Three key reforms that are coming into force in April 2020 should be on your radar now, and below are some tips for how to prepare for them.
(1) New reference period rules for calculating holiday pay
At the moment, the way to calculate holiday pay for workers with variable pay is to look back at the 12-week period prior to taking the holiday. An average is taken over that 12-week period.
From 6 April 2020, the reference period will be changed to 52 weeks, or the number of weeks of employment if a worker has been employed for less than 52 weeks.
Ever since the European Court of Justice (ECJ) held that holiday pay must take into account “normal remuneration” such as contractual or regular patterns of overtime, pay allowances and certain commission payments, the 12-week reference period has been problematic. Fluctuations in pay can lead to higher holiday pay if leave is taken immediately following peaks and lower holiday pay if it is taken following troughs.
What you need to do
• Consider when and how you make the change: For the purposes of holiday pay, many firms begin their year on 1 January. If that is the case, you need to decide whether to change the way you calculate holiday pay on 6 April, or at the start of your holiday year. Christmas brings high levels of overtime for some sectors, which could have repercussions on holiday pay if you switch to the new system in January. It could also mean that people who work the same hours receive different holiday pay simply because of the dates they take leave. If your financial year ends after 6 April, the value of accrued but untaken holiday will increase, meaning you may wish to limit how much holiday can be carried forward.
• Adjust your HR systems: The 12-week reference period will need to be altered to 52 weeks.
• Review your variable pay policy: If you have not started to include variable pay in your holiday pay, now may be a good time to do so, given that the reference period was one of the few pieces of holiday pay case law that was unclear. If you decide to tackle this, it is important to assess what pay components you will cover and whether this could trigger claims for backdated holiday pay.
(2) Changes to the tax treatment of off-payroll labour
From 6 April 2020, changes to tax legislation regulating off-payroll working (commonly known as IR35) also come into effect. These new rules will require larger private sector businesses to deduct income tax and National Insurance contributions via payroll from fees for services paid to a personal service company (PSC) where the individual performing the services would, but for the PSC, ordinarily be regarded as an employee of the client company for tax purposes.
The treatment of individuals who are directly engaged by the client company — for example “Joe Bloggs” rather than “Joe Bloggs Limited” — will remain the same. The correct tax treatment of the fees paid to these workers will depend on whether they are in reality an employee of the client company for tax purposes, or if they’re genuinely self-employed.
At present, the tax liability rests with the PSC. The change will be accompanied by obligations on the client company to determine the correct position for each engagement and notify the other parties involved. It pays to be prepared for this reform. When similar changes were introduced in the public sector two years ago, many organisations were caught out.
What you need to do
• Audit your off-payroll labour: It is a good idea to start doing this as soon as possible, as the audit process could take some time. It is likely you will need to make individual decisions and have different communications with each PSC. The audit will be a factual investigation, looking at what each individual does in practice, how they do it, what contracts they’re engaged under, how they are paid etc. This may also be a good time to audit any off-payroll labour that is not provided through PSCs.
• Consider the knock-on effects: The audit is likely to have knock-on consequences that may require legal advice. As well as determining employment status, you may need legal advice to amend or draft contractual documentation, to advise on the effects on pension liability, and to consider how this change intersects with rules around immigration, the apprenticeship levy, and the gender pay gap reporting figures and strategy. In addition, if liabilities are identified or a revised model of working is required, accountancy input may be needed to quantify the position.
(3) Written particulars becoming a “day one right” for workers and employees
The requirement to give written particulars will be altered in three key ways:
• It will become a “day one right” for those employed after 6 April 2020 – rather than the current position of needing to provide particulars within two months of the start date;
• It will cover workers as well as employees; and
• It will need to cover additional topics, such as probationary periods, any variation in working hours, and “any other benefit provided by the employer”.
What you need to do
• Review your contracts: Begin by revisiting all contracts used to engage employees and workers in readiness for new starters arriving after 6 April 2020. Most of the new areas are formulaic, but some thought will need to be given to areas that are more complex.
• Consider the impact on flexible working: If your workforce includes flexible working patterns, such as shift workers or zero hours workers, you will need to consider how your approach may vary and build this into your terms.
• Assess your benefits: To cater for the somewhat vague “any other benefit” requirement, you will need to decide what types of benefits should be covered and their contractual status.
Although these legal reforms may seem minor at first sight, they require HR teams to review key processes and possibly make important changes that have legal and financial consequences.
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