News Items – at 13th December 2007

New Employment Bill Published

Strengthening the minimum wage and replacing the dispute resolution procedures

On 6 December, the Government introduced its latest Employment Bill into the House of Lords.  The Bill will make the following changes to employment rights.  Note, however, that any of these measures may be changed or adjusted before the Bill becomes law.  The paragraph numbers refer to the numbered clauses of the Bill

1. Statutory dispute resolution procedures:  The mandatory “three step” statutory procedures, introduced by the Employment Act 2002 (EA2002), were found by the independent Gibbons Review to have tended to lead to disputes becoming formalised and to encourage the involvement of lawyers at an earlier stage than had previously been the case.  Following public consultation, the Government has decided to repeal the statutory procedures.  The Bill will repeal sections 29 to 33 and Schedules 2 to 4 to EA2002, thus removing the statutory procedures in their entirety.
   
   
2. Procedural fairness in unfair dismissal:  Prior to 2004, the handling of breaches of procedure in unfair dismissal cases was based on case law.  In particular, the 1988 House of Lords judgment in Polkey v A E Dayton Services Ltd provided that a dismissal could be unfair purely on procedural grounds but that, in such circumstances, the tribunal should reduce or eliminate the compensation payable (other than the basic award) to reflect the likelihood (if any) that the dismissal would have gone ahead anyway if the correct procedures had been followed.
   
   At the same time as the statutory dispute resolution procedures were introduced in 2004, a new section 98A was inserted into the Employment Rights Act 1996 (ERA), providing that a dismissal is automatically unfair where an employer does not complete the statutory dispute resolution procedures.  It also provides that a tribunal may disregard any failure by the employer to comply with other (e.g. workplace-based) procedures in respect of the dismissal if following them would have had no effect on the decision to dismiss.
   
   Following public consultation, the Government has decided to repeal section 98A of ERA in its entirety, thereby returning to the case law developed from the Polkey line of cases.
   
   
3. Failure to comply with statutory codes of practice:  In place of the repealed statutory dispute resolution procedures and procedural fairness provisions, the Bill introduces an alternative mechanism to promote good practice.  Compliance with a statutory code on disciplinary, dismissal and grievance procedures (to be developed by Acas) will be encouraged by means of discretionary powers for tribunals to increase or decrease awards by up to 25% where the employer or the employee has unreasonably failed to comply with the code.  Under the provisions of  the Trade Union and Labour Relations (Consolidation) Act 1992 (TULRCA), a Code of Practice that has been approved by Parliament, although not legally binding, is admissible in evidence and can be taken into account by an employment tribunal.
   
   The new Code of Practice will apply across almost all of the jurisdictions under which employment tribunal claims are brought, including
   1. unauthorised deductions and payments
   2. redundancy payments
   3. payment of the national minimum wage
   4. breaches of the Working Time Regulations.
      
   
   Where a tribunal award also falls to be increased because the employer has not issued written employment particulars, the new adjustment is to be made first.
   
   
4. Tribunals proceedings without a hearing:  The existing employment tribunal legislation includes powers to authorise cases to be decided without a hearing.  These powers have not been used and tribunal cases are currently decided at a hearing before a full tribunal panel or a chairman sitting alone.
   
   A new fast-track procedure for settling monetary disputes in certain limited jurisdictions is to be introduced, although this does not in general require primary legislation.  The procedures will permit cases to be decided without a hearing on the basis of documentation submitted to the tribunal.  However, as a protection, the Bill requires that tribunal regulations ensure that all parties to the proceedings consent to the process or are given the opportunity to request a hearing instead of a decision based on documentation.
   
   
5. Conciliation before institution of proceedings:  The Bill removes the requirement for an Acas officer to justify the reasons for deciding whether or not to offer conciliation.  The intention of the amendment is to enable Acas to prioritise cases where demand for conciliation exceeds resources available for conciliation and to relieve Acas of the obligation to offer conciliation in pre-tribunal disputes where there is no prospect of success.
   
   The Bill also replace the existing mandatory requirement to seek reinstatement or reengagement, or compensation in lieu, in pre-tribunal disputes with a discretionary power to do so.
   
   
6. Removal of fixed periods for conciliation:  The duty of Acas to conciliate currently becomes discretionary once the period for which tribunal hearings are postponed for the purposes of conciliation ends.  The Gibbons Review of the statutory dispute resolution procedures concluded that the prospect of the loss of Acas’ assistance did not serve to promote earlier settlements.  Accordingly, the Bill maintains Acas’ duty to conciliate in employment throughout the proceedings until the tribunal delivers a judgment.
   
