Employment, incentives and pensions

October 2015

AUSTRALIA BELGIUM CHINA FRANCE GERMANY HONG KONG SAR INDONESIA (ASSOCIATED OFFICE) ITALY JAPAN PAPUA NEW GUINEA

SAUDI ARABIA (ASSOCIATED OFFICE) SINGAPORE SPAIN SWEDEN UNITED ARAB EMIRATES UNITED KINGDOM UNITED STATES OF AMERICA

Work, rest and pay

Welcome to the October edition of "Work, rest and pay", our bulletin

updating you on employment, incentives and pensions developments.

In this bumper edition we draw your attention to two new sets of reporting requirements

which are likely to create a significant amount of preparatory work for affected employers.

One is the obligation to report on gender pay differences, on which the Government has

issued its latest proposals, and the other is the requirement to issue an annual statement

on slavery and human trafficking. In addition, we look at the NAPF's comments on

remuneration issues in its 2015 AGM report, and banks and other financial institutions will

be interested in the latest publications from the regulators on the whistleblowing rules and the need for

regulatory references. On the pensions front, employers should be thinking about their cyclical automatic re-

enrolment duties which we summarise. Note too that the Pensions Regulator has issued its revised guidance on

assessing and monitoring the employer covenant aimed at defined benefit scheme trustees.

We look at some recent UK and EU court decisions and, to keep you up to date with what is on the horizon, we

round up a number of consultations on employment and pensions issues which could lead to significant changes.

To discuss any of the issues raised in this bulletin in more detail, please get in touch with your usual Ashurst

contact or anyone whose details are listed on the final page.

Caroline Carter

Partner

Head of Employment, Europe

Contents

Looking ahead: timetable for key areas of

employment law reform

Employment highlights

Mandatory gender pay reporting

Statements under the Modern Slavery Act 2015

New National Living Wage

Trade Union Bill

Corporate governance and regulation

NAPF review of the 2015 AGM season:

remuneration issues

Financial sector institutions: update on

whistleblowing and regulatory references

Pensions update

Cyclical automatic re-enrolment

Defined contribution occupational pension scheme

and short service refunds

Assessing and monitoring the employer covenant

Case law round-up

Court of Appeal's decision on civil partners'

pensions

Employees who do not have a dedicated place of

work

LLPs and repudiatory breach of contract

Transfer of employees' data to the US

Consultation catch-up

Freedom and choice in pensions

Simplifying the taxation of termination payments

Tightening the rules on personal service

companies

Posted workers: changes for the construction

sector

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Looking ahead: timetable for key areas of

employment law reform The table below outlines the timetable of reform anticipated for the remainder of 2015 and into 2016/early 2017.

Timetable for key areas of employment law reform

October

2015

National minimum wage rates. Increased minimum wage rates took effect on 1 October

2015. See here for the new rates.

October

2015

Employment tribunal recommendations. The Deregulation Act 2015 has amended the

Equality Act 2010, with effect from 1 October 2015, by removing the power of employment

tribunals to make wider recommendations in successful discrimination cases (for example,

recommending that an employer retrains staff or introduces a diversity policy). However,

employment tribunals will still be able to recommend changes that will benefit an individual

claimant.

October

2015

Extension of Sikh safety helmet exemption. From 1 October 2015, under the Deregulaton

Act 2015, the health and safety exemption allowing Sikhs who wear turbans not to wear safety

helmets on construction sites has been extended to almost all workplaces (there are some

limited exceptions to this).

October

2015

Modern slavery statements. According to the Government's response to its consultation on

Modern Slavery and Supply Chains, section 54 of the Modern Slavery Act 2015 will be brought

into force during October 2015 (please see our report below).

First half

of 2016

Gender pay differences reporting. During the first half of 2016, new regulations are due to

come into force requiring employers in the private and voluntary sector with at least 250

employees to report on the difference in pay between male and female employees (please see

our report below).

First half

of 2016

Shared parental leave with grandparents. The Chancellor has announced that he will

extend shared parental leave to working grandparents. The Government will consult on the

details of legislation in the first half of 2016 in order to implement the policy in 2018.

April

2016

National Living Wage. From April 2016, a new National Living Wage will be introduced (please

see our report below).

