Russell-Cooke Solicitors www.russell-cooke.co.uk

EMPLOYMENT LAW UPDATE 2002

As most employers already know, employment law is constantly changing and developing. Every day, each member of Russell-Cooke's Employment Group receives up to date information online from legal publishers. This is rarely less than five pages of comment on new legislation and case law, and has been known to stretch to twenty.

The articles in this Update explain some of the recent major changes which have taken place and which are expected this year and next and deal with a number of other topics you should be aware of. They relate to references, the use of e-mail and the Internet, part-time working, the Human Rights Act, pay in lieu of notice, discretionary bonuses and stakeholder pensions. There is also an article on employee share schemes, which was contributed by Scott Leonard, of our Company Department.

We have had one addition to our Employment Group, Alex Bearman, who has settled in well and complements the team.

As ever, we pride ourselves on being accessible and able to provide up to date advice as standard, and rapid responses where necessary. At the same time, we know the importance of providing assistance that is cost effective, not just effective.

Many of our business clients already know that they are always welcome to telephone any of the members of our team if they have a problem and they would like some off the cuff advice. Often, they do this because they are not sure whether or not there is a problem, or to check their understanding of the correct procedure in a given situation. Our experience tells us that this sort of approach can save thousands of pounds, and we hope that more of you will begin using us in this way in the coming year. The general rule in employment law is that prevention is better than cure!

REFERENCES
Providing a reference for an employee with whom you have had problems can be a legal minefield, as you balance your obligations to the employee with your obligations to the prospective new employer.

Are you obliged to provide a reference?
Strictly speaking you are not obliged to provide a reference unless you are required to by:


However, even if none of these apply, if you refuse to provide a reference for someone who is still your employee, you could face a claim of constructive dismissal. Further, if there is any question of the refusal being based on the employee's sex, race or disability, this might result in a discrimination claim.

It has also been decided fairly recently, that an employer can be guilty of sex discrimination if it refuses to give a reference to someone who has previously complained of sex discrimination, even though that person is no longer an employee by the time of the refusal.

What are your duties to an employee or a former employee when giving a reference?
Providing references for employees probably does not pose any difficulties in the majority of cases, but if there are employees about whom you have doubts, what and how much should you say?

Once you have decided to give a reference, you owe the employee a duty to exercise reasonable care and skill in preparing it. In practical terms this means you must ensure that it is fair and reasonable, does not give a misleading picture overall, does not express unjustifiable opinions, and is not based upon inaccurate information. Be aware that merely being accurate and stating the truth will not always result in a fair and reasonable reference if, for example, the end result is not balanced because of what you have omitted to say. Nor will it always be safe simply to follow general industry practice, or to restrict yourself to the strict requirements of your regulatory body.

On the other hand, there is no duty to provide a detailed or comprehensive reference, or even to provide all material facts. For this reason, many employers only ever provide bare forms of reference, which are restricted to how long the employee was employed, and in what capacity. There is nothing wrong with this approach, provided you do not make any exceptions.

It may also be possible to incorporate a term into the contract of employment to the effect that you will only give a reference if the employee accepts a disclaimer of liability. Be aware, however, that such a term may not be enforceable under the Unfair Contract Terms Act 1977, which protects vulnerable parties from onerous contractual terms.

What claims does an employee in this situation have?
The possible claims are:


What are your duties to the party requesting the reference?
Basically, you owe a duty of care to any prospective employer to whom you give a reference. This means that exaggerating an employee's competence or experience, saying anything that is untrue, or simply omitting negative information can all have serious consequences, in that the new employer may be able to sue you for negligence if it acts in reliance upon the reference and suffers loss as a result.

It may be possible to avoid this risk by inserting disclaimers in any references you provide.

Do you have to show a reference to an employee?
Under the Data Protection Act 1998 you are not obliged to show an employee the reference you have prepared. However, you should always bear in mind that there are circumstances in which a prospective employer may be obliged to disclose it, for example, in Court proceedings.

