Time to listen

Top 10 questions you need to consider before the Information and Consultation of Employees Regulations 2005 take effect from next March.

1. Who will this legislation affect?

Initially, the legislation will affect employers with 150 or more employees in an “undertaking” in the UK. An undertaking is defined as “a public or private undertaking carrying out an economic activity, whether or not operating for gain”. The DTI’s view is that this covers entities with their own separate legal entity, as opposed to merely a factory or office. The legislation will affect employers of 100 or more employees from March 2007 and employers of more than 50 employees from March 2008.

2. What will the effect be?

The legislation will enable employees in an affected business to require their employer to set up a works council. The constitution of the works council may have to follow the standard provisions of the legislation, unless the employer takes steps to dilute the impact of the legislation. If the standard provisions apply to the works council, the employer will have to consult with the council on “decisions likely to lead to a substantial change in work organisation and contractual relations”.

The scope of this is wide and would cover, for example, the decision to enter into M&A activity or to outsource services. Consultation will have to be “with a view to reaching agreement” with the works council and must occur in advance of any decision that might affect the employees. This will have an impact on timing. There are steps that an employer can take to try to avoid the imposition of standard provisions governing a works council. See paragraph 5.

3. What are works councils, and why is this a big issue?

Works councils have a major role within most European jurisdictions, except, until now, the UK. Works councils are bodies of elected employee representatives who may have co-determination rights – ie the right to be informed, and in some instances consulted, before the implementation of important employment issues.

In France or Germany, for example, employees may be represented in a number of ways – they may have representation through a domestic works council (with a lower employee trigger threshold than under the new UK regulations) or the legislation may allow employees to sit on the board of directors. Alternatively, or in addition, employees may be members of an industry-wide trade union.

Works councils are already widespread throughout the EU and are the most common form of representation. Their powers vary in different jurisdictions but most have ongoing information and consultation rights. In France, for example, it is a criminal offence to fail to inform a works council of an acquisition of a French company – even if the decision is taken by the parent company in another jurisdiction. In certain circumstances, a works council can also demand that an independent auditor is brought in to assess whether the company is justified in making lay-offs. In the Netherlands, a corporate transaction cannot even go ahead unless the works council approves it.

In addition to the above, representation may also exist at a European level – undertakings employing at least 1,000 people in the EU with at least 150 in each of two member states may be required to set up a European-wide information and consultation body (a European Works Council – EWC). EWCs are informed and consulted on issues of a transnational nature.

4. What is the current position in the UK?

There is no domestic works council legislation in the UK. Employers are free to set up their own bodies to disseminate and/or discuss issues with their employees. For example, employees may elect employee representatives who may be informed or consulted on specific issues, or have representation through trade unions, whether or not formally recognised by the employer.

While the employer is free to establish its own constitution for any employee forum, it must appoint employee representatives in the UK to discuss health and safety issues, and must inform and/or consult with employee representatives on the transfer of an undertaking (eg an outsourcing or the sale or purchase of a business) and on collective redundancies (ie when 20 or more employees are to be made redundant at one establishment in a 90-day period).

5. What if an employer already has an information/consultation forum?

To escape the imposition of the standard provisions, an employer must show that there is already in existence one or more valid pre-existing agreements covering information and consultation arrangements. To be valid, these agreements must at least: be in writing; cover all of the employees in the undertaking; set out how the employer is to give information and seek views; and have been approved by the workforce.

Employers should beware, though, that their existing arrangements may not satisfy the legislative requirements. For example, do they cover all employees and have they been approved by them? If not, then 10 per cent of the employees can make a request to initiate discussions to set up a new forum. If agreement is not reached within six months, then the constitution of the forum/council must comply with the standard provisions.

6. What might happen in March 2005?

Come March 2005, an employer will be faced with one of three scenarios:

  • the employees are content with their existing consultation arrangements (if any)
  • there is a pre-existing agreement in place that establishes and defines current areas of information and consultation with employees/employee representatives; or
  • there is no agreement in place regarding information/consultation and employees want one.

If the pre-existing arrangements are valid (see paragraph 5), it will take a vote of 40 per cent of the workforce to change them, as opposed to 10 per cent if there is no valid consultation forum in place.

7. What must a UK employer do now?

Employers can take steps to lessen the impact of the new legislation and ensure they maintain some control over the arrangements to be introduced. However, employers must start planning now if they are to avoid the worst effect of the new legislation. If employers agree with their employees to set up a voluntary consultation body (a voluntary works council) that covers all of the employees, then the employer and the employees can agree what issues to consult about.

In theory, employers have total flexibility in this – the ambit of the voluntary works council can be drawn much more narrowly and could be restricted to consulting about changes to terms and conditions and redundancies.

Once a voluntary works council is in place, it is much harder for employees to force an employer to introduce the wide-ranging and restrictive arrangement in the standard provisions; it will take 40 per cent of the workforce to vote in favour of reopening negotiations.

However, voluntary works councils must be up and running before April 2005. Therefore, employers need to start making plans now as before a voluntary arrangement can be introduced, it will have to be agreed with and communicated to employees, constitutions and agreements will have to be drafted, employee representatives elected, management and employee representatives trained on their roles and, potentially, the arrangements dovetailed with existing continental works councils/EWCs.

8. What happens if a UK employer does nothing?

The worst course an employer could follow would be to do nothing. Come March 2005, it will take only 10 per cent of a company’s UK workforce to vote in favour of a works council before the employer must enter into negotiations to introduce one. An employer will then be considerably disadvantaged in this process. For example, if no negotiated position is reached, the standard default provisions will apply.

In addition, if an employer fails to comply with its obligations under the regulations, affected employees can get a declaration from the CAC that the employer is in breach and the employer could be fined up to £75,000.

9. What are the standard provisions?

In the absence of agreement, the standard provisions will dictate the information and consultation framework. These provide that the works council must be informed in advance of recent and probable developments in the undertaking’s activities or economic situation, and informed and consulted on the situation, structure and probable developments of employment, including threats to employment and decisions likely to lead to substantial changes in work organisation or contractual relations.

This could impact on the timetable of an acquisition or a sale, or an outsourcing, and may require an employer to inform the workforce of its plans before it might ordinarily want to. An employer cannot hide behind confidentiality as a reason for a failure to meet its works council obligations.

10. What practical issues should an employer consider?

An employer should start to think about tactics and its options immediately. For example, should it raise awareness, test the temperature, review existing mechanisms and determine where a works council would fit within its organisation? Or should it do nothing and try to ride out the storm?

If an employer decides that a works council should be introduced, it should start considering the following issues:

  • What will be the topics for discussion with the works council? Will it only be very material issues such as redundancies, plant closures and changes in terms and conditions and benefits? Will the works council discuss company strategy and finances?
  • Who will represent management on the works council? Will it always be the same management team? Will senior management/chief executive make regular presentations to the works council?
  • How will communications be dealt with? How will its agenda/minutes of its conclusions be disseminated? How will middle management be kept up to date so that they can deal with queries arising from the minutes of works council meetings?
  • How many employee representatives will there be? How will their constituencies be divided up – on the basis of geography or status/seniority?
  • How should the works council interact with any existing trade union? (either formally recognised or not)? How will the works council fit within any existing collective bargaining framework?
  • How will an employer get employee “buy in” at the start and then on an ongoing basis to the works council and its importance? How will the employer maintain interest in the works council?
  • How should an employer market the works council to employees so that implementing a new consultation framework is seen as a positive step rather than a measure that has been forced on it?

Stephen Brown is head of the employment group at Latham and Watkins .

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