The regulatory landscape for UK employers has evolved significantly over the second half of 2023. New legislation is in force or is due to come into force over the next 12 months, covering a variety of employment-related issues for which employers will need to be prepared, including changes to flexible working requests, active duties to prevent sexual and other types of harassment in the workplace, and adjustments to holiday pay and working time obligations. We have also seen a lifting of the cap on bankers’ bonuses and new detailed guidance from the UK’s data protection authority, the Information Commissioner’s Office (ICO), on employee monitoring, health data, employment records and recruitment.

In this alert we explain what you need to know about these significant developments and look at how the landscape may evolve as we move into 2024. Please feel free to contact our UK-based employment team if you would like to discuss any of these developments further.

Legislative developments

In our previous alert in this series, we promised to monitor the development of various UK government-backed employment-related bills that were progressing through Parliament. Two of the most highly anticipated bills received Royal Assent in the last few months and will come into force in 2024:

1. Positive duty to prevent harassment – From October 2024, employers will be subject to a proactive duty to take “reasonable steps” to prevent harassment of employees in the course of their employment. Discussions around the new Worker Protection (Amendment of Equality Act 2010) Act 2023 have focused on sexual harassment, but the Act also extends to unwanted conduct on the other grounds protected by the Equality Act 2010: age, disability, gender reassignment, race, religion or belief and sexual orientation. Failure to comply with this duty could result in a 25% uplift in compensation payable in harassment claims.

While employers will be relieved to see that some of the proposals in the Act’s early discussion stages have been softened – such as an expansion to employer liability for third-party harassment – employers should start giving thought now to what adjustments need to be made to their policies and training schedules to ensure that they cover these additional protections. We also recommend a review of commercial arrangements with third parties, as liability may still arise through other channels where an employee is subject to harassment by a customer or supplier, such as negligence or constructive dismissal claims.

2. Flexible working as a ‘Day One’ right – Along with the well-publicised removal of the 26-week qualifying period, the Employment Relations (Flexible Working) Act 2023 changes the circumstances under which employees are entitled to request a flexible working amendment to their contract, and the way in which employers are required to respond to such requests. Employers should be ready for the shorter timetable, and these additional changes to come into force in summer 2024:

1. 1. Employers must now consult with the requesting employee prior to rejecting their request for flexible working. See the Acas consultations on the draft code of practice for a further explanation of how employers can best handle flexible working requests, including how these consultations should be approached.
   2. Employees may now make up to two requests in a 12-month period. The previous limit was one request.
   3. Employers must now make their decision within two months of receiving a request. The previous deadline was three months.
   4. Employees no longer need to provide a “business case” to accompany their request for flexible working.

There have been a number of other employment law reforms in the second half of 2023 which will also require updates to employers’ policies and practices over the coming months. Some of the most notable are:

1. Working time rules on holiday and TUPE – New regulations come into force on 1 January 2024, reflecting the UK government’s response to its consultation on reforms to retained EU employment law. The changes aim to:

1. 1. Simplify annual leave and holiday pay calculations by:
      1. Permitting rolled-up holiday pay, provided certain criteria are satisfied, and setting an annual leave accrual method of 12.07% of hours worked, for irregular hours or part-year workers – these changes will be of the most relevance to organisations with employees working part-time or atypical hours;
      2. Clarifying and restating the distinction between the 4 weeks of EU-derived annual leave entitlement and the additional 1.6 weeks’ domestic entitlement (rejecting an initial proposal to treat the full 5.6 weeks as a wholly domestic entitlement), now with a clearer definition of what constitutes “normal remuneration” for the EU-derived leave portion; and
      3. Confirming carry-over leave entitlements for family-related leave, sick leave, and other situations where employers have failed to provide reasonable opportunity to take holiday.
   2. Simplify working time record keeping requirements by establishing a minimum “adequate” standard of record keeping, as compared to the previous requirement for detailed records of daily working hours and rest periods.
   3. Enable direct information and consultation with employees in the context of a TUPE transfer, rather than via newly elected representatives, by removing the obligation to elect and consult with worker representatives where there are no existing representatives and where the transfer involves either a “small business” with fewer than 50 employees in total or a transfer of 10 or fewer employees overall (regardless of the size of the business). The practical impact of the change, which will apply to TUPE transfers taking place on or after 1 July 2024, remains to be seen; however, removing the requirement to hold elections for worker representatives is likely to at least speed up consultation processes and ease the burden on transferors.

2. Carer’s leave and redundancy protection – The carer’s leave and maternity-related protections outlined in our last alert are also due to come into force around April 2024.

3. Predictable terms and conditions – The Workers (Predictable Terms and Conditions) Act 2023 will give workers and agency workers the right to request more predictable terms and conditions of work in circumstances where there is a lack of predictability as to their work pattern and is likely to be come into force in Q3 2024.

