PART 2 – WHAT CAN AN EMPLOYER DO WHERE TPR HAS FOUND IT IN BREACH OF THE AUTOMATIC ENROLMENT LEGISLATION FOR FAILING TO PAY CONTRIBUTIONS – THE REVIEW AND APPEAL PROCESS

01 / 02 / 2022

Any employer who employs eligible jobholders, even just one, has duties under the automatic enrolment legislation (AE Obligations). These can be split into two elements: the initial AE Obligations at the start of an eligible jobholder’s employment, and the on-going duties including paying monthly contributions, keeping records and dealing with an employee leaving the scheme.

It is the duty of The Pensions Regulator (TPR) to maximise employer compliance with AE Obligations. Some employers may not meet their AE Obligations and will be in breach of the legislation. It is the duty of TPR to investigate any potential breaches. In this instance TPR will intervene and bring enforcement action against the employer, set out further below, such action can include a fine, or require an employer to backdate contributions. This can extend to both the contributions of the employer and the employee.

Who can report an employer’s breach?

Where an employer is in breach of its AE Obligations the employee who is affected can report the employer to TPR; an employee can also report its employer in its capacity as a whistleblower. This might be an employee who works in HR or who has knowledge of the employer’s non-compliance. The administrator of the pension scheme should also report non-compliance to TPR (which is commonplace), and of course the employer should report itself.

Types of enforcement action

TPR will bring the following enforcement action against an employer, in this order:

  1. The first step is a warning letter setting out the AE Obligations that the employer needs to comply with and a deadline to comply.
  2. If the employer does not comply with the warning letter within the deadline, TPR will issue a statutory notice. This will set out how the employer can comply with its AE Obligations and/or pay any contributions that have been missed or the employer is late in paying.
  3. Where the employer fails to comply with the statutory notice, or to address specific breaches, TPR will issue a penalty notice. There are three types of notice that TPR can issue:
    • a fixed penalty notice which is fixed at £400;
    • an escalating penalty notice which sets out a deadline to comply with the statutory notice after which the employer will be fined a daily rate of £50 to £10,000 depending on the number of staff. The daily rate will continue until compliance; and
    • a prohibited recruitment conduct penalty notice at a rate of £1,000 to £5,000 depending on the number of staff.

There will be instances where TPR intervenes but the employer has an excuse for failing to comply. The COVID-19 Pandemic, for example, has had a negative impact on many businesses. Some have suffered from a constantly changing workforce, the complexities of the furlough scheme and employees not attending the office. This may have resulted in errors e.g. employers not paying their own contributions to an employee’s pension, and even not calculating and deducting the employee’s own contributions.

What can the employer do in these circumstances?

Review process

Where an employer has received a letter or notice from TPR they can ask TPR to review its decision. Employers should request TPR to review a decision as early as possible in the process so as to prevent TPR issuing a penalty notice, or where a notice has been issued the amount due escalating significantly. This request for review must be made within 28 days of the date of the letter/notice. Employers must note that they must apply directly to TPR for a review before issuing any other appeal.

Appeal process

Where an employer disagrees with the review decision and the notice includes a penalty the employer can then appeal to the General Regulatory Chamber of the First-tier Tribunal (the Tribunal). The appeal must be brought within 28 days of receipt of TPR’s review decision (or TPR’s decision not to review). Only in exceptional circumstances will a review or appeal be considered outside the deadline.

Grounds of review/appeal

In order to be successful in an appeal to either TPR or the Tribunal an employer needs to show one of the following:   

  • employer AE Obligations do not apply (for example where the company is only made up of directors);
  • the employer did in fact comply with its AE Obligations on time; or
  • the employer has a reasonable excuse for failing to comply.

The first two grounds are fairly self-explanatory and the key is for the employer to provide TPR with sufficient evidence to show that the notice should be revoked.

Reasonable excuse

The final ground is open to more interpretation and is dependent on the employer’s circumstances. TPR’s website sets out a number of examples of circumstances that will be considered “a reasonable excuse”. For example a delay which is out of the employer’s control such as delay caused by the pension scheme provider, or a key member of staff is suffering from a serious and prolonged medical issue with no alternative staff who can carry out the work instead.

It is important to note that employers cannot rely on their own (or an employee’s) lack of knowledge of AE Obligations as a reasonable excuse for lack of compliance. Employers need to make sure they employ competent and knowledgeable staff to ensure the employer remains compliant with its AE Obligations, or outsource the role to a company who can provide a high level of service. Non-compliance can lead to the employer being fined a daily rate of £50 to £10,000 depending on the number of staff. This can be a huge burden on employers.

Based on the information published by TPR, a large number of AE cases are reviewed by TPR each year. A large proportion of reviews resulted in some kind of alteration to TPR’s statutory notice. There are three ways a notice can be altered: revoking the notice; varying the notice; and substituting the notice with a different type of notice.

When an appeal goes to the Tribunal, the success rate decreases. As the grounds for appeal and review are the same, if an employer has set out their case well at the review process it is unlikely that the employer will have much more success in the appeal process.

If an employer believes it has a reasonable excuse for failing to comply with its AE Obligations they should seek legal advice.

Employers should also note that if they are unable to pay a notice because they cannot afford it, they should speak directly with TPR’s penalty recovery team to look at potential payment terms.

Whilst it is the role of TPR to ensure employers comply with their AE Obligations, it is also the role of TPR, as its name implies, to ensure that pension schemes can continue running. Where an employer has complied with its obligations, albeit late, then there should be a balance between issuing a notice and protecting the employer to ensure it can continue to employ staff and contribute to their pension scheme.

Other powers of TPR

The ultimate powers of TPR are to prosecute under criminal law (including under the Proceeds of Crime Act 2002).

TPR can also bring a civil claim to recover the debt where the employer fails to comply with a notice.

Wilful vs non-wilful non-compliance?

Pursuant to criminal law, wilfully failing to put eligible staff into a pension scheme and knowingly providing false information in a declaration of compliance are criminal offences. As such, employers can face criminal prosecution for wilful non-compliance.

This is where the education for employees is imperative, to ensure the employer can show that they have provided the employees with the requisite skills to ensure compliance with the AE Obligations. 

Considerations for employers

Employers who are most likely to be impacted by failure to pay contributions are those with a higher turnover of staff. Where employees only stay in employment for a short time period it may become complex working out when AE Obligations start and stop. Another complexity will be where the employer has a less sophisticated payroll system, this will be particularly the case for smaller employers who may manage payroll internally.

Employers with a large number of temporary workers or employers who have employees on different types of contract, such as zero hour contracts or changing contract hours, are also likely to face difficulties with compliance.

Also employers who employ non-English speaking employees. The employees may not be able to properly understand the information provided to them in the information packets and will be unable to make an informed choice to opt-out.

Employers need to make sure that they are mindful of their continuing AE Obligations. Employers should ensure that the employees who manage the AE Obligations have received sufficient training to prevent any breach. An employer should also make sure that the payroll system they have implemented is able to manage any complexities with worker types and contract types across the business.  

Alison Hills, Partner and Gemma Williams, Trainee Solicitor – Pensions & Employee Benefits Team