Early

2017

Tax-free childcare scheme. A new tax-free childcare scheme to support eligible parents with

childcare costs is set to come into force, replacing the existing Employer Supported Childcare

scheme.

Eligible working families will be able to claim 20 per cent of qualifying childcare costs for

children under five (and children with disabilities under 17) with claims capped at £2,000 per

child. The new scheme will be available for children under 12 within the first year of the

scheme's operation.

The implementation of the scheme has been delayed due to a legal challenge. However, the

Supreme Court has found the Government's proposals to be lawful and the scheme is now

expected to launch from early 2017.

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Employment highlights

Mandatory gender pay reporting

It is unlawful to pay men and women differently for

the same or broadly similar jobs. However, the

average earnings of men still exceeds that of women

by 19.1 per cent (according to recent figures from the

Office of National Statistics). While this may be

partially explained by reasons such as women

choosing to work in lower paid sectors or putting their

careers on hold to have children, there may be other

factors at work too.

In 2011, the Government introduced a voluntary

initiative under which employers could publish their

figures on gender pay differences. However, only a

handful chose to do so. The Conservative Party

therefore made it a manifesto pledge that they would

introduce mandatory gender pay reporting for large

employers, i.e. those with over 250 employees. This

will force such employers to address whether they do

in fact have such a gap and, if so, how they plan to

close it.

The consultation

Before introducing regulations to impose mandatory

gender pay reporting, the Government has consulted

on the detail of exactly what needs to be reported and

when. The consultation closed in September 2015 and

the Government's response is due "this winter". Our

thoughts, and those of employers with whom we have

spoken, have been included as part of a response to

the consultation submitted by a professional

association of employment lawyers.

Timing

The new regulations will be made during the first half

of 2016 but the Government proposes to delay their

commencement to give businesses time to prepare for

implementation. It may also introduce the regulations

on a phased basis, so larger employers (i.e. those with

500 employees or more) have to comply before

employers with over 250 employees, although this is

not yet definite.

Even though it may be some time before the

regulations take effect, employers who do not already

report on their gender pay gap may have a lot of work

to do to be ready in time. In particular, employers

may need to think about conducting a gender pay

audit now to identify any gap and take steps to close it

before the regulations come into effect. According to

the Government's consultation paper, fewer than one-

third of organisations had conducted a formal pay gap

review or were in the process of doing so.

What figures must be disclosed?

The consultation sought views on the following

possibilities for presenting gender pay gap figures:

an overall figure showing the difference between

average male pay and average female pay – this

would be the most straightforward approach but

the Government suggests it does not offer the

granularity needed to explain pay differences

within an organisation;

separate figures for full-time and part-time

employees – this would be particularly useful for

companies with a large part-time workforce; or

separate figures by grade or job – this would

enable greater like-for-like comparison.

A more granular approach is likely to be more

informative, although pay grades can encompass a

wide range of functions and jobs which are not

necessarily comparable. Although some larger

employers already collect and analyse data in relation

to gender pay, many will need to review (and, if

necessary, introduce) IT and procedural systems in

order to be able to produce meaningful data and

comply with the new reporting requirements.

Contextual narrative

It will be important for organisations to be able to

explain the context of any data in order to give a true

and fair view of what is happening within their

business. The consultation recognised this and sought

views on whether that narrative should be voluntary or

set out in the regulations or guidance. Most employers

would probably prefer to have flexibility with regard to

the detail to be included in such narratives but we

await the Government's response on this point.

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Frequency of publication

The Equality Act does not allow gender pay gap

information to be published more frequently than

annually. The consultation sought views on how long

the interval should be between reporting: one year,

two years, three years or longer?

The advantage of a longer interval, such as three

years, is that it gives employers time to interpret their

data and implement any required changes before the

next reporting deadline. The disadvantages of a longer

period are that collecting and analysing data over that

period would be a more onerous task, and the

explanatory narrative could be complicated by changes

in personnel over that period. We wait to see what the

Government's conclusion is on this.

Be prepared

Although the Government may allow some preparatory

time until the first report has to be published (and we

await the response to the consultation for details of

this), affected employers are advised to start planning

ahead now. The box below lists some suggested action

points.