7. Compensation for financial loss:  The Bill will provide employment tribunals with the power to order employers to compensate workers for any financial loss sustained as a result of unlawful deductions from wages, or non-payment of redundancy awards.
   Where an employer has made an unlawful deduction or payment from wages, a tribunal can require the employer to pay, or repay, to the worker the amount of the deduction or payment.  There is no provision, however, for the employer to compensate the worker for losses arising from the deduction or payment, e.g. additional bank charges or interest charges.  The Bill will empower tribunals to order the employer to make such a compensatory payment of an amount that the tribunal considers appropriate in all the circumstances, thereby removing the need for a worker whose employment has ended from seeking compensation by means of a separate county court claim.
   
   The same provision for compensation is made where an employer has failed to make a redundancy payment to an employee.
   
   
8. National Minimum Wage arrears: When an employer pays a worker at a rate that is less than the relevant national minimum wage (NMW) rate, the employer may be required, by means of an enforcement notice issued by HMRC, to pay the worker the arrears. 
   
   The amount due is the difference between the amount paid in a particular reference period (i.e. the worker’s pay period) and the amount that would have been paid if the NMW rate in force at the time had been used.  As a result, where the underpayment has continued for a long period of time, during which the NMW rate has increased several times, the arrears can be considerably less than they would be if they were calculated at the current NMW rate.
   
   To prevent workers losing out in this way, the Bill introduces a new method of calculating the arrears.  For any particular reference period, the arrears due are the higher of
   1. the arrears, calculated as described above, and
   2. the arrears, calculated by dividing the amount of the underpayment by the NMW rate in force at the time (giving a notional period of unpaid time) and multiplying that by the NMW rate in force at the time the arrears are determined.
      
      
   This comparison formula accommodates the situation of the current NMW rate being lower than the rate at the time of the original payment, as could occur if regional NMW rates are introduced in future.  Currently, however, the new calculation would always give the same or a higher arrears figure.  However, the arrears figure based on the earlier NMW rate has further significance, as explained in Clause 9 below.
   
   The new calculation method applies retrospectively to arrears that arise before the Employment Bill comes into force.
   
   The Bill also makes corresponding change to the Agricultural Wages Act 1948, so that agricultural workers in England and Wales also have the same entitlements.  However, no changes are made to the equivalent agricultural wages legislation for Scotland and Northern Ireland as agricultural wages enforcement is a devolved matter for those countries.
   
   
9. National Minimum Wage enforcement: If an employer is served with an NMW enforcement notice and fails to respond within 28 days, HMRC may take further action through the courts or tribunals, and/or issue a penalty notice.  The Bill replaces the separate enforcement and penalty notices with a single “notice of underpayment”.
   The new notice will require the employer to pay the NMW arrears to the worker(s) involved and, in all cases, pay a financial penalty.  The Bill includes appeal procedures and provides for HMRC to withdraw an underpayment notice and, if necessary, to issue a replacement notice.
   
   The penalty will be 50% of the amount of the arrears due to the worker(s) specified in the notice, using the arrears figure based on the earlier NMW rate.  It will be subject to a minimum of £100 and a maximum of £5000.  However, the penalty will not take into consideration any underpayments arising before the date the Bill becomes law.  The penalty must be paid within 28 days of the notice being served but, if payment is made within 14 days, it is reduced by 50%.
   
   An underpayment notice will be suspended if criminal proceedings may be or are instituted against the employer.  If the proceedings are withdrawn the underpayment notice is reinstated; if the employer is convicted the financial penalty is cancelled.
   
   
10. Copies of NMW-related documents:  HMRC officers are given powers to remove an employer’s pay records in order to copy them and to take copies of all documents without first having to determine whether they are relevant.  All such documents must be returned to the employer as soon as is reasonably practicable.
    
    
11. Mode of trial for NMW offences:  NMW offences, e,g. refusal to pay the NMW, keeping or producing false records, or obstructing an officer, are currently triable only as summary offences in magistrates’ courts.  The Bill makes them alternatively triable on indictment before a jury.  On conviction, the penalty is a fine, not imprisonment.
    
    
12. Powers to investigate NMW offences:  The Bill gives HMRC officers powers to investigate NMW offences as criminal offences, e.g. to apply for production orders and search warrants or to arrest a person suspected of committing an offence.
    
    
13. NMW exemption for Cadet Force Adult Volunteers:  The Cadet Forces are national youth organisations, supported by their own charities and attached to each of the armed forces.  The Bill will exempt from the NMW members of the Cadet Forces who are assisting in the delivery of the Ministry of Defence sponsored cadet force programme.
    
