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For whom the whistle blows

Whistleblowing continues to be a high profile issue for businesses in the UK and globally. This briefing brings together a number of recent developments affecting the UK’s whistleblowing regime and considers potential new UK reforms which are in the pipeline.

In Autumn 2014, Freshfields commissioned a whistleblowing survey of more than 2,500 middle and senior-level managers across the US, UK, Hong Kong, Germany and France. The resulting Global Whistleblowing Report 2014 (see here for the full report) found that employees continue to fear reprisal for blowing the whistle. More than one third (37 percent) of all employees surveyed believed senior management at their organisation would either treat them less favourably or look for ways to terminate their employment if they blew the whistle. Four in every ten (40 percent) employees said their organisation discourages whistleblowing.

The survey shows that there is still some way to go before employees feel confident about blowing the whistle. In order to promote and encourage whistleblowing, it is important that employers understand what their obligations are in relation to whistleblowers and appreciate the impact of new developments in this area. This briefing together with our ‘Whistleblowing Top 5’ briefing (see here) and our ‘Whistleblowing and Employee Issues in Investigations’ briefing (see here) will allow you to refresh your knowledge of this dynamic area of law.

What’s new – for employees?

An employee will only be protected by UK whistleblowing legislation if he makes a ‘protected disclosure.’ Pre-25 June 2013, in order for a disclosure to be a protected disclosure, it had to be made in good faith. This changed in 2013 – for disclosures made on or after 25 June 2013, the good faith test no longer applies. Instead, an employee must reasonably believe that the disclosure is in the public interest. Only if the disclosure meets this test will the employee potentially be protected. The introduction of this new requirement was principally aimed at preventing an employee seeking to blow the whistle on a breach of his own employment contract where there were no wider public interest implications. However, the term ‘in the public interest’ is not defined in the legislation and its potential meaning was queried by commentators when the new test was introduced. There was a question as to whether this legislative change might make it significantly more difficult for an employee successfully to bring a whistleblowing claim.

This situation has been clarified to some extent by a recent judgment of the Employment Appeal Tribunal (the EAT) (Chesterton Global Ltd and another v Nurmohamed[2015] IRLR 614). The EAT held that it is not necessary for an employee to show that a disclosure is of interest to the public as a whole. It decided that the public interest test may be satisfied where the disclosure is only of interest to a relatively small group (in the case in question, 100 senior managers) and that an employee need only demonstrate that he reasonably believed that the disclosure was in the public interest not that the disclosure was in fact in the public interest. It is worth noting that, whilst the former good faith requirement does not apply to disclosures made on or after 25 June 2013, an employee’s personal motivation in blowing the whistle may still become relevant if the employee is successful in his claim – damages may be reduced by up to 25 percent if an employee is found to have acted in bad faith in making the protected disclosure.

What’s new – for employers?

BIS whistleblowing guidance and code of practice

In March 2015, the Department for Business, Innovation and Skills (BIS) published “Whistleblowing: Guidance for Employers and Code of Practice” (see here). The guidance aims to educate employers about whistleblowing and to promote good whistleblowing practices. In particular: it encourages employers to put in place a whistleblowing policy and gives guidance on what a policy might contain;it states that businesses should make employees aware of this policy (including through the use of training) and train managers on how to deal with disclosures;it encourages businesses to foster a culture where employees feel safe blowing the whistle and confident that they will not be subjected to any detriment for doing so. It also provides that employers should provide support and feedback to whistleblowers on the progress of any whistleblowing investigation; it provides that employers should ensure that the terms of any settlement agreement with a departing employee make clear that they do not prevent an employee from blowing the whistle; and it distils the points its makes into a two page non-binding Code of Practice for employers. Employers should ensure that both their internal whistleblowing policy and the way that they manage whistleblowing disclosures meet the requirements of the Code of Practice. If they do not, there is a real risk that a whistleblower will draw this to the attention of the Employment Tribunal in any future whistleblowing claim and this could attract criticism from the Tribunal.

What’s new – for regulators?

Workers should be encouraged to blow the whistle internally at least as a first step. However, in circumstances where they feel unable to do this, they can maintain protection under UK whistleblowing legislation by making a disclosure to a 'prescribed person', which is most often the relevant regulator. If an employee makes a disclosure to a prescribed person, an additional test must be met before the employee is protected under UK whistleblowing legislation – in addition to meeting the ‘public interest’ test, the employee must have a reasonable belief that the disclosure is substantially true.

New guidance

In March 2015, BIS issued a set of guidance specifically aimed at prescribed persons. “Whistleblowing: Prescribed Persons Guidance” (see here) explains the role of a prescribed person and how they should handle disclosures.

Updated list of prescribed persons

If an employee decides to blow the whistle to a prescribed person rather than to their employer, they need to be sure they have chosen the correct person or body for the particular issue or they may not be protected as a whistleblower under UK legislation. In order to enable an employee to check who is the correct prescribed person, BIS maintains a list of prescribed persons and bodies to whom individuals can make a protected disclosure. In June 2015, BIS updated this list (see here). The list includes a brief description of the matters which can be reported to each prescribed person.