Action points for employers in

relation to gender pay reporting

Review whether processes are in place to collect

the necessary data.

Conduct a gender pay review (if there has not

already been one) to identify any pay gap.

If the figures show a significant gender pay gap,

address how that gap could be closed to avoid

adverse publicity, reduced staff morale and the

potential for equal pay claims.

Plan how to comply without disclosing

confidential or commercially sensitive

information as well as being aware of data

protection legislation.

Statements under the Modern Slavery Act 2015

Section 54 of the Modern Slavery Act is due to come

into force in October 2015 and requires relevant

commercial organisations with a total turnover of

£36m per year, wherever incorporated and which

carry on a business or part of a business in the UK, to

prepare an annual slavery and human trafficking

statement for each financial year. This statement must

set out the steps the organisation has taken during the

financial year to ensure that slavery and human

trafficking is not taking place, not just in its own

business but also in any of its supply chains.

For more information, see our briefing here.

New National Living Wage

A new National Living Wage (NLW) will be introduced

from April 2016 for workers aged 25 and above. The

NLW will start at £7.20, which is 50p more than the

increased National Minimum Wage (NMW) which came

into effect on 1 October 2015. The Government's aim

is for the NLW to reach 60 per cent of median earnings

by 2020 and the Low Pay Commission will be asked to

set out how this can be achieved. The introduction of

the NLW will clearly have an impact on costs for

employers who currently pay below the NLW and the

Government recognises there is also likely to be a

knock-on effect on pay further up the wage ladder.

The NMW will continue to apply to workers under the

age of 25.

Trade Union Bill

The Government has published the Trade Union Bill

2015-2016 which aims to reform aspects of the law

relating to industrial action. The main proposals

include:

a requirement that industrial action is supported by

a vote in which at least 50 per cent of eligible

union members participate;

the extension of the period of notice given to

employers on proposed industrial action from

seven to 14 days;

employers should be able to use agency workers

during periods of industrial action; and

more stringent requirements for unions to

supervise picketing.

If passed, these provisions will be relevant to

employers dealing with trade union activity.

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Corporate governance and regulation

NAPF review of the 2015 AGM season: remuneration issues

This is the third year in which the National Association

of Pension Funds (NAPF) has published a review of the

preceding AGM season in advance of updating its

Corporate Governance Policy and Voting Guidelines for

the following year.

As usual, remuneration issues have been under the

spotlight as this remains a key focus for investors. The

new directors' remuneration reporting regime has

started to bed down and, with many companies

sticking by the directors' remuneration policy approved

in 2014 for a three-year period, the number of policy

votes in 2015 was reduced. Levels of dissent in

relation to remuneration resolutions generally at 2015

AGMs was down a little from 2014. Having said that,

there were a small number of companies which

received substantial levels of dissent on remuneration

issues, and the NAPF highlights what it calls the top

2015 "remuneration rebellions" and what the issues of

concern were.

Overall, the NAPF identifies a number of highs and

lows from its review of remuneration issues during the

2015 AGM season and these are summarised in the

box below.

NAPF's remuneration highs and lows from the 2015 AGM season

Positives Negatives

A third of CEO salaries were frozen.

Bonus opportunity and rewards remained static.

Long-Term Incentive Plan (LTIP) opportunity

and awards increased only very slightly.

A majority of companies now have an LTIP

deferral period of at least five years, i.e. vesting

and holding periods combined.

Almost all companies now include clawback or

malus provisions in their directors'

remuneration policies.

Inadequate disclosure of performance targets

with too much reliance on the "commercial

sensitivity" opt-out.

Issues relating to the recruitment of new

executives or the exit of departing executives,

such as guaranteed bonuses for new recruits

and the lack of appropriate performance

conditions.

The NAPF has some interesting comments to make on

the report commissioned from Manifest by the

Department for Business, Innovation and Skills (BIS)

which was published in March this year and looked at

levels of compliance with the new directors'

remuneration reporting regime in 2014. For more on

this, see our article in the last edition of "Work, rest

and pay" here.

Firstly, the statutory regulations require the future

policy table in the directors' remuneration report to

show a maximum (in monetary terms or otherwise)

for the salary element of the director's pay package.

