Auto-enrolment pension regime

‘I’m in’, say the adverts about pensions auto-enrolment. But many law firms will be wondering exactly what they have got themselves into, once they start preparing to comply with the complex requirements imposed by the new pensions auto-enrolment regime.

The first thing to note is that pensions auto-enrolment is not just a ‘large employer’ issue. The regime will eventually apply to all employers, starting from a personal ‘staging date’ allocated by the Pensions Regulator (TPR).

Non-compliance can lead to enforcement notices, criminal liability, fines of up to £50,000, and inspection of premises and documents, not to mention reputational damage. This could be acute for law firms, because clients might expect them to be leaders in regulatory compliance. So, after getting to grips with the basics of the assessment, information and processing obligations, law firms still need to plan in advance how to address some tricky issues.

Scope of employer duties

The employer duties only apply in respect of ‘workers’, not the genuinely self-employed. An individual will count as a ‘worker’ if they are entitled to holiday pay (since the definition used is broadly the same for both purposes). Much of the work in assessing workers should therefore already have been done. Case law has already established the key factors which point to a ‘worker’ relationship, namely the requirement on the worker to provide personal service (with no option to send a substitute) and a mutuality of obligations (on one party to provide work, and on the other to carry it out).

In particular, the tricky areas that law firms are likely to encounter are:

• Partners. You would expect partners, on the face of it, to be self-employed. However, this will be a matter of fact in each case. We know from the Court of Appeal’s judgment in Clyde & Co LLP and anor v Bates van Winkelhof that equity members of an LLP cannot fall within this definition of ‘worker’. But what about salaried partners?  Most firms will adopt the approach that salaried partners are also not workers, and therefore the employer duties will not be triggered. But on a strict analysis they may have employment status. HMRC has recently launched a consultation on proposed legislation to remove the presumption of self-employment for some members of LLPs that seek to disguise employment relationships.
• Secondees. Individuals working on secondment from another firm/company usually remain a worker of that entity, so long as the contractual arrangements do not agree otherwise.

This is also true of workers who are seconded to or from a location outside the UK. Additionally, the employer duties only apply in respect of those who ‘work, or ordinarily work’ in the UK. If a worker’s contract provides for them to be based at a location in the UK and they have no ongoing relationship with a non-UK employer, then that individual is said to be working ‘wholly’ within the UK. Otherwise, an individual temporarily working outside the UK will only ‘ordinarily work’ in the UK if their contract remains with the UK employer and there is an expectation that the worker will return to the UK at the end of their placement.

• Agency staff. If agency staff fall within the regime, it will almost always be the agency which owes the employer duties. The law firm using agency staff will, however, be subject to the employer duties in auto-enrolment if it is responsible for paying (or actually pays) the worker.
• Interns/work experience students. These will usually be caught by the legislation, because they are undertaking to do work ‘personally’ (the law firm would not permit them to send a substitute in their stead). As such, the employer must assess whether they meet the age and earnings thresholds which trigger employer duties. In practice, interns and work-experience students are unlikely to meet the qualifying earnings threshold to trigger auto-enrolment, although they may earn enough either to opt in to an auto-enrolment scheme, or to be entitled to join a different scheme. Earnings thresholds change from time to time, and can be found on TPR’s website. Strategic use of postponement of the assessment date in respect of a worker for up to three months may be useful in cases for temporary staff.
• Contractors/personal service companies. If a contractor is genuinely self-employed, or contracts through a personal service company, the law firm will not owe employer duties to them.

Flexible benefits schemes and salary sacrifice

Many law firms offer flexible benefits schemes, where workers can choose to forego contributions to a pension scheme and allocate these towards another benefit.

This may conflict with the duty to place certain workers into an auto-enrolment or qualifying scheme. As set out below, schemes will only qualify for these purposes if they provide for a minimum level of contribution. If a worker chooses to contribute below this minimum level and put the money towards another benefit, then the worker will need to ‘opt out’ of the scheme altogether. Simply reducing or stopping contributions without validly opting out could produce a yo-yo effect, whereby the employer must automatically enrol the worker back into the scheme on full contributions as soon as they assess the worker to be an eligible jobholder again.

While the yo-yo effect may be frustrating for a worker, employers need to be careful about how they explain the need to opt out, because the auto-enrolment legislation prohibits employers from taking any action if its ‘sole or main purpose’ is to induce individuals to opt out of or cease active membership of a qualifying scheme. As this boils down to the purpose for which an employer’s action is taken, it is prudent to keep a record of the reason why flexible benefits are offered, and to ensure that any communications accord with this. Opt-out forms should usually be provided by the pension scheme, rather than the employer, to avoid any perception that the employer is inducing opt-out.

Salary sacrifice arrangements can be another potential pitfall. An employer who wants workers to agree to sacrifice salary in return for pension contributions cannot give the impression that workers will only be auto-enrolled if they agree to this arrangement.

Self-certifying

Most law firms will already provide access to a pension scheme, at least to employees. It may be possible to use the same scheme for auto-enrolment purposes, if it meets certain qualifying criteria and has no barriers to entry (such as service requirements). The question of whether a defined contribution (DC) scheme will meet the qualifying criteria depends mainly on contribution rates. Where the DC scheme has been created or amended with auto-enrolment in mind, it may calculate contribution rates by reference to ‘qualifying earnings’ (a concept introduced by the auto-enrolment legislation). If not, the employer will need to self-certify the scheme to demonstrate that it meets the criteria in some other way.

Most pension schemes will fall into the latter category, simply because the definition of ‘qualifying earnings’ is limited to earnings between two thresholds set by the government annually. Pension schemes are more likely to measure contributions by reference to ‘pensionable pay’. If so, the pension scheme will only meet the qualifying criteria if the total contributions (and the proportion of employer contributions) meet the thresholds, set by the government from and available on TPR website.

Law firms may want to treat different sections of the workforce differently (for example, to offer some the statutory minimum, and others a gold-plated version). TPR has confirmed this is permissible. However, as with any policy, firms should carry out an impact assessment in case their proposals amount to indirect discrimination against workers with a protected characteristic, or unjustifiable less favourable treatment of fixed-term employees.

Employment contracts

Employment contracts should already have a section dealing with pensions. Employers should check to see if this is still serviceable once employer duties apply. Much depends on what the contract already says, and how the employer plans to meet (or exceed) the employer duties.

Some employers may wish to contractually enrol workers (that is, get their agreement to sign up to a scheme). The key benefits of doing so are that where an individual is already an active member of a qualifying scheme, most of the employer duties do not apply until the individual leaves the scheme, potentially making the employer’s job much less onerous.

Where employees are not already active members of a qualifying scheme on the assessment date, the employer duties will apply, whatever the employment contract says about pensions. Employers will usually want to amend the contract to avoid having two sets of obligations – contractual and statutory – running alongside each other.

Changing employment contracts for existing employees requires consultation and agreement (or termination and re-engagement – taking care that where this affects 20 or more employees, collective consultation takes place). If an employer intends to change its existing pension provision, this may constitute a ‘listed change’ and require additional consultation.

Workers may not realise just how much preparation goes behind that phrase, ‘I’m in’.

Katherine Shaw is an associate and Kathryn Pickard a paralegal in the employment, reward and immigration team at Lewis Silkin