Business Law Articles
Marriott Harrison LLP
London, United Kingdom
It was George Bernard Shaw who referred to the UK and US as, “two countries divided by a common language”, he may or may not have been right. What certainly is the case, however, is that there are fundamental differences between UK and US employment law. Some differences are set out below together with an explanation of key practical implications for US clients with UK employees.
- No “at will” employment
The concept of the employment relationship being terminable “at will”; i.e. instantly without notice at the employer’s entire discretion, is not recognised in the UK.
On the contrary, every UK employee is entitled to prior notice of termination. The period of notice being that set out within the employee’s contract (see 2 below), which must be no less than the employee’s statutory entitlement to notice. In brief, statutory notice is 1 week for each year’s employment, up to a maximum of 12 weeks.
The other key point to factor in when considering potential costs if terminating a UK employee’s contract and mitigating any risks as a result, is that any UK employee with 2 years’ service or more has an additional statutory right not to be unfairly dismissed (see 3 below). In brief, as flagged further below, the key implication of this are that, in order for a dismissal to fair and, therefore, to avoid potential liability, an employer needs to be dismissing for a potentially fair reason, having gone through a prior fair process.
- Importance of the employment contract
An employer is required by UK statute to provide an employee with a written statement of employment terms within 2 months of the start of the employment relationship. As a result, written contracts are standard in the UK for all employees and are the first resource for a UK employment lawyer when considering any employment law issue.
The practical take away point from this, is that a US client with employees in the UK should always ensure that written contracts of employment are in place, to ensure compliance, and, well drafted, as in the UK employment contracts can be used to provide vital protection to an employer’s business interests (see “Now for some good news” below).
- Unfair dismissal protection
As flagged above, every UK employee with 2 or more years’ service has a statutory right not to be unfairly dismissed. Any dismissal will be unfair unless for a specified potentially fair reason (examples include conduct, capability and redundancy [(see 5 below)]), unless, necessary fair process has been gone through prior to dismissal and unless the dismissal is fair in all the circumstances. Where dismissal is unfair, an employee may be entitled to compensation of up to c. £100,000.
The practical impact of this is that, where an employer is looking to dismiss a UK employee, it is vital to firstly check whether the employee has the necessary service in order to have unfair dismissal protection, and, if they do, that proper advice is obtained as to the necessary process in order to mitigate unfair dismissal risk and resultant costs.
- TUPE must be factored in for M & A transactions
TUPE is key UK employment legislation which needs to be factored in on M & A transactions involving a purchase of a UK business. Generally, TUPE only applies on an acquisition through a purchase of assets, rather than shares, because, on a share acquisition, there is no change in the identity of the employing entity. TUPE also however, often needs to be considered on a share acquisition where, prior to or following purchase, there is a need to move employees between different group entities.
Crucially, the effect of TUPE, is that all employees assigned to the business automatically transfer to the employment of the buyer (there is no option for a buyer to “cherry pick” the staff it wants), on their existing contractual terms and conditions, together with any liabilities relating to their employment. Employees also obtain additional protection against dismissal and, crucially, from a timing perspective, there are obligations to inform and consult with employees (and, where employee representatives are not already in place, to carry out elections of employee representatives), in advance of the transfer, the date of purchase. In the event of breach of the information and consultation obligations, potential liabilities are up to 13 weeks’ pay per employee.
The key practical point is that it is vital to identify at an early stage whether TUPE will apply to an M & A transaction involving UK assets. If it does, the need for information and consultation will need to be factored into the transaction timetable, and allocation of employment risk through indemnities will be a key component of the Asset Purchase Agreement.
In the UK “redundancy” refers to a scenario where an employer no longer needs a particular employee to carry out a discrete role, needs fewer employees to carry out a particular role or requires employees to carry out a role in a different location.
Redundancy is a potentially fair reason for dismissal, meaning that a redundancy dismissal will not be unfair if a proper prior process is followed. Such a process must entail, however, early warning to employees of a potential redundancy scenario, where an employer requires fewer staff carrying out a particular role, fair selection for redundancy, and a process of individual consultation with employees, in each case, in advance of any decision to make roles redundant being seen to be made.
There are additional obligations to engage in collective consultation where an employer is envisaging more than 20 redundancy dismissals. There is provision for a significant financial penalty of up 90 days’ pay per employee in the event of a breach. Additionally, there is an obligation to notify the UK secretary of state, breach amounting to a criminal offence.
The law surrounding redundancy; when there will be a redundancy and the exact process that must be followed, is not straightforward. It is, therefore, vital that an employer obtains proper employment law advice in order to ensure that redundancy dismissals are fair and, therefore, that the costs of any redundancy exercise are minimised.]
Now for some good news
As highlighted above, there are significant differences between UK and US employment law and US clients will, as a result, need specialist advice in order to mitigate employment law risk in the UK.
In addition to UK employment laws protecting employee rights, which might be regarded as unhelpful/restrictive by employers, UK employment law also contains helpful provisions which can be used to allow employers to achieve their commercial objectives/protect their business.
For example, although, given unfair dismissal protection (as flagged above), it is not straightforward in the UK to dismiss a poorly performing employee on grounds of capability, or at least to do so in the short term, there is express provision for “pre-termination negotiations”, effectively a mechanism allowing a “cards on the table” chat with a view to agreeing an early exit with an employee in return for an appropriate financial package. This can often be helpful for clients in circumstances where the decision has been made that an employee has to go and there is little appetite for going through a lengthy process in order to achieve this.
There is also a lot of protection which a client can obtain through appropriately drafted provisions within an employee’s employment contract. Particularly, through express confidentiality clauses, restrictive covenants and provision for garden leave.
Restrictive covenants can allow an employer, in appropriate circumstances, to preclude a departing employee from soliciting clients, poaching staff and engaging in a competitive business, in each case for a reasonable period.
“Garden leave” refers to the scenario where an employer, rather than allowing a senior employee who has resigned to join a competitor, to work their notice period, thereby maintaining contact with clients and confidential information over this period, instead requires the employee to remain at home, cutting this contact whilst maintaining the employee relationship and, as a result, prohibiting the employee from joining the competitor and/or engaging in any competitive activity.
If you have clients with UK operations we would be happy to work with you in advising your clients on any of the above or any other UK employment issues.