Pensions - Automatic Enrolment

Automatic Enrolment will significantly change the law on workplace pensions.

It will very soon be compulsory for employers to automatically enrol their eligible workers into a pension scheme and to pay money into that scheme.

Although automatic enrolment is being introduced in stages, starting with the largest employers, by October 2018 it will encompass all existing employers.

As employers approach their staging date they will need to contact all of their workers regarding the options available to them. However, not all workers will automatically join the workplace pension scheme. Employers will therefore need to review their workforce to identify which of their workers are eligible for automatic enrolment, and consider how their non-eligible workers will be affected.

Whilst this may not at first appear an employment law issue, determining whether an individual is a worker or an employee involves a question of law.

There is no one single test to determine employee status. An employment tribunal will consider various factors, developed by case law, to decide whether an individual has entered into or works under a contract of employment, which itself may be express or implied. Any written agreement will be the starting point for determining of the parties’ relationship, however, other factors will be taken into account meaning an agreement which purports to be a contract of employment (or contract of service) may not necessarily be that.

Some useful information on employment status and right can be found via the BIS website:

For automatic enrolment, some workers who do not have employee status will be “eligible jobholders” and therefore legally entitled to join the workplace pension scheme. For added complexity, non-eligible jobholders and some other workers will have the right to ask to join the scheme.

Agency workers, individuals on zero hour contracts, self-employed contractors and employees or workers with more than one job will further complicate matters.

Automatic enrolment will therefore put all employment relationships under the magnifying glass. As part of the process, employers may need to vary contracts of employment where employee pension contributions are to be made by salary sacrifice. Communicating the changes to the workforce itself presents a potential banana skin for employers if handled hastily and without diligence.

To compound matters, the penalties for employers who get it wrong are stark. These will include penalty fines and the prospect of employers being ordered to pay missed employer and employee contributions, not to mention the prospect of unlawful deductions claims and other employment tribunal proceedings where a breach of contract or statutory rights has occurred.

But it need not be all doom and gloom…

Automatic enrolment presents an opportunity for employers to take stock of their workforce and advantage of an improving economy. The introduction of automatic pension benefits including minimum employer contributions – initially 1% of qualifying earnings rising to 2% in October 2017 and 3% in October 2018 – is a big positive for employees which should in reality improve employment relations. Employers may even be able to use necessary contractual variations as an opportunity to harmonise terms and conditions or address inadequacies in existing employment contracts.

Our advice to employers is take control of the situation well in advance of your staging date by firstly contacting us for an assessment of your workforce, and then allowing us to advise you on how to manage your affected workers through automatic enrolment. Once you have gone through staging, managing pension contributions will almost certainly become easier. Setting off on the right foot, however, will be critical.