In addition to the much-discussed abolition of the cap on bankers’ bonuses and the proposed changes to trade union laws, last week heralded two other potentially significant changes to employment law.
The government has published the Retained EU Law (Revocation and Reform) Bill. As currently drafted, this bill aims to reform many of the employment laws which came from the EU, presumably as part of a desire to get rid of red tape. The bill will come into effect at the end of 2023, followed by a transition period until June 2026, after which date no EU-derived law can be retained through regulation (rather than primary legislation).
Unless the government takes active steps to assimilate them, which would require significant time spent drafting and passing new legislation, such laws will therefore be revoked, which means that the Working Time Regulations, Agency Workers Regulations, Fixed Term Employees Regulations, Part Time Worker Regulations and TUPE could all be up for grabs. This may lead to unintended consequences if, for example, some laws came through domestic, not EU, legislation, but were designed to amend EU law. In such a situation the UK law could remain in place but not the EU measure it was to amend. This might apply, for example, to service provision changes under TUPE, the service provision changes aspect of TUPE being a domestic addition to the regulations introduced by the EU Acquired Rights Directive.
Another quirk is that the general principles of EU law will become secondary to English law as the presumption that Parliament wants to comply with EU law will cease to apply if the bill is enacted.
If the bill is enacted without significant change, this will lead to a massive shake up of UK employment law, and is likely to result in increased litigation as employers and employees work through what English law may mean, with resultant uncertainty. After all, the last 40 plus years have been spent getting used to EU law and its ability to impact English legislation. The full extent of the bill’s impact is yet to be seen; however, what is already clear is the new government’s intention to reshape UK employment law for the post-Brexit era.
Another change introduced last week was the proposed reforms to the off-payroll working regime. Off-payroll working, or IR35, was introduced in 1999, and was intended to combat a particular form of tax avoidance by contractors who provided their services through an intermediary - usually a personal services company (PSC) - to an end client.
Historically, the client would not need to deduct income tax or National Insurance contributions (NICs): instead, the client would pay the PSC rather than the contractor, and the PSC could pay the contractor a small salary. This salary could fall below the minimum threshold required for NIC or income tax deductions, and be topped up through the payment of dividends. Originally, contractors were responsible for determining their own employment status and whether they were ‘disguised employees’ of the client.
HMRC believed that this led to repeated improper assessments of employment status, and considered it possible that a number of self-employed contractors wrongly decided they were not disguised employees. HMRC estimated this lost £700 million in tax revenue per year. In 2017 and 2021 the government put the onus onto public sector entities, and then medium and large private sector companies, to determine whether any contractors they engaged were ‘disguised employees’ and, if so, required them to deduct amounts for NI and tax. Any failure to make an accurate status determination could result in the end client being responsible for any unpaid NICs and taxes, plus penalties imposed by HMRC and interest.
This change in who took the risk led to a number of self-employed contractors being treated as employed, and also to a widespread unwillingness on the part of ‘clients’ to engage contractors.
The proposal is that the newer IR35 rules (those which put the onus on the ‘client’ to determine status) will be repealed. Part of the government’s growth plan, this is stated to be the first step towards simplification of the tax system. In the meantime, the government believes that the repeal will reduce the risk that genuinely self-employed contractors will be caught by the IR35 legislation.