On Notice
May 2009
Authors:
Noel Deans
noel.deans@klgates.com
+44.(0)20.7360.8187
Paul Callegari
paul.callegari@klgates.com
+44.(0)20.7360.8194
Daniel Wise
daniel.wise@klgates.com
+44.(0)20.7360.8271
Jackie Cuneen
jackie.cuneen@klgates.com
+44.(0)20.7360.8184
Lisa Perelman
In this month’s On Notice we report on the new Employment Act 2008
and the provisions which came into force on 6 April 2009. We also
summarise important changes to the Immigration Rules, the significant
Court of Appeal case of Secretary of State for Business, Enterprise and
Regulatory Reform v Neufeld (whether a director and/or shareholder
can be an employee) and the EAT decisions of Clearsprings
Management v Ankers (no TUPE protection where transferred services
are too fragmented), Osborne Clarke v Purohit (finding indirect
discrimination against overseas job applicants), and Richmond
Pharmacology v Dhaliwal (ruling that a single degrading comment can
constitute racial harassment).
Employment Act 2008 and amendments to the Working Time
Regulations 1998 now in force
In January’s On Notice we summarised the Employment Act 2008 and the
proposed amendments to the Working Time Regulations 1998. These are now in
force and some points to note on their implementation are set out below.
lisa.perelman@klgates.com
+44.(0)20.7360.8256
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The amendments to the Working Time Regulations 1998 (increase of holiday from
4.8 to 5.6 weeks) came into force on 1 April 2009.
The position with regard to the Employment Act 2008 is more complex. The main
purpose of the Employment Act 2008 is to abolish the much-criticised statutory
dismissal and grievance procedures. Broadly speaking, the procedures were
abolished from 6 April 2009. However, there are a number of traps for the unwary
employer relating to transitional arrangements.
In simple terms, the position is as follows. In dismissal cases, the old rules
continue to apply if the employer has sent a "step 1" letter (inviting the employee
to a meeting), held a "step 2" meeting or dismissed the employee before 6 April
2009.
Otherwise, the old dismissal procedures no longer apply. In grievance cases, the
statutory grievance procedures do not apply to cases where the action which the
employee complains about occurs on or after 6 April 2009. Where the action predates 6 April 2009, the old statutory grievance procedures do still apply in certain
circumstances. However, employers should proceed with caution or seek advice
on these issues to avoid falling foul of the transitional provisions.
For more information on these developments please contact Noel Deans.
Immigration Update
The United Kingdom Border Agency (UKBA) has announced changes to Tiers 1
and 2 of the points based system ("PBS"). The rationale for this is said to be to
“help British workers through the hard times of recession”.
From 1 April 2009, the Government implemented certain changes which included
the following:-
On Notice
Tier 1 - Highly Skilled (General)
The UKBA has tightened the criteria against
which highly skilled migrants seeking entry to
the United Kingdom are judged, by raising the
qualifications and salary required for Tier 1
(General) of the PBS to a Master's degree and a
minimum salary of £20,000.
Many employers did not register as Sponsors
under the PBS in the hope that they could meet
their immigration/recruitment needs under Tier 1
(on the assumption that any recruitment outside
of the European Economic Area would be at
graduate level or above). By utilising Tier 1 in
this manner, employers were able to side step the
fairly onerous reporting and record keeping
obligations to which a Sponsor is subject.
However, employers may now need to revisit this
decision as the requirement to have a Master's
degree will rule out this category for many.
Tier 2 - Skilled Workers
The UKBA has strengthened the resident labour
market test for Tier 2 skilled jobs so that
advertising is no longer restricted to trade press
but must be made in Jobcentre Plus. This will
undoubtedly lead to a profusion of applications
from unsuitable candidates meaning a
proportionate increase in management time spent
formally rejecting these applications.
For more information on these changes please
contact Lisa Perelman.