Practical Steps
You may be able to avoid any problems, simply by being aware of the potential pitfalls involved in giving references, and implementing some of the following practical suggestions:


E-MAIL & THE INTERNET
Increasingly, the ability to communicate by e-mail is becoming an essential requirement for any modern business. Organisations can be seen as behind the times, and may even lose business, if they cannot be contacted by e-mail. At the same time, the Internet can be an invaluable research and information gathering tool, and providing employees with access to it can lead to considerable savings in time and costs.

However, the use of this new technology can create legal difficulties for an employer. By way of examples, liability can arise from the way in which employees use the technology, the way in which employers deal with its misuse, and from surveillance of electronic communications carried out by the employer.

Acceptable use
The risk of legal liability can be reduced by having in place a comprehensive E-mail and Internet Policy, to give employees effective guidance on acceptable use of the computer network, and to provide you, the employer, with greater certainty as to the appropriate form of disciplinary action in the event of any misuse. Events at a large City law firm, which received wide press coverage, showed that even solicitors are capable of using their work e-mail system so as to attract very unwelcome publicity for their employers!

We would recommend that your E-mail and Internet Policy deal very clearly with the following:

Monitoring & recording of employee's activities
Employers may wish to monitor or record their staff's use of the e-mail system and the Internet for a variety of reasons. Before doing so, employers should be aware of the limits on their powers, and the rights of employees in this area.

The Regulation of Investigatory Powers Act 2000 says that interception of communications on a public telecommunications network (which includes external e-mails and the Internet) may only take place with the consent of both the sender and recipient, or with specific lawful authority. Breach of this Act is a criminal offence.

Lawful authority comes in the form of The Telecommunications (Lawful Business Practice) (Interception of Communications) Regulations 2000 which came into force on 24 October 2000. These regulations provide employers with the right to monitor and record communications without the employee's consent, for certain defined purposes, provided they have taken all reasonable steps to inform all users that interception may take place.

The defined purposes are in fact quite wide and include establishing the existence of facts, monitoring quality control and training, and investigating and detecting any unauthorised use of the system. Provided an employer can show what its intention was, and that that was permitted by the regulations, covert monitoring would be lawful, at least for the purposes of the Regulation of Investigatory Powers Act.

However, that is not the whole story. Where interception involves the processing of personal data, as is often likely to be the case, employers also need to be aware of their obligations under the Data Protection Act. The Data Protection Commissioner has published a draft code of practice, which specifically addresses the issue of employee surveillance. One of the recommendations made in this code is that any monitoring should be targeted and proportionate to the objectives. More specifically it should, where possible, be limited to monitoring e-mail traffic or the duration of Internet access rather than the actual content of the e-mails or Internet access. The code also recommends that inappropriate use should be prohibited through technical means, rather than human monitoring, and that employees be provided with the means to 'expunge' from the system e-mails which they send or receive.

Finally, as so often seems to be the case these days, the Human Rights Act is also relevant in this area. Article 8 of the European Convention on Human Rights guarantees a right to respect for an individual's private and family life, home and correspondence. Although this Act is more directly relevant to public authority employers, it also requires courts and tribunals to interpret existing legislation in a manner which is consistent with the Act, and therefore private sector employers can be affected. Broadly speaking, acts of surveillance which are otherwise permitted could fall foul of the Human Rights Act if they cannot be shown to be both necessary and proportionate. This could, for instance, lead to an employee claiming constructive dismissal relying on unjustifiable monitoring of his or her e-mails.

Significant test cases have yet to emerge in this area. For the time being employers are advised to seek guidance if they are in any doubt about the legality of their surveillance of employee communications.

PART TIME WORK
The Part Time Workers (Prevention of Less Favourable Treatment) Regulations came into force on 1 July 2000. These make it unlawful to treat part time employees (or part timers working under contracts for services) unfavourably, or to "subject them to a detriment".

The Regulations also make it automatically unfair to dismiss an employee merely because he or she has asserted a right under the Regulations, and provide protection against victimisation for having asserted a right, either on the employee's own behalf, or on behalf of another employee.

