State Of The Nation: A Summary Of UK Employment Law

Over the past decade, the UK has consistently been the most popular choice of location for foreign direct investment in Europe. International investors, particularly those from the U.S. and Japan, make up some of the UK's most substantial and innovative industries, bringing enormous benefit to the country. The UK's commitment to free trade and economic stability appear to be contributing factors to this ongoing success.

Clarkslegal LLP has a long tradition of acting for international companies requiring assistance with a range of economic and legal issues. In our experience, it is essential that overseas investors who seek to employ members of the skilled local workforce appreciate how employment and labour law operates in the UK. This article considers some of the defining characteristics of employment law in England & Wales. (Although Scotland and Northern Ireland have their own legal systems, a number of statutory and contractual employment law rights operate in a similar manner in these jurisdictions.)

The Basics

Employees have a number of entitlements which do not always have direct equivalents in overseas jurisdictions, particularly those outside the European Union such as the U.S.

First, employees have a right to receive a written statement of their terms and conditions of employment within two months of starting work. A failure to provide this statement exposes the employer to the risk of having to pay the employee between two and four weeks' pay.

Employees' and workers' hours are governed by the Working Time Regulations 1998. These Regulations provide for a maximum working week of 48 hours, although employers are entitled to ask workers for their consent to "opt-out" of this weekly limit.

As well as regulating the amount of night work and setting out rights to daily and weekly rest periods, the Regulations also provide that workers are entitled to four weeks' paid holiday each year (which may currently include the eight days' public and statutory holidays such as Christmas and Boxing day). It is not possible for employers to pay workers in lieu of their statutory holiday entitlement, except where employment is being terminated.

Employee Benefits & Pensions

There is no obligation to provide benefits such as life assurance, medical insurance, bonus schemes, company cars or critical illness. Many organisations do so routinely however as part of the employment package. Medical benefits can often be obtained at lower cost than in countries such as the U.S., especially where they simply supplement medical protection which is available without charge via the National Health Service.

Since October 2001, employers with over five employees are required to designate a private pension scheme to which employees can contribute (stakeholder pension schemes), although there is no obligation on the employer to contribute on employees' behalf. Alternatively the employer may establish its own occupational pension scheme.

Occupational pension schemes provide for two types of benefit: defined benefit (final salary) and defined contribution (money purchase) schemes. Under the first kind of scheme, the level of benefit which the employee receives is fixed at the outset. Under the latter scheme, as only the contribution levels are set, the ultimate benefit cannot be known until the scheme member retires. As a result, money purchase schemes are considerably less expensive to operate.

Developments In Discrimination

Employees and applicants for employment also have the right not to be discriminated against. Discrimination may take the form of any one or more incidents of direct discrimination, indirect discrimination, victimisation or harassment. Domestic employment law offers protection against discrimination on the following grounds: race, colour, nationality or ethnic origin; sex (including marital or civil partner status, pregnancy or gender reassignment); sexual orientation; disability, religion or similar belief.

As of 1 October 2006, new regulations also provide protection against discrimination on grounds of age - or perceived age - designed to protect both young and old. Unlike other discrimination provisions in England and Wales however, the Age Regulations provide that direct, as well as indirect discrimination, can be justified in certain circumstances.

From October onwards, age should not be used as a recruitment criterion or as a basis for promotion and training opportunities. Care must also be taken in formulating employee benefits which are based on an employee's length of service. In certain situations, employers must be able to demonstrate that such benefits encourage loyalty or motivation, or reward the experience of some or all of its workers.

The new regulations also make significant changes to procedures relating to retirement. In summary, employees approaching retirement age must be notified of their right to request to work beyond the employer's normal retirement age. If an employee makes a request in writing three to six months before the intended retirement date the employer must hold a meeting to consider that request, although there is no obligation to grant it. Where an employer agrees that an employee may work on for a specific period, an identical procedure must be followed in respect of the subsequent retirement date. The employee is entitled to appeal against a decision to refuse the request.

As a result of considerable lobbying, the pensions aspects of the age regulations will be delayed to 1 December 2006. This follows criticism that the proposed new provisions were unclear, and would have prevented employers from giving older workers more generous pension contributions than younger workers.

There is no minimum qualifying period before an individual can bring a discrimination claim. Generally, claims must be presented within three months from the alleged discriminatory act, unless the Employment Tribunal considers that it is 'just and equitable' to extend the time limit. As in other jurisdictions, there is no statutory cap on discrimination awards. There have been numerous instances of discrimination awards running into five-figure sums in recent years.

