Employees and Job Contracts in the UK

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Employees and Job Contracts in the UK

This page contains guidance on the following:

• Employee contracts
• Employee benefits
• Immigration

Employee Contracts

UK law grants employees a range of protections that create obligations and potential risks for employers. Although these are generally less stringent than in other European countries, you will nonetheless need to be aware of them.

The obligations an employer owes its UK employees include:

• a general duty to provide a safe place of work, safe access and safe work systems, supported by related obligations, among other things, to take out employer’s liability insurance, consult with employees or their representatives over health and safety issues and provide staff with certain health and safety information
• a requirement to provide a written statement of terms and conditions of employment to employees within two months of commencement of employment. (A contract of employment can satisfy this obligation)
• an obligation not to discriminate against employees, including job applicants, on a range of grounds, including race, colour, nationality, ethnic origin, age, gender (this includes sexual harassment), pregnancy and maternity, marital or civil partnership status, religion or religious belief, sexual orientation, gender reassignment, disability, or part-time or fixed-term status
• an obligation to pay employees at least the national minimum wage, which is a fixed hourly rate and is increased annually
• various benefits in connection with giving birth, adoption and other family situations. (These include maternity absence for up to 12 months, part of which is paid, and a right to time off to deal with domestic emergencies)
• a requirement not to allow a worker to work beyond 48 hours per week (on average over, normally, a 17-week period) without express consent. (There are additional limits on working time, including daily and weekly time off and specific limits related to younger workers and night workers)
• a duty to give each employee a minimum amount of 5.6 weeks' paid holiday each year
• a requirement to observe limitations on the freedom of an employer to process personal data obtained about its employees and job applicants, including transferring it to third parties. (These limitations are more strict in relation to personal data which is ‘sensitive’ and where the data may be transferred outside the EU to countries with lower levels of privacy protection)
• various rights for employees to protect them in the event of termination of employment. These include a minimum notice entitlement that can be as long as 12 weeks and a right to a statutory payment on being made redundant with more than two years’ service. Where service exceeds one year, a dismissed employee has a right to claim compensation for unfair dismissal and that claim will be successful unless the employer can show a permitted reason for termination and that a fair and legal process has been followed

Union or other collective rights are less significant in the UK than in many other European countries. The law in the UK requires an employer to recognise a trade union or establish a national works council or committee in certain circumstances, but only where such an arrangement is specifically requested by a union or workers. As a result, many UK employers have no such arrangements in place.

It is beneficial for an employer to establish a comprehensive contract of employment to be issued to each employee. This can include all of the terms and conditions of employment, covering the rights described above, and in addition protect the employer’s business interests by placing obligations on the employee. Examples are specific requirements to keep information about the business and its customers confidential, provisions securing ownership of inventions and developments made in the course of employment, and covenants restricting certain competitive activities after employment ends, such as poaching customers or key staff.

Employers frequently supplement this contract with a formal staff handbook setting out company policies, including ones that support compliance with the issues referred to above, such as discrimination/harassment and data protection.

An employer is under an obligation to make a pension arrangement available to its staff if it employs five or more people. At present, there is no obligation to contribute to this arrangement, although there are plans to change that from 2012. Whilst this may seem a long way off, employers are advised to start thinking about their forthcoming obligations as soon as possible in order to plan effectively for the potentially significant financial liability, as well as any implementation costs that these changes will impose. Otherwise, additional benefits such as bonus, health insurance and car allowance are a matter of choice for the employer.

The contract of employment is an important tool in setting out the terms of any benefits provided, most notably bonuses. Precise language in the contract can clarify the employee’s rights and may save the employer unexpected costs on termination of employment.

Employee Benefits

The contract of employment will include terms relating to:

• salary
• potential bonuses
• benefits provided by the employer to employees

Providing benefits (rather than paying a higher salary) can have tax advantages for both the employer and the employee. The employer is responsible for reporting any taxable benefits provided to an employee in an annual return (form P11D).

As previously mentioned, every employer of five or more people must offer a pension arrangement. However, the employer is not obliged to contribute to that arrangement. This will change from 2012 when UK employers must automatically enrol all workers into a pension scheme and ensure minimum contributions are paid equal to 8% of total earnings.

The provision of pension benefits is in the process of further significant changes with dramatic alterations in the tax treatment of pension contributions for ‘high-earners’. The challenge for an employer is how to maintain pension provision as an attractive part of the reward package or at least develop tax-efficent savings arrangements as an alternative.

In the UK it is common to find some sort of equity incentive arrangement as part of a senior executive’s reward package (and in some organisations employee share ownership is spread across the workforce in general) though this is usually made available outside the contract of employment.