Complaints are made to the Employment Tribunal in the normal way, and the employee does not have to have any particular length of service to make a claim. This includes employees who have been dismissed and wish to bring a claim of unfair dismissal, which normally requires one year's qualifying service.

In order to succeed the employee or worker must show that the dismissal or detriment arose from the fact that he or she was employed part time. There is also a right to request a written statement of reasons for particular treatment. Any such request should be responded to within 21 days, and the Tribunal may draw a negative inference from a failure to respond.

The Act is more restrictive than was expected. It provides definitions of full and part time workers and says that a part-timer must not be unfavourably treated as compared to a full time worker of the same employer working under the same type of contract, doing broadly similar work. In some circumstances the comparison can be made with a full time worker or employee at a different establishment of the same employer. The part time worker may also rely on any change in treatment or conditions from those he or she previously enjoyed as a full time worker.

There is no specific provision saying that an employer is obliged to offer part time jobs but employers should seriously consider whether employees wishing to work part time can be accommodated. A rule that an employer will not allow anyone to work part time is unlawful.

Part-timers must be treated in the same way as full time workers in relation to pay (pro rata), promotion, training, holidays and any other benefits, and they must not be put at any disadvantage in such matters as selection for redundancy.

There is a defence if the employer can show that the different treatment was objectively justified, but we suspect that Tribunals will not accept this defence easily. An example of a benefit that cannot easily be granted pro rata is health insurance. This would not necessarily make it justifiable not to give it to a part-timer however. It would be necessary to show that the cost was disproportionate for the employer. The argument that this was objectively justifiable on economic grounds might then be accepted.

Our advice is to treat any request for part time work seriously and discuss all the implications carefully with the employee. Always keep an open mind. Consider keeping a database of those interested in entering a job sharing arrangement and have a flexible approach generally. Keep your procedures under review and make sure that you are not consciously or unconsciously submitting your part-timers to a detriment. Make sure they are being promoted, recruited and generally treated on a comparable basis with their full time counterparts.

You should also bear in mind that, in addition to contravening the Part Time Workers Regulations a refusal to allow a woman to move to part time work could constitute indirect sex discrimination (unless it can be justified). This has serious implications as, in discrimination cases, Employment Tribunals can make extra awards for injury to feelings.

THE HUMAN RIGHTS ACT 1998
Human Rights claims can now be brought in Britain, as a result of this Act. The Act only applies directly to public authorities (such as government departments, local authorities and the police) so that it will have its most significant impact on public sector employers and unions. It may also be possible for employees in authorities with mixed public and private functions (such as doctors in general practice) to bring claims under the Act, depending on the circumstances.

Employees of purely private employers will also benefit, however, because all courts and tribunals (being public authorities themselves) will have to take human rights considerations into account in applying legislation and deciding cases. This means that, for example, an Employment Tribunal will be able to take into account whether or not an employer's conduct infringed the Human Rights Act in deciding whether an employee was constructively dismissed.

The Articles of the Human Rights Act which are most likely to be relevant in an employment context are thought to be:

Article 4
Protection from slavery and forced or compulsory labour.

Article 8
Protection of the right to respect for private and family life, home and correspondence.

Employers will have to be careful of doing or saying anything which might betray, for example, a lack of respect for an employee's sexual orientation, personal relations or change of sexual identity.

They will also have to ensure that they do not record employees' conversations or video them without their knowledge, and in any case without some good reason.

Examples of good reasons are:

Courts and tribunals will look to see that a fair balance has been achieved between any restriction of a right (here the right to privacy) and the aim for which it was restricted (such as that of preventing crime, or whatever else it might be).

Article 9
Protection of freedom of thought, conscience and religion.

Employers will have to be vigilant about not treating employees any differently because of their faith, political convictions, vegetarianism, etc.

Article 10
Protection of the right to freedom of expression.

Dress codes and rules banning long hair, earrings, tattoos etc. could theoretically infringe this right unless there was some proportional justification.

