Legal briefing | 05 Apr 2024 |

Travers Smith's Sustainability Insights: Employment law and private markets

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A regular briefing for the alternative asset management industry.

With elections looming in the US, the UK and the European Parliament this year, economic growth, productivity and competitiveness will be firmly in the spotlight. But employment law protections and worker rights are also vote-winners. Private capital firms and their portfolio companies should expect some significant changes.

In the UK, the opposition Labour party – which currently has a significant lead in the polls – has pledged the biggest upgrade of workers' rights in a generation if it wins power. While there is no date for the UK general election, and the parties are yet to publish their manifestos, Labour has touted a number of reforms that would have a significant impact for UK businesses.

Among the proposals are plans to reform the UK law on unfair dismissal, by removing the qualifying period and lifting the cap on compensation. These changes would give significantly more UK workers the right to challenge their dismissal and claim compensation, making it more difficult and costly for employers to terminate staff. Under current UK laws, employees generally need at least two years' service to claim unfair dismissal. That effectively creates a category similar to "employment at will" for the first two years – which is the prevailing position throughout employment in the US. Even after that two-year period, compensation for unfair dismissal is usually capped at around £135,000 (although more can be claimed if there is discrimination, whistleblowing or breach of the employment contract).

Labour's proposals would bring the UK closer to other European countries: most either have no qualifying period, or a much shorter one. Business lobby groups have warned that a move to a more "European model" would be counterproductive, arguing that it would make businesses more reluctant to take on staff. In response, Labour has sought to reassure businesses that they will still be able to operate probationary periods and dismiss new joiners for "fair reasons".

Labour has also pledged to strengthen collective bargaining (starting with the social care sector) and ban contracts that offer casual workers no guaranteed minimum hours (so-called zero hours contracts). They would also outlaw "fire and rehire", a tactic commonly used by employers to implement changes to terms when agreement with staff is not possible. These moves will be welcomed by workers and trade unions but will remove some flexibility to manage workforces and restructure operations. Business groups have warned about the cost to business and the risk to the competitiveness of the UK market.

These proposals add to a proliferation of new and proposed laws designed to protect workers elsewhere in Europe. The EU recently implemented a new law on transparent and predictable working conditions, providing "extensive and updated labour rights" for around 2-3 million workers in precarious work, including part-time, temporary and casual workers. A new EU directive on working conditions for gig economy workers is also in the pipeline and is likely to be approved this year.

DEI (Diversity, Equity and Inclusion) is also generating new labour regulation. EU-based businesses will, for example, be required to report on their gender pay gaps under a new EU directive which will introduce mandatory pay reporting from 2026. Some countries, such as the UK and Ireland (and, to some degree, France), already have mandatory gender pay gap reporting. However, the EU-wide requirements will be more granular and come with stronger enforcement mechanisms, including penalties for noncompliance and mandatory equal pay audits where issues are identified.

"The UK proposals add to a proliferation of new and proposed laws designed to protect workers elsewhere in Europe."

In the UK, the Labour party also has plans to require large employers to report on their ethnicity and disability pay gaps, on top of the current gender pay gap reporting requirements (and the FCA proposals for asset managers). Few would object to the policy behind these measures, but they do reflect increasing regulatory burdens on businesses, particularly multinational employers who must grapple with different rules in different jurisdictions.

Economic growth is, and has always been, another driver for labour law reform – but here again are unintended consequences. In the US, the Federal Trade Commission has proposed a ban on employers imposing non-competes on employees – clauses which prevent employees from joining a competitor or starting up a rival business for a time after leaving. The aim is to boost competition and innovation, and drive-up wages. The current UK government announced a similar proposal last year, saying it would limit the length of non-compete clauses in employment contracts to three months. While the changes would make it easier for businesses to recruit staff, concerns have also been raised about the ability to protect trade secrets and the wider impact on the economy. The changes could have a significant impact: it is estimated that non-competes affect around 30% of UK workers and around 38% of workers in the US. It is unclear whether the UK proposals will go ahead, and many expect the FTC ban to be challenged. However, some asset managers are already considering alternative ways to protect business interests by tightening up other restrictions (for example confidentiality and garden leave) and using indirect restraints through carry and other incentive arrangements.

With a host of developments in the pipeline, labour law continues to be an important area of focus in business planning and forecasting for asset managers. Restructuring plans for existing and new portfolio companies should anticipate changes in the future that could add cost and complexity.