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Government launches two consultations: on confidentiality clauses and the extension of IR35 to the private sector

  • United Kingdom
  • Employment law - HR E-Brief

07-03-2019

Government launches two important consultations: over the use by employers of confidentiality clauses and the extension of off-payroll rules to the private sector from April 2020

The Government has published two important consultation papers this week. The first is aimed at increasing protections for staff over confidentiality (non-disclosure) clauses, whilst the second addresses issues around the extension of off-payroll rules next year and the increased responsibility and potential costs to both public and private employers who engage workers through personal service companies. Below we consider these consultations in turn and their potential implications for employers.

  • Consultation over use of confidentiality clauses (closes 29 April 2019)

Whilst the consultation proposals fall short of what many lobbyists had hoped for, banning or limiting the use of such clauses was always going to be fraught with practical and legal difficulties, particularly in differentiating the protection of a legitimate commercial interest from an attempt to conceal unlawful sexual misconduct.

Background to the consultation announcement 

Last year, the Government’s Women and Equalities Committee and the Equality and Human Rights Commission each proposed several measures aimed at addressing sexual misconduct and harassment in the workplace and increasing employer engagement and responsibility. Amongst these proposals, was the recommended restriction or even banning of non-disclosure or confidentiality clauses.

Confidentiality clauses are routinely included in employment contracts and settlement agreements, for example, to protect trade secrets. However, the wording by which the individual agrees to keep the existence of the settlement agreement, and its terms, confidential even where they relate to sexual misconduct and discriminatory complaints has been criticised. Those wanting a ban on such terms argue that secrecy enables employers to suppress and avoid tackling systemic problems, allowing predatory employees to act again. Those against a ban fear that restricting secrecy in settlement agreements will deter employers from settling claims – which won’t help those complainants who prefer to settle to avoid re-living distressing events and for those who want confidentiality in their settlement terms.

Consultation proposals

In its consultation proposals, the Government is not advocating an outright ban on the use of  confidentiality clauses when settling workplace disputes but intends to impose conditions which restrict their use. These include:

  • clarifying the law to make clear no confidentiality clause can prevent any disclosure to the Police and, potentially, other bodies;
  • ensuring the wording of clauses themselves spells out their limitations so that individuals understand their rights. For example, in employment contracts, this information should be provided at the start within the written statement of terms and conditions;
  • requiring that an individual obtains independent legal advice on confidentiality terms in a settlement agreement;
  • rendering any non-compliant confidentiality clause included in a settlement agreement void.

Comment

Many employers have reacted to high profile media campaigns since the Harvey Weinstein revelations by promptly re-enforcing their sexual harassment and disciplinary and grievance policies. However, concerns over sexual misconduct in the work place, an environment in which there can be particular inequality of status and potential for abuse of power, have continued to be a focus of attention.

It is nonetheless significant that, of the various recommendations put to the Government in recent months as a mean of tackling sexual misconduct or harassment at work, including a proposed Code of Practice for employers, it is the use of non-disclosure or confidentiality clauses that the Government has chosen to address most urgently.

In legal terms, it seems inevitable that, in the short term, employers will need to at very least  ensure contracts and settlement agreements include a clear statement regarding any confidentiality terms and their intended effect. However, with the close media attention this issue has attracted, there is much more to consider than legal compliance alone and the potential for reputational damage to individuals (accused and accuser) and their organisations can be immeasurable. It is therefore recommended that even prior to Government intervention, employers now start to review entrenched practices and procedures and ensure that their use of confidentiality clauses is reviewed on a case by case basis and is not automatic.

Off-payroll (IR35) consultation (closes 28 May 2019) 

The Government has also published a consultation on how best to implement the extension of the off-payroll rules, introduced in the public sector in 2017, to the private sector in April 2020. The consultation anticipates changing the existing public sector off-payroll rules as part of the process of extending them to the private sector. As such, this consultation will be of relevance to both private and public sectors.

Background to the consultation announcement 

In recent years, more people have been engaged, through their own limited company, to provide ostensibly self-employed contracting services to businesses. By providing their labour through a ‘personal service company’ (PSC), or other intermediary, they typically pay less tax.

However, the Government believes that many of these workers are not genuinely self-employed and should be paying higher taxes, as if they were an employee, under the off-payroll, or IR35, tax rules. To tackle IR35 non-compliance, the Government announced last year that it will change the way the rules applying in the private sector by making businesses engaging a worker through a PSC responsible for determining whether the off-payroll rules apply and, if they do, requiring the ‘fee-payer’ (usually the business or agency that pays the worker’s PSC) responsible for deducting employment taxes and paying employer NICs. This change affects medium-sized and large private sector businesses only and will come into effect on 6 April 2020 via a draft Finance Bill legislation, to be published this summer.

Consultation proposals

In outline, the consultation addresses the following issues:

  • The private sector off-payroll extension excludes small employers. The consultation proposes using the Companies Act to determine size (i.e. small if two or more of following are met: annual turnover, balance sheet total and employee numbers are not more than £10.2m, £5.1m and 50 respectively – small groups are also covered in the Act) and another turnover/employee based test for small, non-corporate entities. In contrast, no such size-based exclusion applies or will apply in the public sector;
  • The Government wants to improve the way the determination (of whether off-payroll applies), and the reasons for it, are communicated to all parties involved. It proposes that businesses should provide the worker and the party they contract with, such as an agency, with their determination and reasons, and this should be cascaded down the labour supply chain and shared with the fee-payer as appropriate. It would provide a right for the worker and fee-payer to seek those reasons directly from the business (if not provided) and require the business to have in place a process for resolving determination disputes which meets certain minimum requirements;
  • It proposes a change to the current rules on liability for unpaid tax and NICs to allow liability to move up and down complex labour supply chains, depending on which party is at fault. For example, if an agency failed to cascade the determination, it would be liable until such time that it did. HMRC could ultimately collect from the business at the top of the supply chain if it could not recover from the agency or other parties involved;
  • There are further tax details in the consultation, for example, dealing with the apprenticeship levy, student loans and addressing double taxation.

Comment

Extending off-payroll rules to the private sector raises the prospect of new administrative burdens and tax liability risks for affected businesses, as well as a potentially detrimental impact on future staff availability and flexibility. Up to a third of contractors working through PSCs may be financially worse off when the changes are implemented, with take-home pay dropping as they pay more tax. This may lead some to quit contracting, others to raise their rates or seek to transfer onto the business’s payroll as employees. Some may dispute how the rules have been applied to them by the business or even demand holiday pay and other worker entitlements in protest at having to pay tax like an employee but not receive the same rights and benefits.

Where the private sector business contracts directly with a worker via a PSC, there is also the significant additional cost of employer NICs to be paid (13.8% of gross). As such, alternative ‘solutions’, such as routing the worker via other third parties, or reducing and changing contractors roles may by investigated by businesses, depending on the final details in this summer’s Finance Bill. However, the consultation’s proposal to allow HMRC to hold the business ultimately liable for any unpaid off-payroll tax and NICs means that such solutions need careful consideration to ensure that all parties involved are reputable and compliant. Although still in consultation stage, businesses should consider acting now, including auditing their current off-payroll arrangements, given the April 2020 deadline.

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