The Manifest report found that 93 per cent of the

companies it sampled failed to comply with this

requirement. Instead, companies tended to set out the

factors that they would take into account in setting

salary rises, in accordance with the GC100 and

Investor Guidance on the regulations. The NAPF

remarks that investors and their representative bodies

(including the NAPF itself) have been relaxed about

the lack of firm caps for salary increases and, in fact,

welcomes the more flexible approach adopted which

"avoids potential unintended consequences". While

this is reassuring, companies should, however, bear in

mind that the inclusion of a maximum is, in fact, a

statutory requirement.

Secondly, the Manifest report for BIS highlighted that

a significant minority of companies in its sample failed

to provide adequate detail on how the pay of the

workforce generally had been taken into account in

setting directors' pay. The NAPF draws attention to the

fact that the Securities and Exchange Commission in

the US has recently adopted a new rule requiring

public companies to disclose the ratio of CEO pay to

the median pay of employees, and says that pressure

will grow for companies to be mindful of internal

disparities in pay and to communicate more clearly

how these considerations are taken into account. It

emphasises that remuneration committees should

consider whether they are able credibly to justify any

such differentials.

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The NAPF also reiterates its view that the directors'

remuneration policy is expected to last the full three

years for which it is approved, and that the

shareholder vote should be on a triennial rather than

an annual basis. Returning to shareholders with a new

policy within the three years should not be the norm

and should be accompanied by a convincing rationale.

Financial sector institutions: update on

whistleblowing and regulatory

references

Two recent publications from the Financial Conduct

Authority (FCA) and the Prudential Regulation

Authority (PRA) will be of interest to banks and

financial sector firms.

Firstly, following a consultation process, the FCA has

published a package of rules for deposit-takers with

assets of £250m or more, PRA-designated investment

firms and Solvency II insurers to formalise their

whistleblowing procedures. A whistleblowers'

champion must be appointed by 7 March 2016 and

compliance with the full whistleblowing rules will be

required from 7 September 2016.

Secondly, the FCA and PRA have published a joint

consultation paper on their proposals with regard to

regulatory references for firms within the scope of the

new senior managers and certification regimes. Firms

wishing to appoint an individual to a senior

management or certification function would be

required to request a reference from all previous

employers going back six years. Any reference

obtained from another regulated firm would have to

disclose, among other things, any breach of conduct

rules by the individual or any conclusion that the

individual was not a fit and proper person to perform a

function. This is designed to deal with the problem of

what have been called "rolling bad apples" moving

from one job to another.

More information on both these publications is

available in our briefing here.

Pensions update

Cyclical automatic re-enrolment

1 October 2015 marked the third anniversary since the

pensions automatic enrolment regime came into force.

Larger employers, who had to comply with their

employer duties first, should now be considering

whether they need to automatically re-enrol eligible

jobholders.

Cyclical automatic re-enrolment means that, broadly

every three years after their staging date, an

employer must re-enrol into an automatic enrolment

scheme (subject to certain exceptions) eligible

jobholders who, more than 12 months before the re-

enrolment date, have:

opted out;

voluntarily ceased active membership of a

qualifying scheme; or

remained in the pension scheme but who have

reduced pension contributions to below the

prescribed minimum levels.

Cyclical automatic re-enrolment is fundamentally a

recurrence of the employer duties performed at their

staging date/deferral date. However, there are a

couple of points to note:

re-enrolment will only apply to eligible jobholders

who have already had an automatic enrolment

date with that employer; and

postponement cannot be used.

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There is a six-month window within which

the cyclical automatic re-enrolment date

can fall, starting three months before the

third anniversary of the employer's

staging date and ending three months

after it.

An employer will need to provide a re-declaration of

their compliance to the Pensions Regulator. The date

on which this will have to be done will depend on

whether there are eligible jobholders to re-enrol.

Defined contribution occupational

pension scheme and short service refunds

From 1 October 2015, defined contribution

occupational pension schemes can only make refunds

within the first 30 days of membership. Previously, a

member might be entitled to a short service refund if

they left service having completed more than three

months' but less than two years' qualifying service.