    
14. Mode of trial for employment agency offences:  Offences under the Employment Agencies Act 1973 (EAA), i.e. failure to comply with a prohibition order, failure to comply with measures contained in the Conduct of Employment Agencies and Employment Businesses Regulations 2003, and requesting or receiving a fee for providing work-finding services (except where permitted), are currently only triable as summary offences in magistrates’ courts.  The Bill allows them to be tried on indictment in the County Court.  This is the same provision as for the NMW in Clause 11 above.
    
    
15. Inspection power of the Employment Agency Standards Inspectorate:  Inspectors of the Employment Agency Standards Inspectorate (EASI) will be given extended powers to request financial records and documents and a new power to require in writing the provision of records and documents at a specified time and place.  Records may be taken away to be copied and returned as soon as is reasonably practicable.
    
    
16. EAA offences by partnerships in Scotland:  The Bill provides that, where an offence under the EAA is committed by a partnership in Scotland with the consent or connivance of a partner, or attributable to the neglect of a partner, the partner may also be prosecuted.  English law does not treat partners as a separate legal entity to the partnership, so this provision is not required in English law.
    
    
17. Exclusion or expulsion from trade union membership:  In the 2007 case Aslef v UK, the European Court of Human Rights decided that a union member, who was expelled because he was a member of a  particular political party, infringed his right of association.  The Bill accordingly removes the provision in TULRCA that makes it unlawful for a trade union to expel or exclude a person on the grounds of membership or former membership of a political party.

The various provisions of the Bill will, when enacted, come into force:

• two months after Royal Assent – clauses 10, 13 and 17
• a date to be appointed – clauses 1 to 9, 11 and 12
• 1 October 2008 or, if the Bill is not passed by then, 6 April 2009 – clauses 14 to 16.

Further information:
Employment Bill  http://www.publications.parliament.uk/pa/ld200708/ldbills/
013/2008013.pdf
Explanatory Notes on the Employment Bill  http://www.publications.parliament.uk/pa/ld200708/ldbills/013/en/2008013en.pdf

Statutory Payment Rates

Statutory Sick Pay rate for 2008/09

From 6 April 2008, the 2007/08 weekly SSP rate of £72.55 is increased by 3.948% and rounded down to £75.40 (subject to parliamentary approval).  Because the weekly rate has to be divided by 2, 3, 4, 5, 6 or 7, depending on the number of qualifying days in a week for an employee, it is not possible to give most daily rates as whole number values.  The Table below shows the unrounded daily rate in each case.  To calculate the rate for a number of days, the unrounded rate is multiplied by the number of days and rounded up to a whole penny.

Among the qualifying conditions for SSP is the requirement that the employee’s average earnings over the eight-week relevant period be at least equal to the National Insurance Lower Earnings Limit.  This is £90 per week from 6 April 2008.  There is no requirement for employees to have paid Class 1 NICs.

Statutory Payment Rates

Statutory Maternity etc. Pay rates for 2008/09

From the first payment week starting on or after Sunday, 6 April 2008, the standard weekly SMP/SPP/SAP rate of £112.75 is increased by 3.948% and rounded down to £117.18  (subject to parliamentary approval).  The daily rate is £16.74 exactly.

As a result of recommendations made by the author, DWP Ministers agreed to set a weekly rate for 2008/09 and future years that is exactly divisible by 7, to avoid the need to round calculations involving the equivalent daily rate.  The legislation that governs the annual increase allows some discretion in how the new rate is rounded so it is possible every year for a weekly rate to be set that does not result in a fraction of a penny.

The rates, percentages and thresholds for SMP, SPP and SAP for 2008/09 and the two earlier years are shown in the following Table.

Among the qualifying conditions for SMP, SPP and SAP is the requirement that the employee’s average earnings over the eight-week relevant period be at least equal to the National Insurance Lower Earnings Limit.  This is £90 per week from 6 April 2008.  There is no requirement for employees to have paid Class 1 NICs.

Further information:
Statutory Payment Rates for 2008 - 2009  http://www.hmrc.gov.uk/employers/pay-rates-
2008-2009.pdf
Proposed Benefit Rates 2008/09  http://www.dwp.gov.uk/mediacentre/pressreleases/2007/dec/benefit-rates-2008.pdf

Money Laundering Regulations

Relevance to payroll service providers

On 15 December 2007, the Money Laundering Regulations 2007 come into effect.  They revoke and replace the 2003 Regulations.  The new Regulations

• bring new businesses under the supervision of HMRC
• introduce a new “fit and proper test” for people in positions of ownership or control in Money Service Businesses (MSBs) and Trust or Company Service Providers (TCSPs), and
• require businesses to implement risk-based systems and controls to help prevent money laundering and criminal financing.

