Government seeks input on proposed changes to Working Time Regulations, TUPE and non-competition clauses (Part 1)

Proposals include changes to holiday leave and pay administration and collective consultation requirements.

On 10 May the Department for Business and Trade (DBT) announced an ‘initial package of regulatory reform’ to reduce what it labelled unnecessary regulation for businesses with the aim of cutting costs and allowing those businesses to compete.

The announcement highlighted DBT’s policy paper Smarter Regulation to Grow the Economy which set out three areas for reform in the Working Time Regulations 1998 (WTR), the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) and in respect of an intention to introduce legislation to limit non-compete clauses to no more than three months’ post-termination to allow employees more flexibility to join competitors or start up a rival business having left their position.

Consultation launched

On 12 May, DBT launched a consultation on the proposals to amend the WTR and TUPE, alongside a more expansive paper setting out the proposed changes and seeking feedback from businesses and workers. Separately, DBT published its response paper to the 2020 consultation on measures to reform post-termination non-compete clauses.

In this article we focus on the proposed changes to the WTR.  Part 2 considers the proposed changes to TUPE and non-compete clauses.

Recording working hours

The WTR includes a number of protections limiting hours of work and regulating rest periods. A 2019 European Court of Justice (ECJ) decision ruled that employers must have an objective, reliable and accessible system enabling the duration of time worked each day by each worker to be measured. In addition, records must be kept in relation to various rights considering daily uninterrupted rest periods and the limit on the maximum weekly working time.

The consultation paper states that the UK government believes this requirement to be disproportionate and opines that ‘we believe in many cases such an obligation on employers would be damaging to relationships between employers and their workers’.

The paper does not set out any clear reasoning behind the government’s stated views nor does it seek to explain the reasoning of the ECJ in the case referred to, which determined that these records were required in order to give effect to the Working Time Directive (WTD). Neither does the consultation paper draw attention to the fact that the WTR were brought in to give effect to the WTD in the UK and the WTR only require employers to keep ‘adequate’ records to show that workers are not exceeding the 48-hour maximum working week. In short, the effect of the ECJ’s decision highlighted that the WTR do not fully enact the rights afforded to workers under the WTD.

Nonetheless, the consultation paper presents these changes as beneficial to employers, purporting to help them save £1bn per year, and having no impact on ‘the rights that really matter to workers’, even though on the face of it the benefits appear one-sided. For example, the paper does not address how workers’ ability to invoke rights in respect of rest and pay might be affected by a lack of working time records.  

Holiday entitlement reform

The DBT is also proposing to amend aspects of holiday leave and holiday pay provision in the UK.

Paid holiday entitlement derived from the WTD was enacted as part of a European effort to protect and preserve workers’ health and safety and general welfare. Holiday entitlement in the UK is set out at regulations 13 and 13A of the WTR, which provide (for a full-time employee working five days a week) for four weeks of ‘normal’ holiday entitlement (derived directly from the minimum holiday entitlement under the WTD) and 1.6 weeks of ‘additional leave’ (which accounts for the usual bank holidays in the UK) making a total of 5.6 weeks’/ 28 days’ leave a year.

As the paper highlights there are some discrepancies in the rights attaching to holidays under regulation 13 and 13A. For example, holiday under regulation 13 (i.e. that directly derived from the WTD) is paid at a worker’s ‘normal remuneration’ which case law has determined to include commission, bonuses and overtime, whereas holiday under regulation 13A is paid at the basic rate of pay only, unless there is a contractual agreement between the worker and employer that states otherwise.

Likewise, regulation 13 holiday can only carry over to the next holiday year if the worker has not been able to use it due to being on long-term sick or maternity, paternity or parental leave. Regulation 13A holiday only carries over if there is a written agreement between the employer and employee to that effect.