Assessing and monitoring the employer covenant

The Pensions Regulator has issued

updated guidance on monitoring the

employer covenant, which is primarily

aimed at the trustees of defined benefit

pension schemes and their advisers. The

guidance includes suggestions on how

trustees can develop a monitoring

framework to analyse changes to the

employer covenant and also steps that

trustees can take to improve the security

of the pension scheme assets.

The guidance recommends that as a starting point all

trustees should read:

the "At a glance" section, which sums up the

guidance's main points; and

the introduction (section 1), which considers the

role of the covenant and the way in which trustees

should approach covenant assessments, including

how to carry this out in a proportionate way and

when an external review is needed.

"Assessing the covenant" (section 2) should be read

by trustees who assess their employer covenant

themselves and considers how to evaluate the legal

obligation and the employer's financial ability to

support the funding of the scheme.

Applicable to all trustees are:

"Monitoring the covenant and taking action"

(section 3), which considers establishing a

monitoring framework and the development of

contingency plans; and

"Improving scheme security" (section 4), which

sets out the benefits from improved security of the

scheme and examples of how this can be done.

Case law round-up

Court of Appeal's decision on civil partners' pensions

In the April 2013 and March 2014 editions of "Work,

rest and pay", we reported on the decisions by the

Employment Tribunal (ET) and the Employment

Appeal Tribunal (EAT) in Innospec Ltd -v- Walker,

which concerned the non-contracted-out element of

pension to be paid to a surviving civil partner.

Innospec relied on an exemption under the Equality

Act 2010 which allows civil partners to be treated in

the same way as spouses on the death of a scheme

member, but only in respect of service since 5

December 2005.

In what was a surprising decision, the ET concluded

that the basis on which the scheme was proposing to

pay out a widower's pension to Mr Walker's partner (in

the event that Mr Walker predeceased him) was both

directly and indirectly discriminatory. The ET

considered that the trustees should pay out a

widower's pension to Mr Walker's civil partner on the

same basis as it would to a surviving female spouse.

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However, the EAT overturned the ET's decision,

effectively ruling that pension schemes may indeed

restrict survivors' benefits for civil partners to post-

2005 accrual.

The Court of Appeal has now agreed with the EAT's

decision and declined a reference to the European

Court of Justice.

Employees who do not have a dedicated place of work

The European Court of Justice (ECJ) has recently

issued a decision which will have a significant impact

for any organisation that employs individuals who do

not have a dedicated place of work, such as home

workers, sales staff, or maintenance and repair staff.

The ECJ has decided that time spent by peripatetic

workers travelling between their home and the

premises of their first and last customers of the day

should be classed as "working time" for the purposes

of the Working Time Directive.

The case was brought by Comisiones Obreras, Spain's

largest trade union, on behalf of technicians who were

employed by Tyco, a Spanish security installation and

maintenance company. The technicians used company

vehicles to travel from their homes each day to

customers, where they carried out installation and

maintenance services before returning home at the

end of the day. Tyco sent details of the technicians'

assignments each day via an application on a mobile

phone. The court case was prompted after Tyco took

the decision to close their provincial offices in Spain.

This meant that staff had to travel for up to three

hours every day to install the company's products.

Tyco did not regard the employee's first and last

journeys of the day (to and from home) as working

time, but only started recording working time from the

moment the technicians began their first assignment

and ending when they left their last assignment. It

was significant that, before the closure of the

provincial offices, working time was classed as

beginning from the moment the technicians collected

their vehicles from the office, so all journeys to and

from the customer were classed as working time.

The technicians were successful in arguing that their

journeys to and from their first assignments should

also be classed as working time. Under the Working

Time Directive, "working time" is defined as any period

in which the worker is: (a) working; (b) at the

employer's disposal; and (c) carrying out their activity

or duties in accordance with national laws and/or

practice. The ECJ held that each of these tests had

been satisfied. The workers were clearly at the

employer's disposal as Tyco could change the order of

the customers or cancel appointments at any time.

The employees were not free to pursue their own

interests during the travelling time. Further, the ECJ

held that if a worker does not have a fixed place of

work and is carrying out their duties on journeys to

and from their customers, that worker must be

regarded as working on the journey.

