Joint ventures and human capital issues

Who is to employ the workers?

One of the preliminary questions to be asked in relation to employees is whether the joint venture entity will employ the staff or whether staff will be seconded to the business by the parties involved, or provided by way of a long-term services arrangement. The decision as to whether to employ the staff directly may be driven by various factors: the tax consequences of hiring employees; the employment rights that the staff acquire in the relevant jurisdiction and other local law considerations (such as the illegal supply of employees or illegal subcontracting of labour); whether this has an effect on the benefits that the employees enjoy (i.e. can they continue to participate in share plans or pension arrangements if no longer employed by their existing employer?) There may also be practical issues impacting whether or not the employees are employed or seconded: are they to work full time in the new venture or will they have residual duties for their old employer and be providing work to the joint venture on a part-time basis suggesting that secondment may be a better option?

The decision on whether the workers will be employed by the joint venture entity or not may also be driven by the long term intention behind the joint venture. Is it anticipated that all staff will transfer to the joint venture in the long-term? Is the employer happy to retain individuals on different terms and conditions and salaries or will there be a harmonisation of terms? Finally, if there is a long-term secondment which will eventually end with the employees transferring back to one of the entities participating in the joint venture then will the Transfer of Undertaking (Protection of Employees) Regulations 2016 (the Transfer Regulations) or equivalent legislation apply at the end of the period?

Third-party interests may also influence the decision. For example, if the joint venture is regulated, there may be an issue if the joint venture entity is not the employer and the secondment of individuals may not be accepted by the regulator. The identity of the “supervisor” for regulatory purposes can be very complex.

Transferring staff to the employment of the joint venture entity

If the decision is to transfer all the employees to the employment of the joint venture entity, the parties will have to consider the legal issues arising from this transfer.

In most joint venture arrangements, a new company is established and the employees will be transferring from an existing business to that new company. However, in some cases the JV may acquire the shares of an existing company such that there is no change in the legal identity of the employer.

However, where there is a transfer of a business or part of a business as an economic entity from a joint venture party to the joint venture entity then the Transfer Regulations, or equivalent legislation, may apply. The Transfer Regulations implement the European Acquired Rights Directive (the Directive). Where the Directive or the Transfer Regulations apply, employees that work in the transferring business are automatically transferred to the joint venture entity with their employment rights and obligations.

It is those employees who are assigned to the business or part of the business being transferred who will transfer to the joint venture entity. The joint venture parties therefore have to determine which employees are assigned to the business and, if any of those employees are not to transfer to the joint venture entity, then they will need to be transferred out of that business prior to the transfer or be asked to formally object to the transfer.

If the Directive applies, then the employees are transferred to the joint venture on their existing terms and conditions of employment with their statutory rights and obligations intact (such as their period of continuous employment). Any dismissal because of a transfer is automatically unfair unless it is for an economic, technical or organisational (ETO) reason entailing changes in the workforce. Any redundancy dismissal may fall within the ETO reason, but the employer will need to ensure that it is carried out fairly and in accordance with the requirements of the jurisdiction.

An additional issue which arises on a transfer of an undertaking falling within the Directive is that the transferor and transferee are required to inform and consult in relation to the transfer with employee representatives. This consultation process should be factored in to any timescale for the joint venture transaction (see below).

If the transfer is not within the EU then the parties will have to consider whether other legislation will apply so that the employment will automatically transfer. If there is no equivalent legislation to the Directive which allows for the automatic transfer of employment then, if there is a desire to transfer existing employees to the joint venture entity, the parties will have to terminate the employment with the current employer and offer employment with the joint venture entity. This will also be the case if the transfer does not amount to the transfer of assets which falls within the definition in the Transfer Regulations or the Directive or if there is an individual employee who is agreeing to transfer to the new employer. In that situation, the parties will need to consider who will be liable for termination of the employment and also what will be the terms of the new contract? As there is no automatic transfer there will not necessarily be continuous employment with the new employer; that will be dependent on local law. A lack of continuous employment will affect the employee’s right to claim a redundancy payment or unfair dismissal in the UK giving rise to the potential for claims for compensation for lack of those rights.

Terms and conditions

As stated above, if the employees have transferred under the Directive, then the employees will transfer on their existing terms and conditions. The Directive and the Transfer Regulations provide limited ability to change terms and conditions. This could mean that if the employees are transferred from different businesses then the employees will be employed under different terms and conditions which can lead to employee relations, human resources and legal concerns (for example on grounds of discrimination and the absence of equal pay). The JV may wish to harmonise the terms and conditions but will need to consider if this is legally possible.

If changes are made to terms and conditions by reason of a transfer under the Directive or the Transfer Regulations, there is a risk that these will be declared void, even if the employees are no worse off as a result of the changes. Another option is to dismiss the employees and re-engage them on the new terms and conditions, but this is subject to the point that such a dismissal will be automatically unfair for a reason linked to the transfer as mentioned above. In the UK context, it may also trigger additional consultation rights under the Trade Union (Labour Relations) Consolidation Act 1992. Alternatively, the joint venture entity may decide to delay the changes until a later date when it may be less likely that any such changes will be considered to be linked to the transfer.

Where relevant, the JV participants may consider giving indemnities to protect a transferring employer from liability under the Transfer Regulations in the event that changes are made to terms and conditions.