The new Regulations also affect High Value Dealers (HVDs) and Accountancy Service Providers (ASPs).  HMRC already supervises MSBs and HVDs for compliance with the former 2003 Regulations.  The new regulations extend this supervision to ASPs as well as TCSPs.

The four types of business that fall within the scope of the new Regulations are:

1. Money Service Businesses (MSBs), i.e. bureaux de change, money transmitters and third party cheque cashers
2. High Value Dealers (HVDs),  i.e. businesses that deal in goods and accept (or are prepared to accept) a payment or payments in cash of at least 15,000 euros (approximately £9,000 or more) in total, whether the transactions are executed in a single operation or in several operations that appear to be linked.
3. Trust or Company Service Providers (TCSPs), i.e. persons whose business involves forming companies, partnerships or other legal persons, or acting as a director, secretary, partner or similar role for such businesses, unless they are supervised by a designated legal or accountancy professional body.
4. Accountancy Service Providers (ASPs), i.e. auditors, external accountants and tax advisers, unless they are supervised by the Financial Services Authority or a designated legal or accountancy professional body.

The issue under consideration in this article is whether or not payroll service providers (PSPs) fall within the scope of the new Regulations and, as a result, are required to register and fulfil other statutory obligations.  The expression “payroll service providers” is used here to include all businesses that act as agents on behalf of employers in any or all aspects of payroll processing.  So, it includes bookkeepers, accountancy practices and payroll bureaux.  Payroll bureaux provide a wide range of services, from a basic pay calculation and payslip printing service to a fully managed service.

PSPs could fall into two of the four types of businesses listed above.

Firstly, a PSP would be a High Value Dealer if it were prepared to accept cash (at or above the specified level, in one or more payments) from a client

• as payment for the payroll services provided,
• to fund the payments sent to the employees, or
• to fund the tax and NICs due to HMRC’s Accounts Office.

It is the author’s understanding that payroll bureaux do not, as a general rule, handle money belonging to their clients (cash or otherwise), for the purpose of paying employees or HMRC.  Whether some accountancy practices do this is not known.  The issue, however, is not that a PSP does not routinely accept cash from its clients, but whether it would be prepared to do so if a client suggested it.  It would not be illegal to accept cash for any of these purposes, as long as the PSP is registered as an HVD and carries out due diligence on the client.

Secondly, a PSP is an Accountancy Service Provider if it provides “accountancy services”.  Professions that are always viewed as providing such services are auditors, external accountants and tax advisers.  Unlike the HVD category discussed above, this is not an issue of whether ASPs handle their clients’ money.  Rather, it is the extent to which they are involved in keeping the financial records and transactions of their clients.  If they are “recording, reviewing, analysing, calculating or reporting financial information”, they are providing “accountancy services”.  They must register with HMRC as ASPs, unless their business is supervised by a relevant professional body.  The Explanatory Memorandum on the Regulations estimates that there are around 65,000 external accountants in business, 40,000 of which do not belong to any supervisory body.

References to “payroll agents” in HMRC’s various guidance notes make it clear that, in most situations, a PSP will be viewed as an Accountancy Service Provider because some of its key activities are “accountancy services”.  For example, HMRC’s guidance notes on Registration, in Appendix 5, specifically refers to “bookkeepers, payroll agents, tax consultants” as “external accountants” and consequently covered by the Regulations.  The same information is given in the basic guidance to help businesses decide whether the Regulations apply to them.  The Registration form MLR100 also lists “payroll” as one of the services that an ASP may offer to customers.

Accountancy firms that process the payrolls of the clients for whom they keep the books certainly fall within the scope of the Regulations.  It does not really matter whether the additional payroll services they provide fall within the definition of “accountancy services” – they must register because they are directly handling their clients’ accounts.  The same would be true of bookkeepers who process the payrolls of those clients for which they keep the books.  But, what of payroll bureaux that do not provide traditional accounting services – only payroll services?

Because of the several references to “payroll” in the published guidance, we asked HMRC to comment on the situation of payroll bureaux.  The response, reproduced below, is very clear.  While initially stating that it “depends on the full extent of the service they provide”, HMRC is of the view that, if a payroll bureau is “recording, reviewing, analysing, calculating or reporting financial information”, it is an ASP.  As an example of such activities, HMRC refers to “determining the amount of tax due to HMRC (income tax and NICs) - under PAYE” and states “We would see the calculation of pay or tax liability as accountancy services”.

As ASPs, payroll bureaux would be obliged to carry out due diligence on their customers, i.e. the employers with which they are contracted to provide payroll services.  They would not, however, be required to carry out due diligence on the employees being paid as they are not customers of the bureaux.

