Geared for auto-enrolment

Many law firm leadership teams will be wondering exactly how they keep on top of the auto-enrolment process and reduce their risks of non-compliance. Non-compliance can lead to uncapped pension contribution liabilities, enforcement notices, criminal liability fines of up to £50,000, and inspection of premises and documents, not to mention reputational damage. No firm wants to be splashed all over the papers like Dunelm Soft Furnishings Ltd as they were forced to make good unpaid contributions by The Pensions Regulator for getting auto-enrolment wrong.

When clients expect law firms to be leaders in regulatory compliance, not getting to grips with the requirements just isn't an option. Some firms forget that a key question is: what is the LLP and any service company's staging date/s, and have they passed? The Pensions Regulator has confirmed that 1 April 2017 is the correct staging date for all entities that did not operate a PAYE scheme in April 2012. So that might just save the day for LLPs, who engage some of the harder groups of workers to categorise.

Background

In December 2002, the then Labour government established the Pensions Commission in response to the concern that individuals were not saving enough for their retirement, and that measures taken to encourage private sector pension provision might not be succeeding.

Based on these recommendations, the Pensions Act 2008 established a duty on employers to automatically enroll jobholders into, and to contribute to, a qualifying workplace pension scheme.

The new duties started to take effect from 1 October 2012 and the larger firms started auto-enrolling but it will take a few more years before all employers are finally in.

Those that started back then thought it was a rough ride, but with adequate planning and resources most came out the other side feeling that they were compliant.

The impact of Clyde & Co

In May 2014 when the Supreme Court ruled in Clyde & Co v Bates van Winklehof that a partner of a LLP was a 'worker' under the Employment Rights Act 1996 (the ERA), a fog descended on firms - what should they now do about auto-enrolment for members?

This was because the Court made no distinction between 'equity members' or fixed share members within an LLP (the Clyde & Co case does not give precedence in regards to worker status of a partner within a general partnership). Prior to this ruling, previous case law under the ERA said that a member of an LLP was not considered a 'worker' under the ERA. The Supreme Court explicitly declined to rule on the position of other partnerships, and the law remains unchanged in relation to them.

The Court noted that the same 'worker' definition is used in other legislation, most notably in relation to the national minimum wage, working time and part time working. Although the Court did not mention the automatic enrolment legislation, the definition of 'worker' under the ERA is similar to the definition of 'worker' in the Pensions Act 2008 for automatic enrolment purposes.

Firms tried to get information on the implications of this ruling in relation to auto-enrolment and LLP members, a group everyone previously believed to be excluded.

The Pensions Regulator said at the time: 'Employers [LLPs] should assess the individual circumstances of the person, but may look to the precedent set by case law'. They suggested the case 'may lead [the LLP] to conclude that such persons are workers and may need to be automatically enrolled'.

So confusion all around, and law firms were left in the uncomfortable position of being possibly non-compliant if they ended up taking a different view from the Pensions Regulator without any clear instructions on what to do!

The truth is that LLP members are not the only group where potentially difficult decisions must be taken by firms, although they are a group where the resulting lack of clarity has finally led the Department for Work and Pensions (DWP) to amend the regulations from 6 April 2016.

What is the new proposed change from April 2016 for firms/LLP members?

The draft regulations include the following of interest to firms:

• Jobholders with tax protected status: the Finance Act 2016 will amend the auto-enrolment regulations (backdated to 6 April 2016) to give employers the discretion not to auto-enrol any jobholders who has the new protected tax status having made a lifetime allowance election.

• Exemption for company directors: where a jobholder is also a director of his/her employer, the employer will have the power to auto-enrol (or re-enrol) the director but will not be required to do so. This may help those with service companies, but only if the Director does not have an employment contract.

• An exemption for members of LLPs: where a jobholder is a member of an LLP, the employer will not have to auto-enrol (or re-enrol) the jobholder, but may choose to do so. This exemption will only apply to LLP members who are comparable to partners in a traditional partnership and who are not 'salaried members' under section 863A of the Income Tax (Trading and other income) Act 2005.

The changes may make it easier for the vast majority to identify those that will be a 'worker' and also have 'qualifying earnings' and therefore subject to automatic enrolment.

In summary, if the regulations are enacted in the current form, from April 2016:

• An LLP member who is a 'worker' taxed under PAYE as a salaried member is likely to be subject to full auto-enrolment.

