Regulations which came into force on 1 January 2019 create new reporting obligations on UK companies in relation to employee engagement and certain pay matters.
Which regulations?
The Companies (Miscellaneous Reporting) Regulations 2018
What are the new obligations?
There are three that relate to employee engagement and pay (and others relating to corporate governance generally that are outside the scope of this bulletin):
| Summary of new obligation | Companies to which it applies | |
|---|---|---|
| Employee engagement | To report on how the directors have taken into account the view of employees engaged with employees and how they have had regard to employee interests. | Large and medium-sized companies (whether quoted or not) with more than 250 UK employees. |
| CEO pay ratio | To report on the ratio of the CEO's pay to the median percentile full-time equivalent remuneration of UK employees. | Quoted companies with more than 250 UK employees. |
| Effect of future share price increases | To illustrate the effect of future share price increases on executive pay outcomes. | All quoted companies. |
When do they apply?
They apply in respect of financial years beginning on or after 1 January 2019. So the first “reporting season” will be in early 2020.
In this bulletin, we consider the first of these obligations in detail.
What is a large or medium-sized company?
A large or medium-sized company for the purposes of reporting on employee engagement is any UK incorporated company (whether quoted or not) that has more than 250 employees and that satisfies one of the following tests:
- annual turnover of more than £36 million; or
- balance sheet total of more than £18 million.
Employee engagement reporting
The company must describe in the directors’ annual report the action taken during the financial year to introduce, maintain or develop arrangements aimed at:
- providing employees systematically with information on matters of concern to them as employees;
- consulting employees or their representatives on a regular basis so that the views of employees can be taken into account in making decisions which are likely to affect their interests;
- encouraging the involvement of employees in the company’s performance through an employees’ share scheme or by some other means; and
- achieving a common awareness on the part of all employees of the financial and economic factors affecting the performance of the company;
and it must also summarise in the report:
- how the directors engaged with the employees; and
- how the directors have had regard to employee interests, and the effect of that regard, including on the principal decisions taken by the company during the financial year.
It is a criminal offence for a director knowingly not to comply, or to be reckless as to compliance.
What does this mean in practice?
The new regulations presume that a company will have or will create “arrangements” of some kind through which the directors engage with employees. At a practical level, this could mean a range of things, from conventional means of engagement, such as:
- regular “town hall” meetings;
- creating an employee council and holding meetings with representatives appointed or elected for the purpose, with a corresponding flow of information, questions and answers;
- negotiating a formal agreement under the Information and Consultation of Employees Regulations 2004; or
- engaging with representatives of a recognised trade union;
to more radical solutions (at least by typical UK standards), such as:
- permitting an employee representative to attend (parts of) Board meetings as an observer;
- nominating a non-executive director as the director responsible for employee engagement and consultation; or
- enshrining a right in the Articles for a member of the Board to be nominated or elected by the workforce.
New obligation to consult?
The wording of the Regulations suggests that consultation should take place before decisions that are likely to affect employees’ interests are made by the Board (otherwise their views could not be taken into account). That is not the norm in most UK companies and could present company directors with a potentially major cultural change, except for the fact that:
- the new obligation will not override the directors’ statutory duties to the company, nor obligations of confidentiality or to protect price sensitive information, and there will be circumstances in which the directors may legitimately not provide information or not engage with or consult employees because of other legal obligations; and
- there is no direct means by which employees can enforce this.
For more information or to discuss the approach to complying with the Regulations, please contact us.