What does due diligence involve? It is one of the many measures that ASPs have to put in place to determine whether there are reasonable grounds for knowing or suspecting that money laundering or terrorist financing may be taking place.  Other measures include obtaining additional information on customers, conducting ongoing monitoring of the transactions and activity of customers with whom there is a business relationship, and having systems to identify and scrutinise unusual transactions and activity.

Due diligence involves the verification of the identity of customers and, where relevant, the identity of the corporate owners of the customers. However, ASPs must take a risk-sensitive approach to due diligence and be able to demonstrate to HMRC that the due diligence measures that have been applied are appropriate in view of the risk of money laundering and terrorist financing faced by each business.

The inevitable question, therefore, that must be addressed by all PSPs – and by HMRC – is: What is the potential for money laundering in the context of payroll processing?  If there is little or no risk of it ever happening, an ASP is likely to reason that only minimal due diligence measures need be put in place.  More importantly, it raises the question of why HMRC should think that PSPs need to register as ASPs at all.

Would it be possible for an employer wishing to dispose of cash obtained illegally or wishing to transfer money to terrorist groups to do so through the payroll?  The only method that is used at times to make fraudulent payments through the payroll is to create “ghosts”, or “phantom” employees, with the objective of diverting the employer’s money to the fraudster.  The author has never heard of the use of payroll “ghosts” for any other purposes than personal fraud, but that does not mean that it could not be used to move money to terrorists.  (HMRC’s response suggests that all cases of fraud using ghost employees should be reported to the Serious Organised Crime Agency.)   However, it is an almost impossible type of fraud to hide as rigorous PAYE compliance procedures tend to expose it quite quickly.  It is also more likely to occur in an in-house payroll environment, where the payroll administrator works unchecked, than in the payroll team of a payroll bureaux, where strong checking disciplines are usually in place and there would have to be collusion with the customer.

Compliance by payroll service providers with the Money Laundering Regulations is likely to be a major issue over the coming months.  Registration of those ASPs that are not supervised by a designated professional body is due to start in April 2008, with a deadline of 1 July 2008.  Before then, HMRC must provide full guidance for PSPs, explaining exactly what will be reasonably expected of them.  But it is of concern that HMRC should believe that PSPs need to be brought into the scope of the Regulations, suggesting thereby that its own stringent PAYE recording and reporting procedures are inadequate to prevent money laundering through the payroll. 

Further information:
One week to go to new Money Laundering Regulations  http://www.gnn.gov.uk/content/detail.asp?ReleaseID=336485&NewsAreaID=2
Money Laundering Regulations 2007  http://www.opsi.gov.uk/si/si2007/pdf/uksi_20072157_en.pdf
Explanatory Memorandum on the Money Laundering Regulations 2007  http://www.opsi.gov.uk/si/si2007/em/uksiem_20072157_en.pdf
Money Laundering Regulations  http://www.hmrc.gov.uk/mlr/index.htm
Money Laundering Regulations - Latest news  http://www.hmrc.gov.uk/mlr/latest-news.htm
What business area does my business fall into?  http://www.hmrc.gov.uk/mlr/bus-areas.htm
MLR 8: Guide to the prevention of money laundering and terrorist financing  http://www.hmrc.gov.uk/mlr/mlr8.pdf
Application for Registration  http://www.hmrc.gov.uk/mlr/mlr100.pdf
Guide to Registration  http://www.hmrc.gov.uk/mlr/mlr9.pdf
CCAB Anti-Money Laundering Guidance for the Accountancy Sector (published by the Consultative Committee of Accountancy Bodies, representing six of the leading accounting professional bodies  http://www.ccab.org.uk/PDFs/070612 CCAB Guidance Clean.pdf.

JERSEY

Income Tax Instalment System

Default effective rate increases for 2008

From 1 January 2008, the default effective rate for the Income Tax Instalment System (IT IS) increases from 15% to 20%.  Employers must apply the default rate to the earnings of any employee or office holder who fails to provide an effective rate notice.

Further information:
ITIS - Frequently Asked Questions  http://www.gov.je/TreasuryResources/IncomeTax/ITIS/ITISFAQsEnglish.htm

Payroll deadlines during the next month

December 19 – For employers required to pay tax and NICs etc to the Accounts Office monthly, this is the deadline for payment to be received by the Accounts Office, unless made electronically.

December 21 – (December 22 is a Saturday) – For employers required to pay tax and NICs to the Accounts Office monthly, this is the deadline for electronic payments to be cleared into the HMRC bank account.  Payments through BACS must be initiated by December 19 at the latest.

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