Secondment

Rather than the joint venture entity employing the employees, the parties may decide to retain the employees’ employment and second the employees to the joint venture entity. The terms and conditions of the individual’s contract would have to be reviewed to check that they can be seconded and amendments may be required to their contracts in order to allow such secondment to occur. There are other issues which an employer must consider on the joint venture: these include who is to be liable for the acts of the seconded employee as the employer could remain vicariously liable for such acts and also who will assume the health and safety obligations of the employer towards the employees.

The parties will need to agree the terms of any secondment fee. Where the secondment is to a different jurisdiction the parties must determine what currency any such payment will be in. Payment of a secondment fee will also have an implication with regard to tax – for example VAT will be payable on the secondment expenses in the UK.

The parties also need to consider the restrictive covenants owed by the employees (see below) but also whether any additional restrictions are required by the joint venture entity (i.e. confidentiality, non-poaching of joint venture key employees, customers, and a non-compete against the joint venture).

As mentioned above, the secondment may be difficult in a regulatory situation where supervision of an employee is required by a regulated entity and this needs to be considered when looking at the feasibility of the secondment arrangement.

If there is long term secondment, then there may be considered to be a transfer of an undertaking at the end of the secondment. Again, this will need to be addressed in the secondment terms.

Employment rights

Employees are likely to gain employment rights in the country in which they are carrying out most of their work or are predominantly living. As local employment laws may apply, regardless of the law the parties may choose to apply in the employment contract, the parties must ensure that they take local law advice to ensure that they are aware of the additional employment laws which apply (noting that some jurisdictions restrict the ability of employers to second employees). Failure to do so may result in some of the terms of any employment contract or a secondment arrangement being void or resulting in unexpected costs. For example, some countries have 13 month payrolls to allow for one extra payment at a certain time of the year.

Pensions

The joint venture parties will have to consider whether the employees can remain in any pension scheme that they currently participate in. If the employee is transferring to the joint venture as part of the transfer of a business, the transferee (i.e. the joint venture entity) may, depending on the type of pension arrangement, be under an obligation to honour existing pension rights or provide equivalent rights under the Directive or equivalent legislation.

The parties will need to consider what scheme the employees can participate in – whether an existing scheme can be used or a new scheme set up by the joint venture entity. The parties will also need to consider the tax issues regarding any pension payments.

The UK auto-enrolment requirements require that eligible employees who are working or “ordinarily working” in the UK are enrolled in a pension scheme which meets certain minimum requirements. If some employees are not wholly working in the UK but their work has some connection with the UK, the parties should consider whether or not these employees are covered by the UK auto-enrolment requirements.

Employee Share Plans

As far as share awards held by employees who are transferred to the joint venture entity from the joint venture parties are concerned, the legal status of the group of companies will determine if the employee can remain in the scheme with the employing entity or whether the awards will vest early and/or on a reduced basis. Whether or not the employee will lose the right to share awards may be an important factor to consider when determining whether employees are to be seconded or their employment is to be transferred.

Restrictive covenants, confidentiality and conflicts of interest

The existing employment contract with the employee may contain confidentiality and restrictive covenant clauses (typically provisions which restrict joining a new employer in competition with the existing employer as well as the non-solicitation of its staff or customers ). If the employees are transferring with the business then it is likely that the restrictive covenants will need to be redrafted in order to cover the joint venture entity and its clients, customers and activities. New restrictions and confidentiality provisions will also need to be considered in any secondment arrangement as the employee will continue to owe obligations to the employer but may be required to give direct undertakings to the entity to which they are seconded.

If new restrictive covenants are to be required the question arises as to the steps necessary to make these enforceable as well as whether enforceability may be affected by local laws in the likely enforcement jurisdictions.

As well as confidentiality and restrictions regarding client information, consideration also needs to be given to confidentiality regarding information between the parties, particularly if the individual holds a senior position. In practice, such individuals will need permissions to enable them to disclose confidential information about the JV’s activities to the JV’s shareholders. Difficulties may also lie for senior employees if they find that they have a conflict of interest between their employing company and the joint venture entity. Who determines the reporting mechanism that should apply? Generally a contract of employment will specify that the employee will report any conflict of interest to the Board of his employing company.

Issues will also arise where the employee is a director of both the joint venture party and the JV company. In those circumstances, the Director will owe fiduciary duties to both companies and processes must be established to ensure that the Director is not put in a position where he is in breach of such duties.

Wider information and consultation issues

Where the Directive or the Transfer Regulations apply, the employer must give information to the trade unions or elected employee representatives of the affected employees. Employers should therefore bear in mind that this may be more than those who are simply transferring as others may be affected by the transfer of the business out of the company.

Multinational companies with at least 1,000 employees in the European Economic Area (including at least 150 employees in at least two counties in the EEA) must establish a European Works Council if requested to do so by 100 or more employees across two or more EEA countries. There may also be requirements for a national works council to be established. These works councils may require additional obligations to inform and consult above those required in the Transfer Regulations and in the Directive. In that case the parties will need to notify the works council and consider how this will affect the timing of the joint venture.

Immigration issues

The parties will need to consider immigration laws for relevant staff and whether work permits or other employment permissions may be required. For example, currently, the Posted Workers Directive applies to allow employees to move freely within the EEA. However, at the end of the Brexit transition period in January 2021, new immigration rules will apply to the UK-based on a points based system requiring the employer to sponsor employees if they are to work in the UK.