EMPLOYEE SHARE SCHEMES
The Government has introduced two new share schemes enabling employees to benefit from generous tax reliefs.

Enterprise Management Incentives(EMI)
This scheme is designed to enable small companies to grant tax efficient share options in order to attract and retain high calibre employees. A qualifying company is able to grant share options to employees over shares valued at up to £3,000,000 at the time of grant (the limit for each employee being £100,000).

EMI options are very tax efficient because no income tax or national insurance contributions are payable upon the grant or exercise of the option, provided that the exercise price of the option is equal to the market value of the shares at the time the option is granted. Capital gains tax will be payable by the employee on the sale of the shares but he or she will benefit from the generous 'business assets taper relief', which runs from the time that the option is granted. Business assets taper relief reduces the rate of tax which is payable on the gain made by the employee from the sale of the shares, on a sliding scale over a period of 4 years (this is expected to be reduced to 2 years in the next Budget). If the shares are sold more than 4 years from the date of grant of the option then the effective rate of tax payable will be only 10%. The employee will also benefit from a capital gains tax annual exemption, which will exempt the first portion of any gain made (£7,500 in 2001/02) from capital gains tax.

EMI options are also more flexible than previous Inland Revenue approved schemes in that there is no minimum period after the grant of the option before it can be exercised (although it must be exercisable no later than 10 years after the date of grant). Further, exercise of the option can be conditional upon certain performance conditions having been met by the employee and shares can be used which have restrictions attaching to them or which are liable to forfeiture in certain circumstances.

Share Incentive Plans(SIP)
The Share Incentive Plan (formerly known as the All Employee Share Ownership Plan) is aimed at all companies. It must be available to all employees, who must all be invited to participate on the same terms. This does not necessarily mean that all employees will be entitled to receive the same number of shares as awards may be based on level of pay, length of service, hours worked and fair and objective performance measures.

An employer may give employees shares up to the value of £3,000 in each tax year within the scheme. Employees may also be given the opportunity to buy "partnership" shares out of pre-tax and pre-national insurance salary, up to a limit of £125 per month (or 10% of their overall salary, whichever is less). The employer may give the employee up to two further shares ("matching shares") for each partnership share purchased by the employee. Employees may also reinvest the dividends received from their shares to buy further shares up to a maximum of £1,500 in any tax year.

The scheme operates through a trust established by the employer in which the shares are held. The costs of setting up and running the scheme including the cost of the shares (to the extent that this exceeds contributions received from employees) are deductible from the company's profits for corporation tax purposes.

Income tax and national insurance contributions are not payable when shares are awarded or purchased (in the case of partnership shares) to employees under the scheme. If the shares remain in the plan for a minimum of 5 years then no income tax or national insurance contributions will be payable when they are taken out. Income tax and possibly national insurance will be payable if the shares are taken out of the plan before this time. "Free" and "Matching" shares cannot be removed from the plan until 3 years have expired from the date of award of those shares (unless the employee has left employment). Capital gains tax will be payable on a sale of the shares on any increase in value following their removal from the plan.

PAY IN LIEU OF NOTICE
Pay in lieu of notice clauses in employment contracts assist the employer, in that they make it possible to dismiss an employee without notice, and without losing the benefit of any restrictive covenants in the employment contract. However, employers need to be aware that this means that any payment in lieu of notice cannot be made tax free, as would usually be possible if there was no pay in lieu of notice clause, the employer refused to allow the employee the option of working out his or her notice, and the employee did not agree to variation of the notice.

Until relatively recently, there was a considerable disadvantage to employers in having pay in lieu clauses where the employee was entitled to a long notice period, as employees were entitled to be paid in lieu of all their notice, even if they mitigated their loss immediately by finding another position on comparable or better terms. This effectively meant that employees could benefit from double recovery in this situation. The position has now changed, at least for the moment, as a result of the leading decision on this question being overturned by the Court of Appeal, and an employer in this situation is now entitled to take into account any mitigation.

