Major employment changes: 2015’s changes and what to expect in 2016
Estimated reading time 18 minutes
2015 saw many legislative changes and announcements for 2016 that impacted not only UK resident companies and their employees, but also international businesses with a presence in the UK. In this article we review what happened in 2015, and what HR professionals should expect in 2016 and beyond. Follow the links below to jump to a specific section in this article:| Employment Law | Immigration |
| Pensions | Global Mobility |
| Compensation and Benefits | Senior Manager’s Regime |
Employment law
New rules for Holiday pay What happened in 2015? The decision of the UK Employment Appeals Tribunal in the case of Bear Scotland in November 2014 made clear that the 20 days holiday pay required under EU law, and enacted into UK law in the Working Time Regulations 1998 (‘WTR’), must be calculated according to an employee’s “normal remuneration”. “Normal remuneration” is defined as the pay which an individual “normally receives” and can include commission, allowances, non-guaranteed overtime, call-out payments, temporary supplements or bonuses. As holiday pay was previously based on basic salary only, this has led to further expenses for employers. The decision also allowed for the possibility of backdated holiday pay claims from, or on behalf of, employees. Where a series of underpayments of holiday pay could be established, such claims were likely to prove costly. To limit the effect of the ruling, the UK government introduced the Deduction from Wages (Limitation) Regulations 2014, with effect from 8 January 2015 (the “Regulations”). The Regulations introduced a two year “backstop” period on most unlawful deductions from wages claims, for any claims presented on or after 1 July 2015. This means that where a series of deductions from wages is established (for example a continuous underpayment of holiday pay with less than a three month gap between each payment), only the final 2 years of underpayment will be considered as part of the claim. The Regulations also made clear that the WTR (which contain the right to paid holiday) confer a statutory but not a contractual right to paid leave, so as to stop claims for breach of contract for underpayment of holiday pay being brought in the civil courts. However, it should be noted that if individual contracts of employment contain a term which gives an employee the right to holiday pay calculated in accordance with the WTR, a breach of contract claim may still be possible. It is very important to check, and where necessary amend, contracts of employment. What can be expected in 2016? While this case made it clear that the Working Time Directive requires normal remuneration (that is, pay which is "normally received") to be paid during periods of holiday leave, it did not make clear how long such payments needed to be made to qualify as "normal". It stated that where there is no settled pattern, it is appropriate to calculate average remuneration over a reference period determined by national legislation. There is uncertainty about whether this should be the 12 week look back period already contained in the Employment Rights Act 1996, or a longer 12 month reference period as suggested in earlier litigation. A case (Lock v British Gas) did not address this when it returned to the employment tribunal in March 2015, but noted that the issue would be reserved for another stage in the litigation. This suggests that it is likely to be clarified in further litigation this year or the next. New Gender pay gap legislation What happened in 2015? According to the Office for National Statistics (ONS), women in the UK earn on average 19.1% less than men. To help combat this, in July 2015 the Government announced plans to make annual gender pay reporting mandatory for employers with over 250 employees (currently this is only done on a voluntary basis). In November 2015 the government indicated its intention to include bonus information within gender pay gap reporting and to extend the obligation to publish gender pay data to include public sector employers. By improving pay transparency the Government hopes to highlight the fairer and non-discriminatory pay systems amongst employers with no gender pay gaps, and drive those employers that do discover a significant pay difference to address them. What can be expected in 2016? Although the Government is expected to implement the regulations during the first half of 2016, we are still awaiting more detailed proposals. In light of this there may be a further delay to give businesses an opportunity to prepare adequately. Introduction of the new National Living Wage What happened in 2015? First announced in the 2015 Summer Budget, the compulsory National Living Wage will take effect from April 2016. This is set to start at £7.20 an hour and will rise to £9 an hour by 2020, replacing the current £6.50 minimum wage for workers aged 25 and over. With more people in the UK on low pay compared to other advanced economies, the introduction of the National Living Wage is expected to boost the wages of 6 million people. What can be expected in 2016? Although several large employers undertook to increase their pay before the new rules take effect, the Office for Budget Responsibility predicts that 60,000 people will lose their jobs as a result of the changes as employers will hire more workers under the age of 25 who can still be paid at the lower level of the minimum wage. It will be interesting to see if a trend is discernible in an amount of increased age discrimination claims. This change will represent a major challenge to many smaller employers as well as those in certain sectors such as retail. Recent research from the Resolution Foundation also highlighted the impact this will have on certain regions of the UK with the cities of Sheffield, Nottingham and Birmingham particularly affected due to the percentage of low pay workers in these areas. For the affected workers this will bring a welcome boost in income but for their employers it will present several challenges of not only how to deal with their increased costs but also how to invest in new ways of working, training and equipment which can improve productivity levels. Data Transfers to the US What happened in 2015? EU privacy law forbids the movement of its citizens’ data outside of the EU, unless it is transferred to a location which is deemed to have “adequate” privacy protections in line with those of the EU. The Safe Harbor Scheme allowed US companies to self-certify that they would protect EU citizens’ data when transferred and stored within US data centres. In 2000, the EU Commission agreed that the Safe Harbor Scheme offered equivalent protections to EU law, and that EU-based companies could transfer data to the US provided that the US-based organisation processing it had signed up to the Safe Harbor Scheme. However, in October 2015 the Court of Justice in the European Community (CJEU) gave its judgement in a case concerning the validity of the US Safe Harbor scheme and found that it did not adequately safeguard EU citizens’ personal data. The CJEU believed that the US authorities had unfettered access to all data for the purposes of surveillance, and that any data transferred to the US from an EU state would be considered unlawful as long as US law remains in its current state. What can be expected in 2016? Negotiations have been taking place for some time between the European Commission and US authorities with a view to introducing a new, more privacy protective arrangement to replace the existing Safe Harbor agreement. On 2 February 2016, a form of agreement was produced on a replacement data flow system, a new “EU-US Privacy Shield” (view article here). The EU Commission is also working with national data protection authorities to agree a coordinated response on alternative means of data transfer and have so far agreed new rules on data protection in December 2015 that will come into force in two years’ time. Under the new rules, companies who handle significant amounts of data will need to employ a data protection officer or face sanctions of up to 4% of their global turnover. This not only has a wide-reaching impact on internet firms, but all other companies, as consumers will be given more say over what businesses can do with personal information. Further detail on the action EU companies can take is expected early in 2016. What can be done now? It is important for organisations to establish exactly what their systems and processes are regarding data transfer and to be ready to act when further guidance is issued. Undertaking the groundwork now should place companies in good stead for the wider-ranging data privacy rules that are likely to come into force next year and safeguard against unlawful transfer of data outside of the EEA in the meantime. Examples of pro-active measures that can be taken include enforcing binding corporate rules approved by the data protection authority in each EU Member State; or implementing model agreements approved by the EU Commission. However it is possible that both measures could be subject to further challenge given the underlying concerns about US surveillance that were raised in the CJEU decision.Pensions
Auto-enrolment What happened in 2015? From October 2012 employers have been required to enrol “eligible jobholders” (employees over age 22, working in the UK and with income levels above the income tax threshold) into a qualifying pension scheme and to make a minimum contribution to that scheme on their behalf. Auto enrolment (AE) has so far been a success - there are more people saving for retirement with opt-out rates much lower than predicted. However, the self-employed continue to be excluded by this legislation. Nevertheless, AE will begin to address the pensions issue in the UK caused mainly by people’s increasing life expectancies, as well as the switch from defined benefit to defined contribution schemes. What to expect in 2016? In 2016, small and medium sized employers (with 250 employees or less), will have to start preparations as they near their staging dates. Although most larger employers will have already completed their auto-enrolment in the previous years they will need to prepare for re-enrolment. The Government has also delayed the next two increase phases of AE minimum contributions by 6 months to coincide with the start of the tax year. The increases will now take effect in April 2018 and April 2019 with the intention that this will simplify the administration of AE, especially for small businesses. Taxation Changes What happened in 2015? In April 2015, new freedoms were introduced that allow pension savers access to use all their retirement funds as they wish (subject to tax implications). Figures from HM Revenue and Customs (HMRC, the UK tax authorities) found that 146,000 people cashed-in pension pots in the six months since April 2015, withdrawing a total of £2.7bn. What to expect in 2016? From April 2016 a new “single-tier” state pension will be introduced at a flat rate beginning at £155.65 a week. This will not only replace the lower state pension of £115.95 but also secondary and additional pensions above the basic rate. It is currently believed that only one in three pensioners will qualify for the full flat rate pension due to deductions for those who contracted out in the past, and for those with less than the required 35 years of national insurance contributions. The tax free allowance for pension contributions (currently £40,000 per year) will also be reduced to a minimum of £10,000 for those earning over £150,000 per annum. The Government is likely to move to a flat rate of tax relief on pensions, no matter which level of income tax the saver pays. The lifetime pension limit will also be reduced from £1.25 to £1m. We expect the outcome of the pension tax consultation in the March 2016 Budget. The Government is consulting on a potential major overhaul of the tax system for pensions, including possibly stopping tax relief on pension contributions and instead making pension payments tax free.Compensation and Benefits
Share Incentives What happened in 2015? A key change in the field of employee share incentives was the move to online filing of annual share plan returns with HMRC. Although this was intended to simplify the annual reporting process for employers, technical issues at HMRC resulted in many employers having to resubmit their returns. There was also a change in the tax treatment of share incentives held by internationally mobile employees. For employees holding share options or awards, relocating into or out of the UK partway through a vesting period, there will now be a proportionate UK tax charge. An equivalent change to the National Insurance rules also took place. What to expect in 2016? The Finance Bill 2016 will contain further changes to the tax treatment of options held by internationally mobile employees, which will clarify the treatment of Restricted Stock Units (RSUs), as well as some technical changes to the tax advantaged share plan legislation. HMRC has stated that there will be some changes to the online share plan filing forms which should further simplify the process. There are also a number of tax avoidance cases involving share incentives that will be decided by the courts in 2016, including the Supreme Court decision in the UBS/Deutsche Bank case (for our previous article on this case, click here). Taxation of Benefits and Expenses What to expect in 2016 From April 2016, the following measures will be implemented to simplify the taxation of expenses and benefits:- The £8 500 threshold that determines whether employees pay income tax on their benefits in kind will be abolished.
- The voluntary “payroll-ing” of taxable benefits in kind.
- An automatic tax exemption for certain business expenses.
- A tax exemption for certain trivial benefits in kind (worth less than £50).