4. Criminal records checks – Basic criminal records checks (known as “basic DBS checks”) are run where a criminal background check is not a legal requirement of the role but is requested by a prospective employer for other reasons. A basic DBS check provides details only of those convictions and conditional cautions that are considered to be “unspent” under the Rehabilitation of Offenders Act 1974, i.e., the individual is still considered to be in a rehabilitation period having served their sentence and details of their conviction or caution remain disclosable if requested. As of October 2023, substantive reductions were made to the periods of time for which certain convictions remain “unspent”. Updated disclosure periods are outlined in the UK government’s press release and guidance. As a broader point, see our note below on the ICO’s new guidance around the conduct of pre-employment background checks in general, including criminal checks, and the appropriateness of conducting such checks.

New ICO guidance on employee monitoring and health data, and draft guidance on employment records and recruitment

New guidance published by the ICO covers two areas of frequent concern for our clients:

1. Monitoring of workers – The guidance aims to assist employers in best complying with their data protection obligations when using monitoring technologies and data loss prevention tools. The ICO recognises that such tools can be useful for employers but emphasises that they need to be approached with caution and sensitivity, and with proper consideration of the delicate interplay with workers’ privacy rights. For a detailed analysis of the new guidance see our article in Law360.
2. Processing of health data – The ICO also issued guidance on employers’ collection and use of workers’ health data. The guidance is separated into two parts: (i) it provides an overview of how data protection law applies to the processing of workers’ health information; and (ii) it explores practical examples of the most common scenarios in which employers might process workers’ health information, covering occupational health schemes, employer-requested medical examinations, and drug and alcohol testing, among other things. The guidance also contains a series of helpful checklists which employers may use to internally review their data protection practices.

The ICO has also recently published two sets of draft guidance for employers just last week: one on keeping employment records and a second on recruitment and selection. Guidance in these tricky areas will be welcomed by employers, particularly so far as it covers the sharing of employment records in an M&A context and the use of artificial intelligence and automated decision-making tools in recruitment. Another notable takeaway from the draft guidance on recruitment is that it sets a high threshold for pre-employment vetting, indicating that background checks can only be justified by either a legal obligation to conduct the relevant check or the existence of a significant and particular risk. Consultations on both sets of guidance are open until March 2024.

Lifting the cap on bankers’ bonuses

One of the enduring policies of the 2022 “mini-budget” was the proposal to remove the cap on bankers’ bonuses. The cap was introduced in 2014 by the EU’s Capital Requirements Directive (CRD IV) and provided set permissible ratios between fixed and variable pay, aimed at de-incentivising financial services workers from taking excessive risks in order to obtain significant bonuses.

Initial expectations were that these changes were unlikely to apply until at least the 2024 bonus performance year. However, in a joint statement setting out their feedback on the responses to the joint consultation on this issue, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) announced that the cap would be lifted from 31 October 2023, meaning that banks would not need to wait until the next performance year to implement the changes.

The regulators cited various reasons for their proposed approach to implementation, including allowing relevant institutions to “restructure pay faster” and have “further flexibility over their cost base” to deal with market downturns, better share risk with their employees, and remain competitive with businesses in jurisdictions where there is no bonus cap.

Whilst affected institutions now have significantly more freedom in defining the remuneration element of employment contracts, firms are reminded that several of the rules aimed at aligning remuneration with prudent risk taking continue to apply, including that at least 40% of variable remuneration needs to be deferred for a minimum of four years, all variable remuneration must be subject to risk adjustments, and the fixed and variable components of pay must remain balanced.

Looking into 2024 and beyond – The Parker Review and a renewed focus on DEI in the workplace

There is an ever-increasing emphasis on the importance of diversity, equity, and inclusion (DEI) in the workplace to the financial success of organisations, and this trend will continue into 2024 and beyond. The Parker Review was first commissioned by the UK government in 2015 to assess how best to improve ethnic and cultural diversity on UK boards. It set voluntary targets for the largest 350 public companies to have at least one ethnic minority director on their boards by December 2021 (for FTSE 100 companies) or by December 2024 (for FTSE 250 companies). The first set of reported results, published in December 2022, revealed ethnic minority directors on 96 FTSE 100 boards (more than double the figure from 2016 when the review started) and that 18% of FTSE 100 director positions were held by directors from a minority ethnic group (which is roughly in line with the 17% ethnic minority representation across the general UK population). These results are indicative of significant voluntary engagement and efforts by companies in the DEI sphere.

The Parker Review Committee has now set new objectives extending beyond board level and listed companies. Private companies will be asked to disclose data about their ethnic diversity and separate objectives have been set in relation to diversity of senior management.

1. Each FTSE 350 company will be asked to set a percentage target for senior management positions that will be occupied by ethnic minority executives in December 2027, by December 2023; and
2. 50 of the UK’s largest private companies will also be asked to provide ethnic diversity data from December 2023.

On a final note, consultations on proposals by the FCA and the PRA to “boost diversity and inclusion to support healthy work cultures, reduce groupthink and unlock talent” in regulated firms close today. The regulators’ stated aims are to see increased diversity and inclusion in firms translate into better internal governance, decision making, and risk management by requiring, amongst other things, firms to develop DEI strategies to meet their objectives, set targets to address under-representation and report data for certain characteristics.

We will continue to monitor these important developments and outcome of the consultations, together with other upcoming regulatory proposals or guidance of relevance to employers of UK-based workers, and will provide further commentary in due course.

Lewis Ball, London trainee solicitor, contributed to the drafting of this alert.

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