Know Your Market
Assuming that US strategies will translate to the UK is an error
regularly encountered. The distinct history and legal regulation of employment
relations in the UK holds numerous traps for the overseas investor, particularly
in labour intensive industries with a history of unionisation, and there are
special concerns where the sector has public service origins. The UK market is
in effect an amalgam of British laws, EU regulation and, more recently, borrowed
legislation that has at least superficial similarities to US laws, for example
in the areas of disability and of union recognition. Yet, as with language, the
similarities may deceive.
The UK market has also seen a massive shift over the last 30 years,
moving initially from a traditional collective bargaining culture with high
levels of union membership, to the world of market forces and individual
contracts in the Thatcher years, now swinging back to a new version of the
collective culture under the Blair Government fashioned this time by a mix of EU
social policies (i.e. labour market regulation) and compromises with the British
trade union movement to restore opportunities for union recognition and
influence. Nonetheless, overall union membership in the private sector has
hugely declined and remains below 20 per cent.
While there are numerous examples of where investment in the UK can prove
misjudged, or where a US parent company does not recognise the likely issues
their subsidiary will face, the main concerns fall into a few quickly described
categories.
Due Diligence
Many investors learn the hard way that they did not tick all the boxes on
due diligence. The inadequacy of labour related due diligence often has a
painful long term effect on financial returns. There is a natural reliance on
the due diligence process to show up the big commercial issues and liabilities,
often assuming labour issues can be managed later. In a labour intensive
business, this is looking through the wrong end of the telescope. Expert due
diligence on labour contracts, employment relations, structural dialogue,
unionisation and levels of union membership to assess risks of unionisation,
individual and collective liabilities, pensions and obstacles to change needs to
be achieved. Transfer of Undertakings laws in the UK and the rest of Europe
impose liabilities not dreamed of by some US businesses entering the UK market.
There are due to be new rules in the UK on the Transfer of Undertakings by
October 2005. Though in general reflecting existing case law, some of the
changes will be new and could make the rules more likely to apply than in the
past in some situations.
Talking To The Employees
There is a constant emphasis now in the UK and the EU generally on
information and consultation. UK businesses with over 150 employees can now be
compelled to set up what is in effect a domestic works council. Other smaller
businesses will be caught in future. This creates obligations to inform and
consult the employees, but pro-active planning can result in a structure more
favourable to the company, and can keep a focus on the primacy of direct
communication if desired. Any investment in the UK should therefore include
checks on what exists to fulfil this role, the pressures to set up a suitable
employee forum, and how it is actively managed.
There can be interesting cross-over with union collective bargaining
agreements, which may co-exist with a staff forum in the same business. No
examination of the labour strategy of a UK business should ignore its current or
possible exposure to collective disputes.
Non-compliance with information and consultation obligations can result
in heavy fines, and a UK subsidiary is not going to escape by pleading it was
not told its parent company's plans.
In addition, there is a range of existing obligations to consult
representatives of a workforce, for example on collective redundancies,
transfers of undertakings, and health and safety matters. These different
consultation obligations tend to point employers to the advantage of setting up
a single standing body that is there to deal with issues quickly. US parent
companies may under-estimate the work needed to carry out a down-sizing
operation in the UK, and part of this is made easier by having a properly
elected and mandated representative body.
Unionisation
Rights of mandatory recognition in the UK over the last 5 years have
given the major unions opportunity to get back into businesses where they have
been de-recognised or to enter new businesses which have never been unionised.
Unlike the US the unions can sometimes get automatic recognition where they have
a majority of members in the relevant bargaining unit. US owners should not
therefore assume they will be given the opportunity to fight and win a ballot
against recognition.
There are limited methods of preventing or hindering union recognition,
usually needing a high degree of advance preparation and a period of building
satisfactory alternatives. Unions rightly see their opportunity to step in and
fill a void where the employer has no alternative consultation structure, and
where the employer may under-estimate the low morale of its workforce.
Many UK businesses have excellent working relations with unions, and this
can quickly be established on a thorough due diligence. If the relationship with
the union(s) is not so good, then there may be trouble ahead.
Strikes
A fact of life in the UK is that strikes, or the threat of them, occur
frequently in some industries. As employees have protection from dismissal for
striking during a 12 week period, there is less risk for them in resorting to
industrial action. Some union leaders are noticeably more ready now to resort to
strikes as a legitimate weapon. Leaders of some principal unions are now more
assertive of the strike option than were their predecessors in the early years
of the Blair Government. Attempts to close unaffordable pension schemes have
been a particular cause of industrial disputes.
It is surprising how few companies seem to make good contingency plans
for strike action and similar crises. Also, few seem to take advice on labour
strategy when considering corporate structures. Yet a timely review of how the
business could be structured to minimise strike risk may in time save a lot of
money, if not the entire business. So many corporate groups seem to be led
towards amalgamating their businesses into one corporate entity without
appraisal of its effect on bargaining unit structures, recognition bids, and
secondary industrial action. The last mentioned area is a particularly good
reason for not putting all the employees in one corporate pot, if there is a
good commercial reason also for preserving a segmented corporate structure in
which it may be harder for the union to spread a strike across different
entities in the group. Generally, employees can strike only against their own
employer not in support of trade disputes between other group companies and
their employees.
Collective Bargaining
This is handled very differently from in the US. Generally collective
agreements with unions are not themselves legally binding, yet some terms of
such agreements will have legal effect by being effectively incorporated into
the individual employment contracts. Thus, analysis of the existing terms and
conditions of a workforce may require details of individual contracts, any
collective agreements, and probably custom and practice. The norm in the UK is
also for less rigorous and less well drafted collective agreements, leaving
ample room for disputes about exactly what is meant to have legal effect as part
of the employee's contract.
Solutions
Clarkslegal LLP is actively involved with US businesses who operate in
the UK and European market, liaising with other professionals who also share
transatlantic business and labour relations experience across the spectrum of
human resource audits, crisis management, media relations and employee
communications. There is a huge advantage in making the labour strategy an early
part of any investment decision process, so as to know how good things really
are in the workforce of the target business. Also, managing a successful
restructuring will entail potentially a range of issues which will tax the most
experienced of US investors.
Some useful mechanisms for changing terms, reducing headcount, managing
union recognition disputes, managing the aftermath of major change and
minimising expensive legal claims are there to be utilised. However, in many
situations the new overseas owner of the business may be regularly one step
behind the people obstructing change. This experience may sadly deter further
investment decisions.
While the UK is far more regulated than a few years ago, and the effect
of the EU on labour laws has been very forceful, the total picture is one of a
thriving business economy that can reward investment if the new owner enters the
market with eyes open, and a willingness to learn and operate within a set of
rules that will be initially puzzling. The flexibilities of the UK labour market
still exist, and some businesses have been highly successful at preserving those
flexibilities, either in harmony with unions or despite adverse union
strategies.
Formulating a comprehensive labour strategy, understanding the right
levers to pull, and having a long term plan to build and maintain trust and
confidence with the workforce should together give the best hope of long term
success in the UK market and of minimising risks of damaging and expensive
labour disputes.
Published May 1, 2005.