The consultation proposes to combine the entitlements under regulations 13 and 13A and retain the 5.6 weeks’ entitlement. In this respect there would be no loss of workers’ rights on the face of it, but questions remain around what that holiday will be worth to the worker. For example, on carry-over the paper proposes to keep the same rules as apply now for the four week and 1.6 week elements (which would not appear to simplify things for either workers or employers), but the DBT have said they will use the consultation to decide on what basis the rate of pay for that combined holiday is paid.

Holiday pay reform

The consultation suggests that the combined 5.6 weeks’ entitlement will either be based on a worker’s normal remuneration, including overtime etc (i.e. how regulation 13 holiday pay is currently calculated), be paid at the basic pay rate only (in line with regulation 13A), or possibly it could be based on some other metric.

The other main area of reform on holiday pay is the DBT’s proposal to permit what has become known as ‘rolled-up holiday pay’. As explained in the consultation paper, when the WTR were drafted in the later 1990s, the flexible working hours and job market that exists in Britain in 2023 (epitomised by the ‘gig economy’) was not envisioned.

Because of this, it is comparatively easy to calculate holiday pay for salaried employees or those on fixed hours but it can be much more difficult to calculate holiday for an ‘atypical’ worker whose hours vary. The 52-week reference period for calculating the average week’s pay for workers with no normal hours requires robust record keeping and can be complex and confusing to administer. Where an employee’s working hours for the year cannot be predicted, it is impossible to know how much leave they will accrue and how much they should be paid for it until the end of the year.

In order to administer holiday pay in real time, some employers turned to the practice of paying ‘rolled-up holiday pay’. This meant employers paid workers an additional 12.07% on top of the usual rate of pay to account for the value of (as yet untaken) holiday.

In theory this was mutually beneficial – the employer avoided potentially complex and costly holiday leave and pay administration for atypical workers and the employee was effectively paid up front for their holiday whether they took it or not. However, the practice was effectively banned by judgments of the ECJ in 2006 on the basis that it disincentivised workers from taking holiday and was effectively a form of pay in lieu of untaken holiday, in contravention of the WTD.

The consultation paper only highlights the benefit of the simplicity of rolled-up holiday and refers to the 2017 Taylor Review into modern working practices, which, according to the consultation paper, recommended that rolled-up holiday pay has ‘significant benefits for some workers, particularly in casual working arrangements or in the gig economy.’

The consultation paper does not cite this recommendation, but it appears to refer to page 47 of the Taylor Review where it is clearly set out that ‘[…] individuals should have the choice to be paid […] “rolled-up” holiday pay’ (emphasis added) and goes on to stress that ‘[a]dditional safeguards would have to be built in to ensure individuals did not simply work 52 weeks a year as a result […]’.

It should also be noted that the section in which rolled-up holiday pay appears in the Taylor Review makes multiple mentions of the issues around atypical workers being able to claim holiday pay (as they are often labelled self-employed contractors by the employer or hirer) and notes that many such workers often struggle to find time to take holiday.

In a subtle but important change to the focus on employee choice in the Taylor Review, the consultation paper says the plan is to introduce rolled-up holiday pay as an option ‘that employers may choose’ for paying holiday for all workers (emphasis added). The consultation paper is silent on consideration around the impact of allowing employers to pay rolled-up holiday and makes no mention of any safeguards.   

Comment

The consultation paper presents these proposed changes as part of DBT’s process of identifying opportunities to reduce bureaucracy and regulation and to ensure these areas are ‘fit for purpose for both businesses and workers alike’ as part of the Government’s wider growth agenda.  

The proposals are likely to be attractive to some employers on the basis that they seek to simplify areas of considerable business administrational burden and reduce the time, and therefore cost, required to comply with the relevant regulations. The paper is keen to stress that no workers’ rights are being lost in the proposals, but critics will likely point to the weakening effect of the proposals on current employment protections and particularly on the structures that help workers to understand and enforce their rights.

The consultation closes on 7 July 2023 and it remains to be seen to what extent the government will seek to address the apparent imbalance of the effect of the proposals made.