UK - Law Firms The UK Labor Environment: A Few Cautions - But Many Attractions For Investors

Sunday, January 1, 2006 - 01:00

Editor: Do you see a commonality of purpose between U.S. laws regarding age and sex discrimination, persons with disabilities, etc. and other employment protection laws in the UK?

Sippitt: Clearly, there is a commonality of purpose. There is a clear distinction in respect to various laws that we have as to how these laws are implemented. The warning I give to U.S. employers is to make no assumptions about the way the laws they are familiar with apply within the UK. Indeed, one of the strong recommendations I make is that if the U.S. employer is to operate within the UK, their relevant managers get some specific briefing on issues such as discrimination so that they don't fall foul of those provisions in the mistaken belief that they are the same as in the U.S. The same applies to British employers operating in the U.S.

Nonetheless, there are some common features. In a presentation I made to U.S. executives several years ago having to do with the disability discrimination laws in the UK, I pointed out that there was much in our then new employment laws which had been adopted from or reflected the U.S. equivalent - but with sometimes significant changes. When the UK adopted new laws on the compulsory recognition of trade unions in 2000, much of the legislation was borrowed from the U.S and Canada, but with vital changes made which closed certain loopholes in favor of British trade unions compared with their U.S counterparts, e.g., making it possible in some circumstances for unions in the UK to win recognition without any ballot. Take age discrimination laws as another example. They are still in the process of being refined. However, we are moving toward implementing these laws by October 2006. No doubt they will be influenced by U.S. laws, but they will be quite different. They are intended to cover protection of all age groups, not just the older workers. It will be a very wide-ranging change of law which will have huge effects on decision-making in such areas as recruitment, development of people, promotions and, of course, terminations.

Editor: Is there any limitation on damages available in connection with discrimination claims?

Sippitt: In the UK all types of discrimination claims give rise to uncapped damages awards. They are not only available against the employer company but also against individuals if found guilty of discrimination. It is not unusual in the UK for a manager to be personally sued as well as the employer if discrimination is alleged. This is why it is particularly important that if a U.S. company is placing managers in the UK, it must make sure the managers know what their obligations are. Otherwise, they may be personally responsible to satisfy the claim.

Editor: Do you in the UK have the legal concept of "piercing the corporate veil"?

Sippitt: This issue does not normally arise in the course of employment law since in the normal course the employer is clearly defined and only one company is the employer. I would not normally expect the corporate veil to be pierced except under very unusual circumstances where there has been some form of insolvency procedure and there might be the need to trace beyond the first employer into another business or to hold "shadow directors" of an insolvent company to account.

Editor: Your firm has been guiding clients who are making acquisitions as to pitfalls to avoid in sizing up a target company's labor situation, particularly TUPE (Transfer of Undertakings Regulation), a protection for employees, which should be considered in the course of due diligence. Does this concept apply when a company is making an asset purchase rather than a stock purchase, since in the U.S. many contracts can be abrogated or negotiated out under the asset purchase arrangement?

Sippitt: The provisions of TUPE apply to any transfer of an undertaking, including a sale of assets. Normally, the mere sale of shares in a company to another company does not entail a TUPE transfer as the employer remains the same. However, a common mistake of acquiring companies is to think they may acquire the other company without TUPE worries. If at a subsequent date they integrate that business into their own business, the employees would be protected under TUPE. This is a pitfall that many new owners are unaware of since they naturally assume that since they have bought the company, they can do with it as they please. Any movement of people from one employer to another employer within a corporate group is potentially covered by TUPE. Whatever the nature of the acquisition, the employer should be thinking, "if I reorganize this business, will I be caught by TUPE and what effect will that have?"

TUPE is not only applied to the acquisition of businesses, but also applies to other forms of transfers of employees or contracts for their use. A very common example in the UK is contracts for outsourcing. A business may contract with a client company to provide services in place of the client's own in-house capability, e.g., typically IT, cleaning, catering or absolutely any commercial activity. Any such outsourcing of services will usually trigger the applicability of TUPE, which protects the staff assigned to the client company's activity, and automatically transfers their employment to the outsourced provider. TUPE continues to apply even if the contractor changes so that the same staff continue with the new contractor on the same terms of employment. Therefore, it is much more difficult for a contractor to offer competitive terms that undercut the wage rates of the previous contractor.

The primary burden under TUPE falls on the new contractor who has acquired the existing work force along with the contract. This may cause problems for the customer of that contractor if that has the effect of preventing the cost savings that a customer may have been hoping for. Other issues arise out of reductions in the size of the work force on the change of the contract. That in turn may entail the contractor then becoming liable for unfair dismissal claims as a result of the transfer. If the customer has agreed to indemnify the new contractor for such liabilities, this may prove very expensive.

In the UK, all outsourcings of services by the public or private sector are normally carefully scrutinized for the effects of TUPE. Certain due diligence must be done in deciding whether it is all right to proceed in the light of TUPE compliance and there may be special contractual provisions to give warranties and indemnities to protect the contractor from taking on liabilities in excess of those normally expected.

Editor: Do the TUPE rules apply to outsourcing beyond the UK?

