Worker classification, employee rights, and equal pay are among the issues that require careful consideration in light of recent and forthcoming changes.
By Tom Evans, Sarah Gadd, David Walker, Terry Charalambous, Adam Ray, and Catherine Campbell
The COVID-19 pandemic, and the growing emphasis on ESG metrics (particularly the “s”), has heightened the focus on worker rights and employee-employer relationships. Legislative changes, planned reforms, and high-profile court decisions in the UK, Europe, and beyond demonstrate a changing approach to worker rights, and underscore the need for careful consideration of these issues. This is an area that will continue to see significant developments, requiring dealmakers to remain alert to the impact of further changes.
What to Know
Worker classification: In February 2021, the UK Supreme Court found that Uber drivers are entitled to worker rights rather than more limited rights as a contractor, and that worker status is a matter of statutory interpretation rather than contractual interpretation. The ruling builds on earlier cases, including the 2018 Pimlico Plumbers judgment, and has a major impact on UK companies reliant on contractors. Further cases are due to be heard later this year. In the same month, Italian authorities ordered four major delivery platforms to fully hire over 60,000 couriers and pay €733 million in fines. Further, Spain recently announced legislation to provide certain employment rights to gig-economy workers.
IR35: Other UK developments include new off-payroll working rules, under which organisations need to assess the status of workers who operate through intermediaries. If employee status is determined, the hirer must pay employer’s national insurance contributions and operate PAYE withholding, creating a cost and compliance burden for businesses.
Equality: Equal pay and discrimination cases continue to impact the employment landscape. In March 2021, the UK Supreme Court ruled that female shop-floor workers could bring an equal pay claim against a grocer by comparing their pay to male depot staff. And in June 2021, the European Courts of Justice found that EU law requires equal pay for “work of equal value” and that workers in different establishments can compare their pay if it is set by a “single source”. The rulings are likely to trigger a wave of similar claims. Elsewhere, a UK food retailer was found liable for the racial harassment of one employee by another, as the business had not refreshed its equality training. The decision leaves companies on the hook if regular diversity training and other steps are not taken.
What to Do
The reputational damage caused by worker mistreatment and disputes can have a long-lasting impact on a portfolio company and hurt the chances of a successful IPO or other exit, especially given the increasing focus of institutional investors on ESG issues.
Worker classification: The reclassification of self-employed contractors to employees or workers could lead to significant backdated costs to cover holiday pay, sick pay, and pension contributions as well as national insurance or social security contributions. This could materially change the valuation of target businesses or portfolio companies that rely on self-employment structures. Recent developments emphasise the significance of how worker relationships work in practice. There is little point in just reviewing standard form agreements, or relying on indemnities from individuals — instead it is increasingly necessary to dig further and assess whether in practice so-called contractors genuinely carry on business or whether they are subordinate/dependent and therefore likely to be classified as workers.
IR35: While startups and other small companies may be exempt under a “small company” exemption, most portfolio companies will need to consider what processes are in place for making status determinations, and if PAYE withholding is operated where necessary.
Equality: Pay disparities and equal pay claim risk must be considered when undertaking diligence, particularly for retail deals, but also for any deal where roles at the target business are typically performed by different sexes, who are paid differently. Equality-related policies and frequency and content of training on discrimination issues also require a targeted approach.
Future reform of worker status and rights is likely. Following the Uber decision, the head of the UK Pensions Regulator said gig-economy firms should start offering pensions to the people who work for them. The House of Lords Select Committee on COVID-19 argued for new laws to provide contractors with enhanced rights. Meanwhile, the European Commission launched the first phase of a consultation process into working conditions for digital-platform workers.
Beyond Europe, similar issues are being considered in the US. President Biden has adopted a pro-union stance, and New York has introduced a bill that would give gig workers the right to organise. We expect employment rights and work relations to remain a central theme for PE to watch in the year ahead.
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