Investor value: Workforce issues – behind the headlines…

15th November 2017

Amidst the daily torrent of media headlines relating to inappropriate workplace behaviour (which clearly needs to be dealt with and will surely inevitably lead to various changes), it can be easy to forget that there are other items affecting workforces which can actually cause greater impact on investor value. These manifest themselves in 3 typical ways:

• A one-off cost due to claims and/or fines.
• Ongoing increased pay-roll costs (which may not have been budgeted for).
• Reduced sales where customers reject a tarnished brand (sometimes leading to damage to the Investor’s brand).

In our experience common areas of risk are:

• Minimum wage compliance – causing large black holes in company accounts. A clear example of this is John Lewis announcing in May that it was revising its annual profit for last year down by £36 million. This was after an internal investigation uncovered that its practice of averaging employees’ monthly pay over the year had led to a breach of the NMW Regulations. The company, which is known for its employee-friendly policies, implemented the pay averaging practice with good intentions in order to give staff a “steady and reliable monthly income”. Another “hidden issue” here is that NMW is payable to “workers” as well as “employees” – clearly if workforces have been mis-classified in terms of status, there can be further significant systemic failures.
• Holiday pay compliance – the issue of underpaid holiday has been fairly well publicised and is still an issue. Indeed, the issue is likely to now be of greater significance given recent cases holding that “voluntary overtime” should be included in calculations and of course the fact that the barrier of having to pay issue fees in the Employment Tribunals has been removed. As will be appreciated, the greatest areas of risk are where businesses pay large amounts of overtime and/or commission.
• Equal pay compliance – one could have previously said this was predominantly an issue for the public sector. However, there are now various multiple (and significant) claims hitting private sector organisations (claims being “harvested” by lawyers). This is likely to increase with the now required publication of Gender Pay Gap data (hitting many companies next spring).
• Status and the gig economy – this is a critical issue for some businesses where they have lots of “non-employed” people. If the workforce has been “mis-classified”, significant liabilities can be triggered in relation to: tax; National Insurance; NMW; holiday pay; and employment claims.
• Immigration – as well as the potential fines (up to £20,000 per illegal worker), if it is the case that a “business critical” person can no longer stay in the UK to work (perhaps because that person never had permission or the ability to have a sponsor licence is lost during the deal), there can clearly be significant commercial issues. These issues are only going to gain prominence as the Brexit process progresses.
• Competition/data loss – over and above the issues dealing with the soon to be implemented GDPR (which will give the current data protection regime more teeth), it is important to properly assess what protections are in place in relation to employees taking confidential data and what restrictions are in place for post-termination activities. Having properly drafted provisions allows the business to be properly protected.
• Investor “embarrassment” – there are items which might not have huge immediate financial cost (such as modern slavery, excessive use of zero hour contract, bribery etc), but can cause long term damage if customers become disaffected (leading to revenue reductions). Additionally, investors can become deeply unhappy if their newly acquired business gets negative press coverage!

As will be appreciated, particularly in a deal scenario, the key step in beginning to protect the investor is via the due diligence phase. During this phase, we seek to:

• Identify the issues by looking not only at the documents but also understanding how the workforce operates (recognising that practice can be as important as what the documents actually say).
• Quantify any issues that have been uncovered. This of course may need some approximations and assumptions to be made, but ultimately leads to a financial calculation which we can undertake. This allows the parties to understand the relative significance and decide what, if any, actions need to be taken.
• Specify actions that can/should be taken. Such actions can include a price reduction (where figures are well defined); indemnities (where issues are identified, but detailed figures are hard to come by); and/or rectification steps to be taken ahead of completion. All such steps can of course be tied in with retention/escrow arrangements.

If you would like further information in relation to any of the above, the contacts below would be happy to discuss and provide assistance.