Sippitt: It is normal in Europe. It is an EU-wide provision. The law we have in the UK has been in place since 1981, deriving from a European directive of 1977. What I have described is in place throughout the EU although its application does vary to some extent from one jurisdiction to another. The fundamentals are to be found throughout the EU. American clients have had us undertake research and give advice about several European jurisdictions where they are carrying out a process, which may entail the change of contractors across several countries at once. Alternatively, there may perhaps be a single contractor providing services to a U.S. company across several countries. If it decides to change that contractor, then we move into the complexity that in each jurisdiction in which the services are provided the laws protecting employees differ somewhat. But, they all have the common theme that workers are to be protected when there is a transfer of business. They are given the assurance that they will keep their jobs under the same terms and conditions unless there are legally acceptable justifications for their dismissal.

Editor: You mentioned in an earlier writing that there are three categories of persons: employees, workers and independent contractors. Is there any bright line that separates the three?

Sippitt: An employee is a person who is accepted as an employee, given a contract as an employee, totally in the control of the employer as to the manner for conducting his work, and treated for tax purposes as an employee. The far end of the spectrum is a self-employed person in a totally separate business, such as a lawyer or accountant who performs outside services to a client. These persons are not in the control of one particular company that they provide services to. They are taxed as self-employed.

The problem lies with the middle group, the "worker." Here people can be deemed workers without being employees. This is where people are personally providing a service but do not have a full employment status. This sometimes includes casual workers where there is no mutuality of obligation. Mutuality of obligation is a principle whereby both parties have committed that one will provide work while the other will perform work for a reward. In the case of the worker there may not be an ongoing employment relationship, and the workers may decline work whenever they wish.

One of the traps in the UK is that assuming that because the worker is casual, the employer can be casual in the way in which it manages these people. There has been a trend in recent years to extend certain rights to workers as well as employees. Many laws apply to workers as well as employees. This includes laws with respect to safety, length of working hours, discrimination rights and certain other matters. If the employer does not manage the relationship with these workers correctly, it may also inadvertently create an employment relationship. If one is trying to avoid creating an employment relationship, it is important that the relationship with the casual worker be carefully documented and managed in a way that avoids creating the mutuality of obligation that would confer employment status and therefore additional rights.

Editor: It has been my observation that there is an ever-increasing number of temporary employment agencies in the UK.

Sippitt: The UK is the one country within the EU that has by far the most temporary workers. This creates a much greater flexibility in structuring the work force by allowing companies to increase or decrease the work force as needed. There is the prospect in the medium term of legislation from the EU that may increase the expense of hiring temporary workers, but that should not come into effect for two or three years at least, as it is not yet agreed at EU level.

Editor: Does the UK have any statute comparable to ERISA in the U.S.?

Sippitt: There is huge debate in the UK as to how pension provisions should be organized for the long term. There is a national state pension scheme, which is regarded as very modest. At the same time it is not compulsory for employers to operate a company pension scheme. The only thing we do have in the UK is a requirement that the employer must make available at least a stakeholder pension plan which an employee may opt to join. We currently have a voluntary approach. This is being debated because there are some that say this should be made a compulsory requirement for employers.

Editor: What resources do you bring to a U.S. client who might be considering an acquisition in the UK or EU in addition to guidance on the law?

Sippitt: When people are looking to invest in another country, they need to have someone to coordinate the effort so that they are not left to struggle to find a number of different advisers who may not work well in a team. At Clarkslegal we have progressively stretched our firm's outlook into working collaboratively with other professional advisers and experts to deal with all the aspects that are needed to deal with our clients' needs. It's not just in relation to a UK or European acquisition, but any type of need.

The problem is that there are so many complexities the business manager has to encounter that they can end up with a host of different experts dealing with different aspects with a blinkered view from the standpoint of their own service. A better approach is that clients are looking for solutions and are grateful to any advisers who can bring solutions to them rather than a super-specialized service just addressing one particular aspect of their needs. The ability to make introductions to the right people is a crucial part of making things work well. At Clarkslegal we have developed a relationship with providers of other types of services, across the whole area of human resource management and recruitment, public relations specialists who help with UK marketing and branding, other companies who help with relocation management and surveyors and accountants who work closely with us through long familiarity. We are progressively becoming more and more involved in providing help to clients with joint venture structures or other mechanisms where we can package a total service to make matters easier for the client and give greater cost certainty as well as avoid problems of conflict or misunderstanding between different advisers.

Editor: As a member of the TAGLaw Network, you are able to call upon other law firms throughout the world to assist clients with global acquisitions. What advantages does this afford your clients?

Sippitt: The TAGLaw Network has now been in place for some six years and has already grown enormously. It is now one of the largest in the world in terms of the number of countries covered. The effect of this is that we can now rapidly draw on the resources of a number of firms that are well known to us in numerous other jurisdictions. The TAGLaw Network consists of medium size law firms that are well established and well connected in their communities. This assures us that we are able to draw upon the expertise of people who are very familiar both with their local communities in their respective countries and how business is conducted there. We therefore resort to a firm in the TAGLaw Network somewhere in the world virtually every week of the year. This enables us to reach out to people who can quickly assist us to help clients to resolve issues relating to employing people in other countries, terminating employment contracts in other countries, acquiring businesses, entering into contracts, and advising with respect to other complexities. It enables us to give a U.S. company advice on a pan-European basis covering several countries at once. A good example is that of a U.S. company that needs to make cuts in its workforce distributed over several countries. We can through TAGLaw Network bring a team together to focus on the issues raised by downsizing in each jurisdiction. In this way, through TAGLaw Network, we can coordinate a multi-country effort that requires working with the work force, the trade unions and the media.

Please email the author at msippitt@clarkslegal.com with questions about this article.