This article is very kindly contributed by Dan Pollard and Richard Harvey, partners at the specialist employment law firm GQ Employment Law LLP. Their contact details are set out at the end of the article.
The purpose of this article is to highlight some of the HR issues that every tax professional, CEO and CFO needs to think about when planning a group reorganisation. It is not intended as legal advice but simply to highlight some of the key issues that may impact timing, cost or overall project feasibility.
We have in mind an internal group reorganisation affecting one or more subsidiary entities in the UK. This would typically involve a transfer of shares or assets in a subsidiary. The reorganisation may be for a number of reasons – perhaps driven by regulation, tax structuring, group simplification or to “hive off” part of the group ahead of a sale.
1. Mechanics – TUPE or not TUPE?
The first question to ask is which group entity or entities employs the workforce? For some groups this will be easy to determine: they may have a single group employer or employees may all be employed by the operating company for which they work. However many groups are far less “tidy” (often for historic reasons) and this will impact the mechanics of how the workforce is divided.
The second question is to understand the mechanics by which employees transfer:
- If employees are “neatly” employed by the operating company which is the subject of a share sale then staff simply go with that company.
- Where employees are employed by a group employer or by an operating company subject to an asset sale there is likely to be a “relevant transfer” of employees under the regulations known at “TUPE”. TUPE will add some administrative complexity but the good thing is that employees transfer automatically without needing to give their consent.
- Where staff are scattered across the group it may be necessary to have them sign new contracts with the relevant group entities. This can be time consuming to organise in a large population.
2. Divvying up the Workforce
It will also be necessary to consider how to separate the workforce. In most cases that will be clear but the complexity will arise with those personnel who do not exclusively work in one or other part of the business. For example those performing “group functions” such as legal, finance, risk, compliance, treasury and HR etc.
Depending on the rationale for the reorganisation it may be possible to put secondment or intra group service arrangements in place so these employees continue to work for both parts of the group - either temporarily or permanently. If secondment is not feasible there may be redundancy costs and/or recruitment costs to fill any skills gaps.
3. Competitor Activity
Where TUPE applies there can be some unintended consequences. One is that employees have the right to object to the transfer. This allows employees to walk away and be released from their notice period or remaining term of their contract.
Businesses which are vulnerable to “poaching raids” by competitors will wish to carefully consider the risk of losing key staff in this manner. This will not be an issue for most businesses. However, some will decide that the risk is too high and others may have to put special retention arrangements in place to mitigate the risk.
4. Changing Terms and Conditions
Will either or both new business units need to (or wish to) change employment contracts or update policies? For example, occasionally, non-competes and similar provisions may no longer work after the transfer. Sometimes business units wish to rebrand themselves.
A workforce wide change to terms and conditions is always relatively complex and time consuming to implement – especially in a large workforce. Where employees have transferred under TUPE there is an added risk that the changes are not effective. In practice is it still possible to change terms but it is more difficult to implement.
5. Employee Engagement
Any business change project will involve a measure of employee engagement for good business reasons. But there may be mandatory requirements that dictate the form, timing and subject matter. For example if employees transfer under TUPE the organisation will need to inform and consult employee representatives before the transfer. This may require the election of representatives. In practice TUPE consultation can take at least 2-8 weeks depending on the complexity of the issues and the organisation concerned.
Other consultation requirements may apply if you have a European Works Council, an information and consultation agreement, an agreement with a trade union, if you are proposing certain pensions changes or if the project impacts employees outside the UK.
6. Share Schemes
The rules should be checked in case the reorganisation triggers “good leaver” treatment for any leavers or has other unintended consequences. Otherwise it is usually assumed that participants will continue to participate in the group’s share schemes as before.
Depending on the rationale for the project, the group’s remuneration committee will have to decide if it still appropriate to incentivise both groups of employees by reference to overall group performance. If not, there may be cost and complexity associated with replacing group share schemes with alternative incentives.
Typically bonus schemes are discretionary. If so, it should be straight forward to change targets in future years but thought may need to be given to how to deal with the current bonus year targets. There may also be unusual cases where employees have a contractual right to a bonus or profit share linked to overall group performance which would be more difficult to unwind.
8. Shared Services
There are typically a number of HR related shared services that can be fiddly to replicate. These include the provision of employee benefits (health insurance etc), HR policies, HR systems and support. Ideally these “head office” services would continue to be provided centrally - either temporarily or permanently. If this is not possible then the replication process will impact cost and timing.
Most large organizations will sponsor a number of non-EEA national employees to work in the UK. Often these employees are senior and/or highly skilled. Specialist immigration law advice will be required to ensure that key employees’ immigration status is not put at risk. It is likely to be necessary to notify UK Visas and Immigration and it may be necessary to apply for a new sponsor license - which is never fast!
If the group only operates a personal pension plans then this should be straightforward and will likely be dealt with as other benefit plans (see above under Shared Services).
If the group has an occupational pension scheme (especially if it is a defined benefit/final salary scheme) then specialist pensions should be taken at an early stage. This applies even if the scheme does not directly impact the employee population involved or has been closed. This is because the reorganisation may, for example, trigger an obligation to pay up the deficit that these schemes typically have or there may be risk for the overall group of the Pensions Regulator exercising his “moral hazard” powers. Read more here.
Partner, GQ Employment Law LLP
T. 020 3375 0331
M. 07769 250155
Partner, GQ Employment Law LLP
T: 020 3675 9823
M: 07901 716652