On 10 May, the government announced a “dynamic package of deregulatory reforms” aimed at growing the economy and cutting costs. The government’s policy paper, Smarter Regulation to Grow the Economy, sets out the details of that regulatory change agenda and focuses on proposed changes to UK employment law, including in relation to holiday pay, TUPE and non-compete clauses.  

A few days later, the government published a consultation paper providing further details about the proposed changes to holiday and TUPE announced in its policy paper. It also responded to a 2020 consultation on measures to reform post-termination non-compete clauses in employment contracts.

We have set out the details below.

1. Working Time Regulations and changes to holiday pay 

• Merger of “normal” annual leave and “additional” annual leave to create one pot of statutory annual leave entitlement 
  Currently, workers have two distinct holiday entitlements – 4 weeks’ leave derived from EU law and a further 1.6 weeks “UK” leave. The government proposes reducing the administrative burden and complexity of calculating holiday pay by merging these two entitlements, whilst maintaining the same overall holiday entitlement.
  
  Whilst a simplification of the holiday entitlement is to be welcomed, currently there are also two separate sets of rules for calculating holiday pay, depending on whether you are dealing with the EU-derived 4 weeks’ leave or the UK-derived 1.6 week’s leave. We assume (although the government has not specified this in its announcement) that the government also intends to simplify the method for calculation of holiday pay.
  
  The government’s consultation paper invites respondents to comment on the appropriate method of calculation moving forwards. If the “UK leave” method is used to calculate all holiday pay,  this would mean that pay elements such as overtime and commission would no longer be included in holiday pay for most workers, so this would be less generous for many workers.
  
  The consultation does not address what will happen to accrual and carry over of annual leave whilst on sick leave – currently some employers distinguish between the 4 weeks’ EU leave and the 1.6 weeks’ UK leave but we assume this would no longer be permitted once the entitlements were amalgamated.
  
  
• Permitting “rolled-up” holiday pay
  Rolled up holiday pay (the practice of not paying holiday pay while the worker is on holiday but making an additional payment during the weeks that the worker works, to cover pay due in respect of holiday periods) has been unlawful under EU law for a number of years. However, the government is proposing to permit rolled up holiday pay in order to allow workers to receive their holiday pay with every payslip.
  
  This will be welcome news for anyone with casual or bank staff, particularly following the recent case of Harpur v Brazel Trust and the recent government consultation paper in this area, which will presumably now be aligned with this proposal and any resulting legislation.  The latest consultation paper proposes that rolled up holiday pay  would be permitted for all types of workers, not just casual workers.
  
  
• Removing record keeping requirements for working hours
  The government has stated that it intends to “remove retained EU case law that imposes time-consuming and disproportionate requirements on business for working hour records to be kept for almost all members of the workforce. This will cut red tape for businesses and help them save £1 billion per year while protecting the rights of workers”. The government is referring to a 2019 case, in which the ECJ stated that the Working Time Directive (WTD) required member states and employers to introduce “an objective, reliable and accessible system enabling the duration of time worked each day by each worker to be measured”.
  
  This case held that records must be kept in relation to the right to a minimum daily rest period of 11 consecutive hours in each 24-hour period; the right to a minimum uninterrupted period of rest of 24 hours in each seven-day period; and the limit on the maximum weekly working time. The ECJ determined that the UK government had not implemented the WTD properly by failing to  require employers to do so. There was some debate at the time of the case as to whether the case was relevant in the UK, given the exit from the EU.
  
  The government is proposing to clarify that businesses do not have to keep a record of daily working hours of their workers. In practice, few employers currently keep such records, so the removal of this obligation may have little impact.

2. Simplifying TUPE 

At present, an employer can only consult directly with employees about a TUPE transfer if it employs fewer than 10 employees (ie it is a microbusiness). Otherwise, there is a requirement to consult with a recognised union or elect employee representatives.

The government is proposing to allow small businesses (those with fewer than 50 employees) and businesses of any size where fewer than 10 employees are transferring to consult directly with employees as long as there are no existing employee representatives in place.

Businesses with 50 employees or more will still need to arrange elections for employee representatives, if not already in place (unless they are involved with a small transfer of fewer than 10 employees).

According to the government, this change will improve engagement with workers, simplify the transfer process and reduce the administrative burden on employers.

In practice, where transfers impact a small handful of employees, many employers have typically consulted directly with employees in any event, often by seeking the agreement of the impacted staff to do so. So this measure may have little practical effect.

However, note that the consultation paper asks respondents to comment on their experience of TUPE and put forward any suggestions for improvements, which potentially leaves the door open for further tweaks to TUPE in the future.

Potential timeframe for the proposed changes?

The consultation paper is open until 7 July 2023. 

While no specific timescales have been confirmed, we anticipate that the likely timescale is at least 9 – 12 months for completion of the consultation process and for the government to pass the secondary legislation required to amend the Working Time Regulations and TUPE accordingly.

3. Reforming non-compete clauses

A statutory limit will be introduced to restrict the length of non-compete clauses to three months’ duration. There will be no impact on non-solicitation, non-dealing or confidentiality clauses, and employers will still be able to use paid notice periods and garden leave.

The 3-month statutory limit will apply to non-competes in contracts of employment and limb(b) worker contracts only – it will not extend to wider workplace contracts, such as partnership, LLP and shareholder agreements.

Where the length of a non-compete is 3 months or less, the common law principles will continue to apply with the starting point therefore being that the restriction is unenforceable unless it can be shown to be reasonable.  In addition, there will be no change to the existing position that employers can unilaterally waive a non-compete clause. Guidance will be published for employers and employees on non-compete clauses to help enhance transparency and the government confirms it will continue to consider measures to raise awareness about non-competes.

The government accepts that this is “bold action” and believes it will promote competition and productivity in the workplace, boost innovation and the wider UK economy, and provide flexibility for up to 5 million UK workers to join a competitor or start up a rival business.

However, it remains unclear:

• whether this statutory limit will have retrospective effect for existing non-compete clauses – the consultation response provides no information on this;
  
  
• how it will impact on those industries where 6, and even 12, month non-compete clauses are standard practice (although we anticipate a greater use of paid garden leave); and
  
  
• whether the 3-month statutory limit could still be reduced by offsetting any garden leave period.

Potential timeframe?

Legislation to implement this change will be introduced “when Parliamentary time allows”. It will require primary legislation so may take longer than some of the other measures referred to in this article.

Safeguarding worker protections and removing the sunset clause 

Lastly, but not least, the government also confirmed:

• (in its consultation paper) that various worker protections, including maternity, paternity, adoption and parental rights, the right to annual leave, agency worker protections, and protections for part-time and fixed-term workers under EU derived legislation will be preserved without change; and
  
  
• it will abandon its proposed sunset clause in the Retained EU Law (Revocation and Reform) Bill, under which retained EU laws would have automatically expired at the end of 2023. Instead, the Bill will contain a list of the retained EU laws that the Government intends to revoke at the end of 2023. Any EU laws not on the list will remain binding, pending proper consultation and assessment. This will therefore provide some certainty for businesses.

To stay up to date on any developments, please subscribe to our blog here. In the meantime, please reach out to your usual contact in our team if you would like to discuss any of these proposals further.