• An LLP member who is not taxed as an employee will be subject to the new exemption (if they would otherwise satisfy all the relevant criteria). This means that they can be automatically enrolled but there is no duty on the firm to do so. The individual can also elect to 'opt in' if they wish.

So who should you now consider for auto-enrolment?

The easy answer is the employees or workers which fall into the following groups:

• Entitled worker: this is a UK-based worker, aged between 16 and 74 without qualifying earnings, in the relevant pay period or in other words someone earning less than £5,824 per annum in 2015/2016. They must be given access to a pension scheme but have no statutory right to an employer contribution.

• Jobholder: this is a UK-based worker, aged between 16 and 74 with qualifying earnings of more than £5,824 per annum in 2015/16. Jobholders are further broken down into:

• Eligible jobholders: aged between 22 and state pension age with qualifying earnings higher than the automatic enrolment trigger which is £10,000 in 2015/2016. They must be automatically enrolled into a qualifying workplace pension scheme unless they're already members of such a scheme or they're enrolled under the terms of their contract of employment. Employer contributions are compulsory.

• Non-eligible jobholders: jobholders who don't meet both the age and earnings criteria needed to be eligible jobholders. They don't have to be automatically enrolled into a qualifying workplace pension scheme but they can opt in and benefit from compulsory employer contributions.

This could seem easy, and you would not have to consider the genuinely self-employed (as case law has already established the key factors which point to a 'worker' relationship are the requirement for personal service, i.e. no substitution and a mutuality of obligations). But when it comes to the following it gets slightly tricky:

• Freelance contractors: if the contractor is genuinely self-employed, or contracts through a personal service company, the firm does not need to consider them, but what about the retired partners still working or those for who you have requested personal service - are they a worker?

• Members/partners: as detailed above, from April 2016 they are a little clearer, the draft legislation catches those considered to be 'salaried members'. But what of the others?

• Secondees: the employer duties only apply in respect of those who 'work, or ordinarily work' in the UK. In some cases this will be obvious. However, in others questions will need to be asked - for example, is there an expectation that the worker will return to the UK at the end of their placement?

• Work experience students: These are likely to be workers as they undertake the work personally. Though in this case, use of postponement of the assessment date, in respect of a worker for up to three months, may mean they do not create an issue.

Be warned, if you are now thinking that you will just move or contract to pay all the difficult groups of workers from the LLP to put off the problem until April 2017 (because you have no PAYE scheme already) you may want to think again. This is because, unless you are happy to include them on a quarterly employment intermediaries return to HMRC this might be a potential problem.

How do you assess qualifying earnings?

A payment to a worker only constitutes qualifying earnings for the purposes of the Pensions Act 2008 if it falls within one of the components listed in section 13(3) of the Act. It is the true nature of the payment that matters, rather than the label put on it by the employer.

'Qualifying earnings' refers to earnings of between £5,842 and £42,385 (2015/16) made up of any of the following components that are due to be paid to the 'worker' described as:

• salary

• wages

• commission

• bonuses

• overtime

• statutory sick pay

• statutory maternity pay

• ordinary or additional statutory paternity pay

• statutory adoption pay.

It is for the LLP to determine if a payment to a worker falls into one of the components of pay that make up 'qualifying earnings', using the dictionary definitions of those terms.

Profit share is not listed as being 'qualifying earnings' but it is also not specifically excluded. The Pensions Regulator has previously indicated that elements of a profit share might be regarded as being of a description of salary, commission or bonus.

Firms still have an issue to consider if a self-employed member elects to 'opt in'. How much, if any, of their profit share is qualifying earnings? What of bonuses for meeting chargeable hours or lock up targets? What of commission bonuses on work introduced to the firm?

In a response to the government's consultation we asked the DWP to publish further guidance on this point.

Conclusion

The change is only in draft regulations at present; so LLPs that took a 'wait and see' approach to how to deal with auto-enrolment for their members can take some comfort from this clear statement of the government's intention not to force the auto-enrolment of genuine members into pension schemes. With confirmation of such a change we would expect clear guidance now from the regulator which should address the areas of concern for members. When looking at the other groups in assessing the workforce, such as a retired partner, there has already been plenty of guidance issued.

LLPs should take care in reaching and documenting their conclusions, as there are penalties for not operating the auto-enrolment regime correctly from the appropriate date which can be high.

Since writing this article the regulation has come into force.

Susan Ball is head of employers advisory at Crowe Clark Whitehill (www.croweclarkwhitehill.co.uk)