Terminating Employment

With regard to bringing the employment relationship to an end, there is no concept of "termination at will." Where employment is terminated, the employee has a range of potential claims available. These include:

Wrongful dismissal. This arises where the employer has terminated the contract without giving the required period of contractual notice. In order to minimise such claims, contracts should contain a clause which allows the employer to make a payment in lieu of notice (PILON) in order to ensure that the employee can be removed from the workplace without having to work their full notice period.

Constructive dismissal. Complaints of this type arise where an employer has varied an employee's contractual duties or job title without consent. Where the variation is significant, the employee may be able to resign and treat themselves as having been dismissed. Again, employers should ensure that contractual duties are drawn up with care, and that employment contracts permit employers to vary those duties. More significant changes should first be discussed and agreed with the employee.

Redundancy. Employees who have been employed for 2 years or more have the right to receive a statutory payment if they are made redundant. This payment is calculated according to a statutory multiplier based on the employee's age and length of service.

Unfair dismissal. Employees who have been employed for at least one year have the right not to be unfairly dismissed. Where the employer has dismissed the employee for certain specific reasons (e.g., for a reason connected with pregnancy, childbirth, maternity leave, or for a health and safety reason), then no qualifying period is necessary to bring a claim. Following implementation of the age discrimination regulations, the current upper age limit of 65 on the right to bring an unfair dismissal claim will be removed.

When presented with an unfair dismissal claim, the employer can rely on up to five reasons to demonstrate the fairness of that dismissal. Those reasons are: the capability or qualifications of the employee for performing their work; the conduct of the employee (including gross misconduct); the employee's redundancy; the fact that it would not be possible to employ that individual without breaching a legal restriction; or "some other substantial reason" which justifies the dismissal.

Some dismissals however will be automatically unfair. This category includes: dismissals for asserting statutory rights; dismissals for trade union membership; dismissals for a reason connected to maternity or parental rights; dismissal for certain health and safety related reasons; or dismissals in connection with making a protected disclosure (so-called 'whistle blowing' dismissals).

An employee whose unfair dismissal claim succeeds may apply to be reinstated in his original position, or re-engaged in an equivalent position. Where the employer can demonstrate that reinstatement or re-engagement are not practicable, the Employment Tribunal will award the employee additional compensation.

Typically, however, the unfairly dismissed employee will seek compensation. Compensation of this kind comprises, first, a basic element which is calculated according to the employee's age and length of service. The current maximum is 8,700. The second element is the compensatory award, designed to compensate the employee for financial losses up to the date of the Tribunal hearing and beyond, including future losses of earnings. The compensatory award will be reduced where a Tribunal considers that the employee has contributed to their dismissal. The current maximum compensatory award is 58,400. At today's rates, the maximum unfair dismissal award equates to over $126,000 - incentive enough for employers to avoid unfair dismissal claims wherever possible.

Statutory Dismissal Procedures

When bringing the employment relationship to an end for whatever reason, it is also imperative that the employer follows the appropriate statutory procedure. In England and Wales, all employers are required to comply with statutory dismissal and disciplinary procedures. In essence, this procedure involves writing to the employee, notifying him of the possibility that his employment could be terminated, and inviting him to a meeting. Next, a meeting must be held with the employee, but written notice of termination (if that is the employer's decision) must only be issued afterwards. Finally, the employee must be permitted to appeal against this decision.

Even where an employee has been summarily dismissed for gross misconduct and the modified dismissal procedure applies, the employee must still be issued with written reasons for the decision and again given a right to appeal. A failure to follow these procedures will result in any decision to dismiss being automatically unfair. In financial terms, compensation may also be reduced or increased by 10-50% depending on which party has failed to comply with the relevant aspect of the statutory procedures (in the majority of cases, employees are also required to comply with the statutory grievance procedure before being able to present a Tribunal claim).


This is, of course, a mere overview of the principal aspects of employment law in England and Wales. These aspects of the law are continually developing and expanding. In addition, by virtue of the UK's membership in the European Union, employment law is also influenced by EU law which is subsequently implemented at a national level. Significant further enhancements to maternity rights and benefits are also anticipated in early 2007.

Whilst the plethora of statutory and regulatory provisions may appear daunting at first glance, specialist assistance is available. Firms such as Clarkslegal LLP, with an established track record of assisting overseas organisations, aim to provide effective strategic advice to enable clients to come to grips with the relevant legal framework and to avoid the most common pitfalls.

Published October 1, 2006.