Court of Appeal decision on whether
a shareholder and director of a
company can be an employee
The Court of Appeal has given useful guidance in
Secretary of State for Business, Enterprise and
Regulatory Reform (BERR) v Neufeld as to
when a shareholder who is also a director of a
company can be considered an employee (and as
such, owing to the relevant companies’
insolvency, be entitled to make claims on the
National Insurance Fund for various specified
debts such as notice pay, holiday pay and
statutory redundancy payments).
The central issue raised by both claimants in this
case was whether their status as controlling
shareholders and directors of their respective
companies barred them from also being
employees. One of the claimants, N, worked
under what appeared to be a genuine contract of
employment but he also gave personal
guarantees for the company, lent it money and
performed other activities that were not typical
of an employee. The other claimant, H, also
worked under a contract of employment.
The Court of Appeal decided that there is no
reason why in principle an individual cannot be
an employee even when he is a shareholder and
director and that shareholding gives him total
control of that company. Whether a director
and/or shareholder is an employee is a question
of fact to be determined by the Employment
Tribunal (ET). In this case the Court of Appeal
decided that both claimants were employees.
When deciding this issue, the Court of Appeal
said that courts and tribunals should address two
points. First, whether the contract is a genuine
contract or a sham.
The Court of Appeal suggested that cases raising
this issue were likely to be relatively exceptional
but agreed with previous judicial guidance that
the three main issues to look at are whether the
company itself is a sham, if the contract is
entered into for some ulterior purpose or if the
parties themselves do not conduct their
relationship in accordance with the contract.
The second point for consideration, if the
contract is deemed genuine, is whether it is a
contract of employment or some other type of
contract. In deciding this issue, courts and
tribunals should consider whether the fact that a
contract was made in favour of an individual
who was also the company's controlling
shareholder, and who had personally invested in
the business and assumed personal liabilities for
it, prevented it from being a contract of
employment.
Courts and tribunals should also look at, among
other things, how the individual in question was
paid (through a salary or through a director’s fee
for instance) or what had actually been done
under the contract. Each case will be decided on
its own facts.
This decision provides some welcome
clarification of the law on this issue although
each case will inevitably be “fact specific”.
There will always, therefore, be some
uncertainty as to the employment status of some
shareholders and directors.
May 2009
2
On Notice
This uncertainty could cause a problem for any
potential third party purchaser of a company who
will be unable to assess what its likely
employment liabilities will be regarding
shareholders or directors of a target company
after purchase. Any such purchaser should
consider the option of requiring the target to
compromise any potential claims from
shareholders or directors before the purchase is
made.
For more information on this case please contact
Jackie Cuneen.
Does TUPE apply when contracts
are split between suppliers?
The EAT in Clearsprings Management v Ankers
and others has considered whether TUPE applies
when activities previously carried out by one
contractor are reassigned to a number of other
contractors.
In this case, the National Asylum Seekers Service
(NASS) awarded contracts to designated service
providers for a five year term for the provision of
accommodation and support services to asylum
seekers. Clearsprings was one of the successful
contractors. After five years, the contracts were
put out to tender and Clearsprings was not
successful. Clearsprings’ employees were
randomly reallocated to the three other successful
companies who had tendered for the contracts.
The claim concerned whether there was a transfer
of the Clearsprings employees to the other
contractors for the purposes of TUPE.
The EAT found that, although there was an
activity which constituted a service provision
change, TUPE did not apply. This was because
no single transferee could be identified as having
taken on the work previously undertaken by
Clearsprings and the “activity” had become so
fragmented by the transfer as to be outside the
scope of TUPE. The EAT agreed with previous
decisions that in some cases TUPE could apply
where a contract transferred from one contractor
to several but in this case the service and
activities carried on by Clearsprings had become
too fragmented on transfer.
This decision is of interest to parties involved in
outsourcing or re-tendering exercises where there
is a redistribution to many different contractors or
a redistribution of the original tasks carried out. It
does not replace the general principle that TUPE
can apply when activities are distributed to
different contractors and the application of
TUPE will therefore be fact sensitive in these
circumstances. Despite this, employers should
be aware that if there is considerable
fragmentation following a transfer (as in this
case), there is a possibility that TUPE does not
apply.
