Government announces multiple post-Brexit employment law reforms

United Kingdom

Yesterday, in its Smarter regulation to grow the economy policy paper, the UK government announced significant employment law reforms affecting the calculation of holiday pay and working time records, electing representatives in a TUPE transfer and non-compete clauses. The measures are the first in a series of post-Brexit regulatory reforms anticipated as part of the government’s smarter regulation agenda. 

In addition, it is now clear that the proposed “bonfire” of EU-derived regulation has been abandoned, following the removal of the sunset clause in the Retained EU Law (Revocation and Reform) Bill. Instead, the government has published a list of the specific retained EU laws that it still intends to revoke, and this does not include any significant employment related legislation. The Secretary of State for Business and Trade has also stated that this government “will not reduce workers’ rights and protections, nor will we repeal maternity rights.

At the moment, the proposed reforms are light on detail and we only know headlines. Further detail will emerge once the government starts to consult on its proposals.  

For now, the government’s employment-related proposals are as follows.

  • When parliamentary time allows, the government intends to legislate to limit the length of non-compete clauses to 3 months, providing employees with more flexibility to join a competitor or start up a rival business after they have left a job.
  • In order to cut red tape, and reduce the administrative burden and complexity of calculating holiday pay for businesses, the government proposes to permit rolled-up holiday pay and amalgamate the basic and additional leave entitlements provided under the Working Time Regulations 1998 (WTR).
  • Removing the requirements on business for working time records to be kept for almost all members of the workforce.
  • The government proposes to allow businesses with fewer than 50 people and for transfers affecting less than 10 employees to consult with affected employees directly where there is a TUPE transfer, removing the existing requirement to elect employee representatives in those circumstances.  

Impact on employers

Non-compete clauses limited to 3 months

This reform would require significant changes to employment contracts, confidentiality agreements and staff handbooks. General market practice is often for senior and highly valuable employees to be restricted from competing with their former employer for anywhere between 6 and 12 months post-termination of employment. Non-compete clauses of 12 months (and occasionally more) have been found by the courts to be enforceable where they go no further than necessary to protect a legitimate business interest such as maintaining confidentiality and customer connections, workforce stability and goodwill. They are typically used where standard confidentiality and non-solicitation obligations would not provide sufficient protection to a business given the value of the knowledge and relationships of the individual in question. Investors in UK businesses expect senior and valuable staff to be prevented from misusing confidential information and customer connections in order to protect the value of their investment.

The announcement comes two and a half years after the Government opened a consultation on measures to reform post-termination non-compete clauses in contracts of employment.  The government says that the proposed reform will give up to 5 million UK workers enhanced freedom to change jobs, with a larger pool of talent operating in the labour market. The government also believes that this change will boost the wider UK economy, by supporting employers to grow their businesses, widening the talent pool, and improving the quality of candidates they can hire. At present, the empirical evidence for this is unclear, as noted by the Employment Lawyers Association during the previous consultation process.

Other methods of restraining departing employees will remain available to employers, including using paid notice periods, garden leave or non-solicitation and non-dealing restrictions. The government’s announcement suggests that this legislation will apply to “employees” and it is currently unclear whether non-compete provisions for LLP members and employees who are also shareholders or stock option holders (and so often restricted under separate corporate agreements) would also be captured. It is unclear whether these reforms will have retrospective effect, and if so whether longer non-compete clauses will be automatically deemed to be limited to 3 months or will be considered wholly unenforceable unless amended in line with the planned new legislation.

The intended reform falls short of other proposed changes being seen around the world, for example, the Federal Trade Commission’s proposals in the US to ban non-compete clauses between employers and workers altogether, which was one of the potential reforms on which the UK government had consulted. We looked at these issues in our Law-Now, A global move towards banning employment contract non-compete clauses? Reconsidering business protection options. It is unclear from the policy paper when we might expect these changes to come into effect, but the government intends to legislate “when parliamentary time allows”.  

This reform will be the first time that the UK legislates on this topic (as there is currently no applicable EU or UK legislation that deals with this legal regime). It will be a significant risk issue for organisations that currently rely on these restrictions to protect their business interests.

