigation led to disciplinary proceedings against Mr Hale and he was summarily dismissed on 16 December 2014. The internal appeal process confirming Mr Hale’s dismissal concluded on 15 April 2015 and he commenced a number of claims against the Trust on 22 May 2015, including a claim for discrimination on the grounds of race by subjecting him to the disciplinary procedures which ultimately concluded with his dismissal.
Although the ET found that the decision to commence the MHPS investigation was discriminatory, the decision was held to be a one-off act with continuing consequences rather than the beginning of a continuing act culminating in Mr Hale’s dismissal; as such the claim for discrimination based on the decision to commence the investigation was adjudged to be out of time.
The EAT overturned that decision, holding that the decision to commence the MHPS investigation created an ongoing state of affairs which ended with Mr Hale’s dismissal; it was the beginning of a continuing act, the conclusion of which ‘started the clock’ for limitation purposes. As Mr Hale’s claim was brought within 3 months of the end of the process, it was brought in time. The EAT further noted that to find otherwise would be to require Claimants to present claims to the Tribunal after each stage of the disciplinary process to be sure they did not lose the right to claim for being out of time.
Comment: This case highlights the difficulties employers face in seeking to argue that a potentially discriminatory act should be excluded by a tribunal for being out of time where the act in question commences a potentially discriminatory chain of events. It appears that Tribunals will include such an act where the act cannot be separated from resulting acts in a potentially discriminatory process.
Consumer product safety update
The Office for Product Safety and Standards (OPSS) is a the new national oversight body responsible for identifying consumer risks and managing responses to large-scale product recalls.
The OPSS’ remit covers general (non-food and non-motor vehicle) consumer product safety. In addition to providing oversight it will also co-ordinate local Trading Standards teams during large scale recalls.
The new Code of Practice on ‘Consumer Product Safety related Recalls and other Corrective Actions’ is due to be published later this month and comes in two parts. Part one is a Code of Practice for businesses and Part two is guidance for regulators.
The legal responsibilities for product safety sits with manufacturers, importers and retailers to ensure they only place safe products on the market and take fast and effective corrective action if a safety issue arises.
It is recommended that all businesses involved in supplying consumer products have a management response plan in place for dealing with product safety related recalls and corrective actions.
If you would like to discuss the forthcoming Code of Practice and/or product recall plans please visit the Regulatory and Compliance page.