This case provides clarity in defining

working time for mobile workers who do

not have a fixed base. However, it will

inevitably lead to greater costs for those

employers who pay on an hourly basis and

have not previously calculated working

time in this way. Rest periods and breaks

will also be affected. Employers would be

well advised to reassess their methods for

calculating working time as result of this

decision and ensure that they have

appropriate monitoring procedures in

place.

LLPs and repudiatory breach of

contract

The rights and duties of members of a limited liability

partnership (LLP) are governed by the agreement

between the members (the LLP Agreement). However,

if there is no LLP Agreement, then certain statutory

default provisions apply. These provide, for example,

that all the LLP members are entitled to an equal

share of capital and profits.

If an LLP member can show that an existing LLP

Agreement has been terminated in breach, the

statutory default provisions would apply. This could

benefit members with, for example, a low profit share,

who would then be entitled to an equal share of profits.

The member might also be able to establish that they

were no longer bound by lengthy notice periods or

onerous restrictive covenants.

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Advisers acting for individual members often try to

find creative ways to argue that the LLP is in

"repudiatory breach" of the LLP Agreement. A

repudiatory breach is a breach of contract which

allows the injured party to end the contract by

"accepting" the breach. The LLP Agreement would,

therefore, be brought to an end and the default

provisions would apply.

However, in the recent case of Flanagan -v- Liontrust

Investment Partners LLP, the High Court has decided

that the doctrine of repudiatory breach cannot apply to

LLP Agreements where there are more than two

members (the position on LLPs with only two members

was left open). The decision was largely driven by the

practical difficulties of having the member who

accepted the breach (A) being subject to the statutory

default rules, while the other members remained

subject to the LLP Agreement. If, for example, A's

profit share increased under the default rules, how

could the other members' profit shares, as set out in

the LLP Agreement, be honoured?

This decision provides welcome clarification in relation

to contractual disputes between LLPs and members

(although, as it is a first instance decision, it is not

binding on other courts). However, even though the

member may not be able to claim repudiatory breach,

it is still important for LLPs to comply with their

contractual obligations under the LLP Agreement.

Transfer of employees' data to the US

On 6 October 2015, the European Court of Justice

ruled that the EU–US Safe Harbour Data Transfer

framework is invalid. This means that the transfer of

data from EEA countries to the US will be prohibited

unless one of the exemptions in the governing EU

directive applies. This could have significant

implications for multi-national employers. For more

information, see our briefing.

Consultation catch-up

Freedom and choice in pensions

There have been two interesting recent consultations,

summarised below.

The Treasury consults on pension transfers and

early exit charges

Following the introduction of the new pension

freedoms from April 2015, the Government wants

individuals to be able to access the new pension

flexibilities easily and at a reasonable expense.

In July, the Treasury issued a consultation looking at

the options to address potential obstacles to

individuals switching their pensions to access the new

freedoms, including:

excessive early exit penalties;

how the process for pension transfers could be

made quicker and smoother; and

the circumstances in which financial advice should

be obtained when making certain transfers.

Excessive early exit penalties

The consultation document considers issues such as

what constitutes an exit charge and the frequency of

such charges. If there is clear evidence of excessive

early exit fees, views are sought on three identified

options as possible ways to address such charges:

a cap on all early exit fees;

a flexible cap in certain circumstances; and

a voluntary approach to limiting early exit fees and

charges.

Pension transfers

The document looks at the existing statutory process

for pension transfers and whether that process could

be made quicker and more efficient.

Financial advice

There are statutory requirements to take financial

advice when making particular transfers. However,

there is evidence that people are being required to

take advice when they are not required to do so under

pensions legislation. The consultation document asks

for views on the current legal requirement to receive

independent advice and whether that process can be

made quicker and clearer.

Additionally, the Government does not want to create

a situation where schemes and providers may feel

forced to require advice where it is not necessary.

Both the Financial Conduct Authority (FCA) and the

Pensions Regulator have also been carrying out

evidence-gathering exercises on the processes in place

for pension transfers and any fees/charges which

might apply on early exit. In September, both the FCA

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and the Pensions Regulator published their report and

survey of results.

The closing date for responding to the Treasury's

consultation is 21 October.