Merging of holiday pay

In recent years, the calculation of holiday pay has proved to be a costly headache for many employers. Proposals to reform this will be welcomed.  

The first change is the merging of the two types of annual leave which are known as “Regulation 13” and “Regulation 13A” leave. Regulation 13 leave is the first 4 weeks of leave calculated in accordance with the rules in the EU Working Time Directive (WTD) and Regulation 13A leave is the 1.6 weeks’ additional leave granted under the WTR.

It was previously the position in the UK that workers with regular working hours would receive holiday pay calculated by reference to their basic pay only (excluding commission and non-compulsory overtime). However, other workers would typically receive holiday pay calculated by reference to their actual average earnings over the 12 weeks prior to a holiday.

As a result of a series of case law decisions on holiday pay, employees who work regular working hours are entitled to receive “normal remuneration” for the first 4 weeks of pay. That has meant that various aspects of overtime pay, commission and allowances should be included in pay in order to ensure that a worker is not worse off because they have taken holiday. However, employers are able to offer basic pay only for Regulation 13A leave, which does not derive from EU law.

While the government does not say exactly what will happen by merging the two types of leave, it may be that the government’s intention is for holiday pay to be calculated based on basic salary only in order to simplify the position and reduce costs for business for some or all workers. We will need to see the detail in the consultation paper.

Rolled up holiday pay

The flexibility to offer “rolled up” holiday pay will also be welcomed by some employers. In the past, employers commonly used “rolled up” holiday pay to ensure that those working irregular hours in particular (e.g. casual workers or those on short term contracts) received a fair payment (calculated as 12.07% of their hours worked) in respect of holiday. However, a series of cases found this practice proved to be a disincentive to actually taking holidays (the objective of which is to protect workers’ health, safety and wellbeing), and it was declared unlawful. Legislating to allow rolled up holiday pay would provide flexibility, and may even be more attractive to workers with atypical working arrangements, as well as employers.

However, the task of simplifying holiday pay calculations, while not significantly decreasing the value of that holiday, is a complex one. Alongside the proposal set out in this announcement, a government consultation on calculating holiday entitlement for part-year and irregular hours workers is already underway, following the Supreme Court judgment in Harper Trust v Brazel last year. The judgment, which we looked at in our Law-Now No pro-rating of holiday for “part year workers”, confirmed that all workers engaged through a holiday year have an entitlement to 5.6 weeks’ holiday, regardless of the hours actually worked during the year. The issue of holiday accrual is closely linked with the issue of how to calculate holiday pay, and therefore the outcome of this consultation will no doubt influence the progress of the government’s proposal as part of its smarter regulation agenda.

Removing the requirement of working time records

The government says in its announcement that the removal of the requirement to record working hours will cut red tape and help businesses save £1 billion per year. Under the WTR, employers are required to keep and maintain adequate records showing whether the 48-hour limit on average weekly working time in particular is being complied with. Many employers deal with this in practice by relying on the voluntary opt out from that limit. While an EU case law decision suggested that the EU WTD requires businesses to go further than the WTR requires, by putting in place a system for recording actual daily working time for all employees, not many employers introduced rigorous working time record-keeping processes in response to that decision. The practical impact of this reform is therefore unclear.

Election of employee representatives

Out of the proposed reforms, this change is perhaps the most surprising. Other aspects of TUPE, considered by some to be unduly burdensome on employers, were ripe for reform. However, this reform will mean that employers are able to consult directly with affected employees only in transfers involving small companies with under 50 people and where fewer than 10 employees are transferring (the precise details of this proposal are currently a little unclear). Under the current microbusiness rules, employers with fewer than 10 employees may inform and consult affected employees directly. When this change was introduced in 2014 it was described as good news for employers by reducing bureaucracy. That change made a limited impact, and it is hard to see how this latest proposal will make a significant difference.

Next steps?

As none of the government’s proposed reforms amount to firm changes at this point, employers do not need to make any immediate changes to policies, contracts or procedures. Businesses should, however, keep a close watching brief on these significant developments and start to think about how they might address them in practice. This should include revisiting any decisions to change the way in which holiday pay is calculated and their business protection strategies when it comes to departing employees.

Professional Support Lawyers Aisleen Pugh and Val Dougan contributed to this article.