The use of equity is not confined to listed companies nor is it limited to the more widely understood share option structure. Legislation potentially enables equity to be delivered to employees at a lower cost (for employee and employer) than a cash based alternative either through careful planning or by recourse to certain Government ‘approved’ structures. When structured as an incentive linked to stretching corporate performance an award of shares can offer significant savings for the employee in particular.

Employee equity awards can of course be delivered by means of a UK ‘sub plan’ to an existing parent company arrangement, the sub plan following the principles of the parent company structure but allowing for particular UK requirements or varied slightly to take advantage of UK relief.

Immigration

In 2008 the UK government introduced a new immigration system known as the ‘Points Based System’ (‘PBS’). New applications will be processed under the PBS and for workers already in the UK with work permits issued under the old regime, there are transitional arrangements in place for renewal of these. The PBS is a five-tier system that has replaced more than 80 existing immigration categories. Tiers 1 and 2 are the most relevant tiers for inward investors. These are discussed in more detail below.

Under the PBS, companies must:

• maintain up date, accurate and comprehensive records for each migrant worker including their UK immigration status documenting their entitlement to work and up to date contact details
• ensure that ongoing checks are made on individuals with temporary permission to remain in the UK on each anniversary of the individual's start date
• notify the UK Border Agency (UKBA) of any changes to circumstances
• maintain robust HR policies to ensure compliance under the Points Based System as well as reflecting data protection and privacy principles
• co-operate with the UKBA to allow them to manage the Sponsorship system properly and by allowing the UKBA's staff access to any of the sponsor's premises on demand, to adhere to any action plan and seek to minimise the risk of immigration abuse by complying with all good practice guidance notes that the UKBA may introduce

Companies that fail to discharge the duties described above may face several penalties including removal from the Sponsorship Register. This prevents the issue of future certificates of sponsorship under Tier 2.

The first employee may come to the UK on either a Sole Representative Visa or Tier 1 (Investor) or Tier 1 (Entrepreneur) Visa. Subsequent employees may come to the UK on Tier 2 Visas.

Other considerations: Business visitors

It is possible for an individual to enter the UK on a business visit for up to six months in a twelve month period if they will be undertaking activities that fall within the business visitor guidance rules. Examples of permitted activities include:

• attending meetings, including interviews that have been arranged before coming to the United Kingdom, or conferences
• arranging deals or negotiating or signing trade agreements or contracts
• undertaking fact finding missions
• conducting site visits

Business visitors should ensure they check whether it is necessary for them to apply for a visa for their business visit. It is also crucial that tax, social security, immigration and employment law issues are considered for short-term business visitors.

Business visitors face serious consequences if they make false representations about their proposed activities in the UK. In such circumstances, they could face the prospect of being unable to re-enter the UK for up to 10 years. Furthermore, if employees travel to the UK and undertake activities over and above those permitted under the business visitor rules, this could be classed as illegal employment and a company may be fined up to £10,000 per illegal worker and/or criminal penalties for knowingly employing an individual without the right to work in the UK.

Tier 1 visa:

From 6th April 2011, the UK Government has implemented a number of changes to the Tier 1 route, these include:

• the closure of the Tier 1 (General) route. There are transitional provisions in place for highly skilled migrants who already hold this visa and wish to extend in the UK
• the introduction of Tier 1 visa for (Exceptionally Talented) individuals (capped at 1,000 per annum). These are for individuals who are internationally recognised as world leaders or potential world-leading talent in the fields of science and the arts and who wish to work in the UK. The individuals should be endorsed by a specified Designated Competent Body (as recognised by the UKBA) and the applicant will need to apply for this endorsement prior to making their application
• changes to the Tier 1 (Investor) rules aimed at attracting investors to the UK. The changes allow those who invest more in the UK to obtain permanent residence over a shorter period (those who have invested £1m will be eligible to apply for permanent residence in 5 years; £5m will be eligible to apply for permanent residence after 3 years; and those investing £10m will be eligible to apply for permanent residence after 2 years). In addition the residency requirements for investors now allow more absences abroad in recognition of the fact that high net worth individuals operate in a global business environment (180 days absence in a 21 month period is permitted

• changes to the Tier 1 (Entrepreneur) rules through the introduction of a prospective entrepreneurs visitor visa to enable individuals to enter the UK for discussions with the FSA/venture capitalist funds/Government departments in the UK; an option to allow entrepreneurs to make an application if they have access to a reduced amount of £50k held in a regulated financial institution if sponsored by a FSA regulated Venture Capital firm / established seed competition or UK Government funding, as well as accelerated options for permanent residence after 3 years subject to fulfilling the conditions stipulated under the rules. As with investors, entrepreneurs can now take advantage of greater flexibility when calculating residency requirements for permanent residence

Tier 2 visa:

The Tier 2 visa is for people coming to the United Kingdom with a skilled job offer to fill a gap in the workforce that cannot be filled by a settled worker. The UK company would act as a sponsor to the employee. There is a general requirement that, in order to sponsor an individual, the UK entity must undertake a resident labour market test (i.e., provide evidence of advertising the specific role plus evidence of why local resident workers cannot undertake this position). There are certain exceptions to this route (e.g., where an individual has worked for twelve months or more with a company abroad that has a direct link with the UK company through common ownership; this is known as an Intra-company Transfer (‘ICT’) or if the specific role is identified as a strategic occupation by an independent advisory committee and is listed on the UKBA Shortage Occupation List).