If there is no pay in lieu clause in the contract an employee will want to take advantage of the "tax free band" up to £30,000.00 on termination of his/her contract and have their notice pay paid as compensation. A recent case cast some doubt on the wisdom of employers doing this and suggested that the payment would be taxable as the Inland Revenue would see termination agreements as agreed variations of the contract. However, the Inland Revenue have now indicated that they are likely to accept the payment as a compensatory one where it has been paid "as part of the process of termination".

STAKEHOLDER PENSIONS
Most employers should already be aware that stakeholder pensions have now been launched. These are low cost pensions into which it is possible to pay contributions as small as £20 per month. Any employer with 5 or more employees has to offer access to a stakeholder pension from October 2001. This means processing deductions from pay, providing information etc. In choosing a scheme, employers are required to consult with employees, by suggesting a choice of schemes and inviting discussion. They do not have to contribute to the scheme.


S T O P P R E S S

PARENTAL LEAVE
New rules on parental leave came into force on 10 January 2002. The effect of this will be that the right will be extended to parents of all children who were under 5 as at 15 December 1999. This also applies to adopted children. The right is to take 13 weeks' unpaid leave by the time the child is 5. Parents have the right in respect of each child. Parental leave for disabled children is 18 weeks.

MATERNITY RIGHTS
The European Court of Justice has ruled that the dismissal of an employee who was recruited on a six month contract and was unable to work for a substantial part of that period on account of her pregnancy constituted discrimination on grounds of sex - even though the employee had known but had not informed the employer of her pregnancy at the time she was recruited.

WORKING TIME
In response to a European Court decision, the Government has had to amend the Working Time Regulations to make it clear that the right to paid holiday commences at the beginning of an Employment Contract. The original 13 week qualification period is not valid. There are quite complicated rules for determining how holiday pay accrues in Contracts commencing after 25 October 2001. Basically, these provide for a monthly apportionment of annual holiday rounded up to the nearest half day. Note that the whole month's holiday accrues on the first day of the month. Employers are advised to make their own rules and incorporate them in the Contract of Employment although they cannot reduce the statutory entitlement.

PUBLIC INTEREST DISCLOSURE
In an important case in June last year the Employment Appeal Tribunal decided that a complaint by an employee to his employer that his Contract of Employment had been breached was a qualifying disclosure under the Public Interest Disclosure Act 1998 and therefore the employee was protected against unfair dismissal. This is a key decision and extends the right to claim unfair dismissal to employees (in these circumstances) who have not got one year's service. Further, it increases the range of protection open to an employee who can claim that he or she has been retaliated against or victimised following a complaint about treatment at work. There is no limit on the compensation the employee can be awarded if successful.

LIMITS ON TRIBUNAL AWARDS
The statutory limits rose on 1 February 2002. The maximum compensatory award for unfair dismissal is now £52,600.00. The maximum on "a week's pay" for the purposes of statutory awards is now £250.00. This sum applies for redundancy calculations.

THE EMPLOYMENT BILL
This is working its way through Parliament and looks set to introduce major changes. These will include penalties if proper disciplinary and grievance procedures are not provided and carried out. Tribunal awards may be reduced if internal disciplinary procedures have not been requested by the employee or increased if the employer has refused to follow them. Provisions will be made for penalties if terms and conditions of employment are not issued and a right provided for employees to ask for flexible working in order to care for a child. Maternity rights will be modified from April 2003 and specific paid paternity and adoptive leave introduced, both from 2003.

FIXED TERM CONTRACTS
The Government has just published a second draft of Regulations preventing less favourable treatment of employees on fixed term contracts. It is due to be implemented in July 2002. It is not intended to apply to apprenticeships, people in government supported training or agency workers.


RUSSELL-COOKE EMPLOYMENT DEPARTMENT

Please note this is an advisory document and is not intended to be relied on.No liability is accepted for its content.

Russell-Cooke, 2 Putney Hill, Putney, London, SW15 6AB Tel: 020 8789 9111; Fax: 020 8394 6540

sakrougea@russell-cooke.co.uk
droopp@russell-cooke.co.uk
bearmana@russell-cooke.co.uk