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Not just a matter of form for employers

13 August 18

Pension briefing: recent cases on “worker” status also have significant pensions implications for employers, highlighted here along with proposed further additions to the regulatory maze

by June Crombie

The challenge continues for employers to categorise worker status correctly – or literally pay the consequences. The mandatory auto-enrolment of eligible jobholders into pension schemes means that all employers with workers fall under a pension regime. For many employers though, compliance with more than one pension regime is required, due to their legacy pension schemes, so it is critical to identify and manage a variety of risks. Legacy defined benefit pension schemes, in particular, continue to throw up financial challenges. 

The Pensions Regulator is now issuing fines to employers for non-compliance with auto-enrolment obligations and publicising those breaches. 

Some recent developments illustrate just how tricky the pensions arena has become for employers.  

Looking beyond the contract 

In Pimlico Plumbers v Smith [2018] UKSC 29 (13 June 2018), the Supreme Court considered the prerequisites for a “worker”, as opposed to a self-employed independent contractor. Smith’s contract described him as “self-employed”. On construction of the contract, the Supreme Court held that because Pimlico Plumbers exercised “tight control” over him, with the obligation of personal performance a dominant feature of the contract, he could not be considered a truly independent contractor and so was deemed a “worker”. 

The importance of analysing working practices and “management” control framework before framing contracts is fundamental. The consequences of employers not assigning the correct status will mean that such employers risk being in breach of the auto-enrolment regime requirements, with exposure to fines and adverse publicity. 

Under the auto-enrolment legislation, employers must enrol all eligible jobholders into a workplace pension scheme and offer access to a pension scheme to other categories of worker. The first step in establishing an employee’s entitlement is confirming whether they are a “worker”. The Pensions Regulator can impose fixed penalty notices of £400 on non-compliant employers, plus escalating penalty notices at a daily rate between £50 and £10,000 for persistent non-compliance. There are also reputational risks, as the Regulator has the power to “name and shame” employers who do not comply. There is an appeal process against any fines imposed. 

Defined benefit schemes: more rules

The Government is consulting on putting in place stronger powers for the Pensions Regulator to target “a small number of employers evading their obligations” under defined benefit pension schemes: Protecting Defined Benefit Pension Schemes – A Stronger Pensions Regulator, issued June 2018. This comes in the wake of high-profile company failures, most recently BHS and Carillion. 

The aim here is to improve the Regulator’s powers, to deliver an effective deterrent against employers jeopardising payment of benefits in full to members of those schemes. This is very much a “declaration of intent”, looking at increased mandatory requirements for employers. 

There would be an “enhanced notifiable events” regime, with a broader range of events known to or in control of the employer to be notified to the Regulator. Potential new notifiable events include granting of security to give priority to third parties ahead of the pension scheme, private equity appointments to the boards, the appointment of a “restructuring” officer, sale of a proportion of the business or assets of specified employers, carrying out an independent business review and breach of banking covenants. 

Payment of dividends is already very much a focus of the Pensions Regulator, but is not included in this consultation because the Department for Business, Energy & Industrial Strategy is considering dividends under a corporate governance review. Expect it to be revisited.

Adjustments to the existing enforcement regime of contribution notices and financial support directions are also proposed.

Nine new offences are included in the consultation, with escalating sanctions from civil fines up to £1 million, director disqualification, and criminal sanctions. 

The intention behind this consultation and any future legislation is a tighter operating landscape for employers with defined benefit pension scheme liabilities. Navigation through it by employers will be for high financial stakes.

Scottish Solicitors Staff Pension Fund

In an earlier article (Journal, February 2018, 32) I doubted that the dismissal by Lady Wolffe after debate of the action Trustees of the Scottish Solicitors Staff Pension Fund v Marshall Ross & Munro [2018] CSOH 1, would be the last instalment of this saga. Indeed, it has not. On appeal, the Inner House agreed with the trustees and the action will now proceed to proof before answer: [2018] CSIH 39. The court decided that a “proper investigation” of the facts should be undertaken before it is determined whether the firm called Marshall Ross & Munro has liabilities as an employer under that fund. 

June Crombie, head of Pensions Scotland, DWF LLP

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