On 20 May 2010, the Government confirmed that it planned to introduce an annual limit on non-EU economic migration in regards to its stated objective of reducing net migration to below one-hundred thousand by the end of the current Parliament. Two separate consultations launched on 28 June 2010, focused on the level of the limit in practice (Migration Advisory Committee (MAC)) and the specifics of how the limit would operate (UKBA).

In June 2010 temporary limits under the Tier 2 (General) route were introduced to ensure that migration levels remained consistent. These came into effect on the 19th July 2010 and remained in place until the 5th April 2011.Following the two consultations, the Home Secretary announced limits on migration and these were implemented on 6th April 2011.

The first annual limit on non-EU migration has been set at 21,700, with 1000 reserved for the Tier 1 (Exceptional Talent) route. The remaining limit of 20,700 will be applied to all Tier 2 (General) out-of-country applications, excluding those earning over £150,000. This cap is set for the period 6th April 2011 to 5th April 2012.

Companies requiring Certificates of Sponsorship under the Tier 2 (General) route, will be required to undertake an additional step by applying to the UKBA Panel (which sits once a month) to request an allocation for a particular role. The UKBA Panel will consider requests from all sponsors and will allocate Certificates based on the points earned for the role. This process is likely to increase visa processing times and is an important consideration for businesses seeking to bring migrant workers within a specific timeframe. In addition, there have been changes to the Tier 2 (Intra-Company Transfer) category, which sits outside of the limits. The new rules confirm that only those individuals earning more than £40,000 and meeting the minimum salary requirements under the SOC code for the role, will be able to remain to the UK for more than 12 months, however this will be limited to a maximum of 5 years. Individuals earning between £24,000-£40,000 and meeting the minimum salary requirements according the SOC code, may enter for a maximum of 12 months. Further changes include the increase in minimum skills rates for roles and for satisfying the English language requirements.

Sole representative visa:

It is currently still possible for an employee to enter the UK on a Sole Representative Visa. This is separate from the PBS.

This route is designed for a first senior employee who is to be relocated to the UK to assist with the set-up of a wholly owned subsidiary or to register a UK Establishment for an overseas parent company. It is generally required that the company must have no UK Establishment, subsidiary or other representative in the UK before the visa application is made. Broadly speaking, the senior employee must have previous experience in a senior role and should have full authority to make operational decisions on behalf of the overseas parent company. The senior employee should also work full time as a representative of the overseas parent company and they will be tied to working for the UK sponsor. The individual must be competent in English language to a basic user standard and cannot be a majority shareholder of the overseas parent company.

In addition, the UK Establishment which the senior employee will establish must be concerned with the same type of business activity as the business of the overseas parent company.

To apply to enter the UK as a Sole Representative of an overseas firm, the senior employee will need to provide a full description of the services provided by the overseas parent company and a detailed job description. These applications can be processed within 1-3 weeks at the British Consulate in the country of which the individual is a national or where he/she resides. Permission to enter the UK as the sole representative of an overseas parent company will be for an initial period of two years with the ability to extend for a further three years.

Illegal employment

Under UK immigration legislation, it is illegal to employ an individual who does not have the appropriate permission to work in the UK. If a company employs an individual illegally they may be liable to a civil penalty of up to £10,000 per illegal worker. A company can establish a statutory excuse if they undertake the appropriate documentary checks for each worker before they commence employment. For any worker with limited permission to work in the UK, these checks should be undertaken every 12 months. If however, a company knowingly employs an individual without the right to work in the UK, they will be subject to a criminal penalty of an unlimited fine and/or imprisonment (of the Authorising Officer in the company) of up to 2 years. A company may not in this instance rely on the statutory excuse. Immigration and tax authorities, the police and customs agencies are all linked up in the UK, so government authorities can easily monitor the movements of foreign nationals in the UK. Thus, UK businesses must ensure consistency and compliance when employing foreign staff.

Information supplied by PriceWaterhouseCoopers
PWC, 1 Embankment Place, London, WC2N 6RH
Contact: Mike Curran | Tel: 0207 213 8190 | e-mail
or Dipan Shah | Tel: 0207 804 0685 | e-mail