UK Government proposes changes to employment law – what are the key points for businesses?

The Government has confirmed that it would significantly amend the Retained EU Law (Revocation and Reform) Bill, listing out the specific EU laws that the Government intends to revoke by the end of 2023. This means that any retained EU law that is not included in the list will remain binding after the end of this year. The Government also published a policy paper announcing various employment law reforms aimed at growing the economy. These proposals were subsequently expanded on in a consultation and consultation response, both published late last week. This blog post summarises the key points from the consultation documents. The most significant proposals relate to non-compete clauses – set out further below.

Working Time Regulations (WTRs)

Record keeping about working time

The Government proposes removing the requirement for employers to have an objective, reliable and accessible record-keeping system enabling the duration of time worked each day by each worker to be measured. This is because the Government believes that these record-keeping obligations, which were introduced in 2019 following EU case law, are disproportionately burdensome on employers. The Government has committed to maintaining certain key provisions of the WTRs – including the maximum average working week of 48 hours (with its available opt out), entitlement to rest breaks of 20 minutes for a working day of more than six hours and special protections for young and night workers. It is unclear how many employers actually changed their record-keeping practices to reflect the 2019 EU case, so this proposal is unlikely to have wide ranging significance.

Holiday entitlement and pay

The WTRs also currently dictate annual leave and holiday pay calculations. At present, there are two separate annual leave entitlements applicable to UK workers – one minimum period of four weeks, which derives directly from EU law, and another 1.6 additional weeks of domestic UK leave. The Government proposes to remove this separation, creating one annual leave entitlement of 5.6 weeks governed by one set of rules. Currently, the different pots of annual leave are treated slightly differently in terms of calculation of pay and carry-over, and so the proposal is designed to reduce complexity and ensure consistency of treatment across the full 5.6 weeks. The consultation seeks views on how holiday pay is currently calculated and how it should be defined in legislation, including in a worker’s first year of employment.

In addition, in order to reflect the growth in ‘atypical’ work and the emergence of the gig economy, the consultation proposes introducing ‘rolled-up’ holiday pay as an additional option for calculating holiday pay for all workers. This means allowing holiday pay to be paid as an enhancement to a worker’s pay at the time that the worker performs work, instead of when they are on holiday. ‘Rolled-up’ holiday pay is currently unlawful following a 2006 EU case due to concerns that workers may not be incentivised to take leave as they could earn more holiday pay by staying at work. However, in practice, ‘rolled-up’ holiday pay is used heavily in the recruitment sector and the gig economy and so the Government is consulting on introducing it as an additional method that employers may choose lawfully to use for calculating and paying holiday pay.

TUPE

The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) protect employees’ rights in various circumstances including when the business for which they work transfers to a new employer. While the Government recognises the importance of TUPE, the consultation proposals removing some of the more burdensome consultation requirements for the smallest employers. Currently, businesses with fewer than 10 employees can inform and consult affected employees directly if there are no employee representatives in place, but larger business are required to elect employee representatives. This can add considerable time and administration to the process. Therefore, the Government proposes that small businesses with fewer than 50 employees and no existing employee representatives, and all businesses where a TUPE transfer of fewer than 10 employees is proposed, will be able to inform and consult directly with employees. This change is unlikely to benefit many employers if the rules require employee numbers to be calculated on a group-wide basis, but it could have greater significance if it is calculated company by company – the consultation does not specify how employee numbers will be calculated so this is an area where we await more clarity. Likewise, where there are a series of small TUPE transfers taking place (perhaps because it’s possible to identify different undertakings or services being transferred), it remains to be seen whether it will be possible to rely on these rules or whether all TUPE transfers occurring at around the same time will need to be aggregated.

Non-competes

In a consultation response published at the same time, and perhaps most significantly, the Government responded to its December 2020 consultation on measures to reform post-termination non-compete clauses in contracts of employment. The response confirmed that the Government has decided not to proceed with introducing mandatory compensation for the period of a non-compete clause nor to introduce an outright ban on non-compete clauses. Instead, it intends to introduce a statutory limit of three months on non-compete clauses in contracts of employment. This is a very significant proposal given that many non-competes are expressed to apply for six or even 12 months post-termination. The legislation implementing this change will be brought forward ‘when parliamentary time allows’.

The consultation response helpfully clarifies various points. It acknowledges for example that non-competes are also used in other contracts, such as shareholders’ agreements, partnership agreements and LLP agreements and states clearly that it does not propose extending the reforms to these ‘wider workplace contracts’. However, recent case law demonstrates that the line between employment and commercial contexts can sometimes be blurred, for example where an employee is entering into a non-compete in a shareholders’ agreement as part of a suite of changes to their employment terms, so this might not be such a simple distinction to make in practice.

The response also acknowledges that, although most of the case law around restrictive covenants relates to employees, restraints of trade do also exist in workers’ contracts. While such restraints are likely to be unenforceable anyway, an employer may still seek to include them to have a deterrent effect. The Government therefore intends to apply the reforms to non-compete clauses to workers and employees equally.

Further, it is clear from the response that other restrictive covenants, such as non-solicit and non-dealing covenants, are not affected by the new statutory limit. This is because they do not have such a significant impact on an individual’s ability to earn a living and compliance with them is not likely to result in the same degree of financial disadvantage.

However, there are questions left unanswered. In particular, there is no commentary on what happens to existing non-competes that are expressed to be longer than three months or indeed non-competes that are to be drafted between now and when the legislation is enacted – will they be automatically treated as unenforceable, amended to apply for three months only or grandfathered such that they continue to apply for the time stated provided that they satisfy the usual common law principles? We will need to wait to see what the draft legislation looks like but, in the meantime, employers should consider alternatives to protect their business, for example longer non-solicits, tighter enforcement of confidentiality undertakings, longer notice periods, and more active use of garden leave.

When it comes to enforcing a three-month covenant, the proposal will likely increase the time pressure to seek injunctive relief and will make courts more likely to adopt the Lansing Linde approach of a more thorough review of the reasonableness of the covenant at the interim stage (this is currently typically left to full trial). Ultimately, if an employer does seek to enforce a three-month covenant, it is likely that the interim stage will become determinative of the issue given the difficulties of getting to full trial within three months.

For more information, please speak to the authors of this blog post or your usual Freshfields contact.