FCA consultation paper: pension reforms –

proposed changes to rules and guidance

In October, the Financial Conduct Authority (FCA)

published a consultation document which:

sets out its expectations on how its existing rules

and guidance work following the introduction of the

new pension freedoms, and consults on changes

which will ensure that its rules are fit for purpose;

proposes further changes to the FCA Handbook;

asks for views on the range of information which it

intends to look at as part of the follow-up to its

retirement income market study; and

invites discussion on areas where it may carry out

further work.

"We have identified four priority areas of risk

for pensions and retirement income: sales and

advice, value for money, firms' management of

legacy business and an increase in scams and

fraud. These risks underpin the policy

development set out in this paper, as well as

our current and future work programme."

Paragraph 2.12 of the consultation

document

The topics for consultation are:

Promoting competition – for example, proposals

are set out to ensure consumers understand the

range of options they have for accessing their

pension savings and in particular rules and

guidance are proposed relating to communications

with individuals on accessing pension savings and

pension freedoms.

Ensuring the market works well – reminding firms

about their obligations on the operation,

distribution and communication of both existing

and new retirement income products. Proposals on

retirement risk warnings are also considered.

Protecting consumers – looking at issues such as

the application of cancellation rights, restrictions

on the promotion and distribution of high-risk

investments, and using pension savings to repay

debt.

The document also outlines discussion areas where the

FCA may carry out more work. These include, for

example:

reminding firms of their responsibilities to ensure

lifestyling investment strategies remain

appropriate;

updating rules on transfer value analysis; and

possible changes to its product disclosure regime.

Comments are requested on the retirement outcomes

review by 30 October 2015 and the consultation

questions by 4 January 2016.

Simplifying the taxation of termination payments

The Government is consulting until 16 October on

simplifying the tax and National Insurance treatment

of termination payments made to employees.

Such payments are often made up of several different

components, such as damages, statutory redundancy

pay, payments in lieu of notice (PILONs) and

compensation for loss of office. Those elements which

arise from the employment, or are payments to which

the employee is contractually entitled, are subject to

income tax and National Insurance contributions

(NICs). Those elements which do not arise from the

employment, such as redundancy pay, are only liable

to income tax on amounts exceeding £30,000 and no

NICs are payable. Additionally, there are various

exemptions and reliefs which can apply on top of the

tax-free threshold.

Understandably, both employers and employees can

find the current rules confusing and difficult to apply.

The Office for Tax Simplification, in a report published

in July 2014, recommended that the system be

simplified and the Government is now consulting on

various proposals to achieve this in a way that is fair,

easy to understand and affordable for the Exchequer.

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Removing the distinction between contractual

and non-contractual payments

The first proposal is to remove the distinction between

the tax and NICs treatment of contractual and non-

contractual payments. Treating all PILONs in the same

way would, in particular, remove a lot of confusion.

The result of this change would be that all payments in

connection with termination of employment would be

treated as earnings and subject to tax and NICs.

Employers would no longer have to consider which

parts of a termination payment are taxable and which

are not.

New income tax and NICs exemption

The Government believes, however, that, in principle,

support in the form of tax and NICs relief should be

provided when someone loses their job. The

consultation paper rules out a blanket income tax

exemption for all termination payments, either at the

current £30,000 level or lower, mainly because of the

avoidance opportunities which that would offer.

Avoidance issues could be sidestepped by linking the

exemption to statutory redundancy pay (SRP); for

example, by making the exemption a multiple of the

employee's SRP. The Government recognises that this

approach is not ideal, as a number of people do not

qualify for SRP (such as civil servants and employee

shareholders) and it would be complex to introduce

new legislation to extend the exemption to these

groups.

One other approach that the Government is

considering is to create a new exemption which

increases proportionately with the number of years of

service the employee has completed (above a

threshold of two years) up to a maximum amount. The

Government is also considering limiting such an

exemption to termination payments made in

connection with redundancy, including voluntary

redundancy.

Anti-avoidance

If such an exemption were to be introduced, the

Government would want to ensure that it could not be

used as a form of tax-free remuneration.

Consequently, payments made through salary sacrifice

would not be eligible for the exemption, nor would

there be relief for those agreeing to accept a reduced

salary in return for a tax- and NICs-free termination

payment. The exemption could also possibly be

disapplied for those working on fixed-term contracts.