For more information on this case please contact
Paul Callegari.
Selecting overseas candidates for
interview
In Osborne Clarke v Purohit, the Employment
Appeal Tribunal (EAT) decided that an employer
was liable for indirect race discrimination in the
context of selecting overseas candidates
for job interviews.
In this case the employer, a firm of solicitors,
had a policy of not considering training contract
applications from candidates needing a work
permit from the Border and Immigration Agency
(i.e. non-EAA nationals). The employer argued
that its policy was justified as it said that it was
following guidance from the Border and
Immigration Agency that employers must show
why a post could not be filled with resident EEA
workers and give credible reasons why they had
not employed a suitably qualified resident
worker or one who, with extra training, could do
the job. The employer argued that as the job was
training-related, EEA candidates who were
apparently less qualified than non-EEA
candidates could always, with training, do the
job. The employer explained that, because any
applications for work permits made in respect of
non-EAA candidates would always be refused on
this basis, it adopted the policy to avoid the
considerable administrative costs in making
work permit applications that were destined to be
unsuccessful.
The claimant, who was Indian, was turned down
on this basis. He claimed that the policy was
unjustified indirect race discrimination.
The EAT upheld the ET’s decision that the
policy was indirectly discriminatory and was not
justified for the reasons given by the employer.
Its view was that employers should make visa
applications and leave it up to the immigration
authorities to determine the outcome. Employers
should not pre-judge the outcome of any such
May 2009
3
On Notice
applications. The EAT referred in particular to
the Code of Practice on Racial Equality and
Employment, which is designed to give ETs
guidelines on equal opportunities practice and
which ETs must take into account. The Code
makes it clear that, as far as possible, selection
should be based purely on merit. Work permit
issues should only come into consideration at a
later stage of selection.
EAT accepted that the facts here were close to
the borderline of those which would constitute
racial harassment (hence the relatively small
award of damages) but saw nothing wrong
with the ET’s decision.
The importance of the decision for employers
lies in the EAT’s analysis of the definition of
harassment in this context. The definition is a
very broad one and the EAT felt that ETs should
focus on (mirroring the statutory definition):
The case does not decide that an employer will
always be indirectly discriminatory if it has a
recruitment policy that in some way
disadvantages overseas candidates. Such policies
may be permitted if they are objectively justified.
But it does make it clear that employers should
not pre-judge applications for visas. Overseas
candidates should be assessed primarily on merit
with the immigration authorities left to assess any
application for a work permit.
For more information on this case please contact
Daniel Wise.
•
Whether there was unwanted conduct on
grounds of race (or ethnic or national
origins);
•
Whether this conduct has the purpose or
effect of violating the other person’s dignity
or creating an intimidating, hostile,
degrading, humiliating or offensive
environment for them; and
•
Whether, if the person felt his or her dignity
had been violated (or that an environment
falling within the definition had been
created), it was reasonable for them to feel
this way.
EAT decision on racial harassment
In Richmond Pharmacology v Dhaliwal, the EAT
has given useful guidance as to what constitutes
racial harassment under section 3A Race
Relations Act 1976. A director of the employer
had said to a senior employee who was leaving
the company: “We will probably bump into each
other in future, unless you are married
off in India.”
The EAT emphasised that, in this context, there
need not be a “course of conduct” for there to be
harassment - a one-off event would suffice.
Further, conduct could amount to harassment if it
had either the purpose or the effect of causing the
prohibited consequences. Either would do.
Hence, harassment may be unintentional.
However, for there to be harassment, the
claimant must show that it was reasonable for
them to have felt that their dignity was violated.
The employee, who was British, but of Indian
ethnic origin, brought a claim under the 1976 Act
for racial harassment.
For more information on this case please contact
Noel Deans.
The ET found that this did constitute racial
harassment and awarded the claimant £1,000
damages. This was upheld by the EAT. The
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