Payments would fall back into charge if the employee

was re-engaged to do a similar job for the same

company, or an associated company, within 12

months.

Other exemptions

As well as the current tax-free amount, there are a

number of other exemptions which apply to payments

that are not earnings. Rather than remove them all,

the Government intends to retain some of them,

including the exemption for payments made on

account of injury or disability. Views are sought on

which other exemptions should be retained.

The consultation paper also proposes that if the tax

and NICs exemption is linked to SRP, two new

exemptions would be introduced: one for payments

made in connection with wrongful or unfair dismissal

and another for compensatory payments made in

cases of discrimination. Views are sought on whether a

financial cap should apply to such awards and also

whether tribunal awards should be treated differently

from settlements agreed between the employer and

employee.

Next steps

The Government intends to publish details of the

consultation responses and expects to make an

announcement in this year's Autumn Statement on

any decisions it has made in the light of those

responses. We will keep you updated on any firm

proposals.

Tightening the rules on personal service companies

Contractors who supply their services through

intermediaries, usually their own company (known as

a Personal Service Company or PSC), pay significantly

less tax than employees. Legislation known as IR35 is

in place to prevent the abuse of PSCs for tax-

avoidance purposes. However, HMRC believes that the

legislation is not working as effectively as it should

and published a discussion document in July 2015

seeking views on how the legislation could be

reformed. The closing date for comments was 30

September 2015.

Currently, it is the responsibility of a contractor who

operates through a PSC to satisfy HMRC as to the

validity of that arrangement if challenged. However,

investigating individual PSCs can be complex and

time-consuming for HMRC. One option for reform,

therefore, would be for those who engage contractors

through PSCs to consider whether IR35 applies and, if

so, to deduct the same income tax and National

Insurance contributions as they would for direct

employees. To reduce the burden for engagers, a

further element of reform could be to simplify the test

for determining if IR35 applies.

This publication is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.

Readers should take legal advice before applying the information contained in this publication to specific issues or transactions. For more information

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© Ashurst LLP 2015 Ref: 44159539 15 October 2015

Reform is at a very early stage at the moment, with

HMRC having sought views on potential reform options

and their pros and cons. If it decides to proceed

further, there will be a full consultation on any

proposals. However, those who engage contractors

through PSCs will be concerned that the burden of

establishing the validity of PSCs may in future fall on

them.

We will keep you posted as to how these proposals

develop.

Posted workers: changes for the construction sector

BIS has been consulting on the implementation of the

Posted Workers Enforcement Directive (the

Enforcement Directive) which must be transposed into

English law by 18 June 2016. This will have a

particular impact on the construction industry.

Posted workers are individuals sent by an employer in

one European member state to work temporarily in

another member state. They are entitled to statutory

employment rights in the country to which they are

posted, including rights to maximum work periods and

minimum rates of pay. The Enforcement Directive is a

response to concerns that these protections are not

being fully complied with.

The most significant proposal in the Enforcement

Directive is a new requirement that member states

introduce measures that ensure posted workers in the

construction sector can claim back unpaid wages from

the next contractor up in the supply chain. This could

have significant financial and other consequences for

such contractors.

For more information on these proposals, please see

our briefing here.

Summer Budget 2015

Please see our newsflash for a summary

of the key announcements on pensions,

employment and incentives issues in the

2015 Summer Budget.

Contacts

Caroline Carter

Partner, Head of Employment,

Europe

T: +44 (0)20 7859 1553

E: caroline.carter@ashurst.com

Crowley Woodford

Partner

T: +44 (0)20 7859 1463

E: crowley.woodford@ashurst.com

Marcus Fink

Partner

T: +44 (0)20 7859 1943

E: marcus.fink@ashurst.com

Paul Randall

Senior Consultant

T: +44 (0)20 7859 1298

E: paul.randall@ashurst.com

Sarah-Jane Gemmell

Expertise Counsel

T: +44 (0)20 7859 1914

E: sarah-jane.gemmell@ashurst.com

Elizabeth Bayliss

Senior Expertise Lawyer

T: +44 (0)20 7859 1816

E: elizabeth.bayliss@ashurst.com