Proposed new annual reporting duty

In July 2013, BIS issued a call for evidence on the UK’s whistleblowing framework. One of the topics included in this call for evidence was how effective prescribed persons were within that framework. When BIS published its response to the call for evidence in July 2014, it acknowledged that confidence in how prescribed persons handle whistleblowing disclosures could be improved and proposed to address this issue by introducing greater transparency through a requirement that prescribed persons report annually on whistleblowing. A consultation then followed on this proposed reporting requirement and what the report should contain.

The reporting requirement has not yet been introduced. However, the Small Business, Enterprise and Employment Act 2015 does include a new power enabling the Secretary of State to introduce regulations requiring regulators to report annually on whistleblowing activities in the sector for which they are responsible. In March 2015, BIS issued its response to the consultation on the reporting requirement which attached a set of draft regulations, the draft Prescribed Persons (Report on Disclosures of Information) Regulations 2015 (see here). The draft regulations only set out the proposals in outline but it seems that regulators would only be required to submit a fairly light touch annual report containing commentary in addition to statistical information, together with such other information as they believe would be helpful or relevant.

What’s new – for employers in the financial sector?

On 23 February 2015, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) published a joint consultation paper in response to a recommendation from the Parliamentary Commission on Banking Standards that banks put in place mechanisms to allow staff to raise concerns internally (see here). In the consultation paper the FCA and PRA propose a package of measures to formalise firms’ whistleblowing procedures. Once finalised these requirements would apply to UK regulated banks, building societies, credit unions (with assets greater than £25 million) and PRA-designated investment firms. The proposals only apply to the regulated legal entity and not to UK branches of overseas firms or subsidiary undertakings (unless they are themselves UK-regulated deposit-takers, PRA-designated investment firms or PRA-regulated insurers).

The proposals provide that relevant firms: should ensure that they have internal whistleblowing arrangements in place and inform their UK-based employees about these arrangements; inform their UK-based employees that they can blow the whistle to the FCA and the PRA;offer protections to all whistleblowers, whatever their relationship with the firm and whatever the topic of their disclosure;include a passage in new employment contracts and settlement agreements clarifying that nothing in that agreement prevents an employee, or ex-employee, from making a protected disclosure; andallocate responsibility for whistleblowing under the Senior Managers Regime and Senior Insurance Managers Regime to an individual, referred to as the 'whistleblowers’ champion', with responsibility for:

–  overseeing the effectiveness of internal whistleblowing arrangements, including arrangements for protecting whistleblowers against detrimental treatment;

–  preparing an annual report to the board about their operation; and reporting to the FCA where, in a case before an Employment Tribunal contested by the firm, the Tribunal finds in favour of a whistleblower.

The proposed requirements raise a number of issues:

they provide that employees should be informed that they can blow the whistle to the FCA or PRA regardless of whether they have made an internal report to their employer. This is unhelpful both from the employer and the employee’s perspective: it is generally the case that misconduct can be most effectively addressed if the employer finds out about it at an early stage – an employer is less likely to be able to do this if employees are encouraged to whistleblow to the regulator rather than internally; and if an employee makes a disclosure to the regulator, then in order potentially to fall within the protection of the UK whistleblowing legislation they have to meet the additional test that they reasonably believe the disclosure to be substantially true. This is not the case with an internal report to an employer; they provide that a firm’s whistleblowing arrangements should cover all types of disclosure, not just those related to regulatory matters or matters which would attract the protection of UK whistleblowing legislation.

This would have the effect that purely personal complaints should be covered by a firm’s whistleblowing policy when such matters are most likely more suited to be raised under an internal grievance procedure; and the requirements require firms to offer protection to a much wider range of individuals than are protected under UK whistleblowing legislation. This may make it difficult for firms to implement the requirements particularly where there is a very loose or no link between the firm and the individual whistleblower. It would be better if the requirements included an indicative list of individuals to whom the firm should offer whistleblower protection so that firms are clear on how widely they are meant to implement the requirements.

The majority of the firms affected by the FCA/PRA consultation are likely to already have comprehensive whistleblowing policies in place as a matter of good practice. Nevertheless, the introduction of a requirement that firms must have these arrangements in place and that they should comply with certain set criteria would be a significant development in UK whistleblowing regulation. Once finalised, the FCA and the PRA intend to implement the changes by amending the Senior Management Arrangements, Systems and Controls sourcebook (SYSC) in their respective Handbooks. The PRA will also introduce a new Whistleblowing Part into its Rulebook which will apply only to insurers and a supervisory statement on whistleblowing which will apply to all relevant firms.The consultation closed on 22 May 2015 and final rules are expected in the Autumn.

Prior to the general election this year a survey conducted by ComRes found that the majority of those polled want tougher action to crack down on tax avoidance. This comes as no surprise as there have already been countless episodes of public outrage at the revelations that various large organisations are only paying a fraction of what they owe, and despite the legality of it, the vast majority of people find it morally wrong. A common method of tax avoidance can be falsely registering what are actually de-facto employees as self-employed. This gives them a non PAYE tax status and means that the employer can save on the likes of National Insurance. Therefore as of April 6th, all intermediaries, defined as any person who makes arrangements for an individual to work for a third party or be paid for work done for a third party, including recruitment agencies, became required by law to report on a quarterly basis to HMRC on non-PAYE employees.

Over recent years it has become increasingly apparent that some intermediaries are helping to create false self-employment status for individuals by listing them as non-PAYE or supplying UK workers from offshore locations. These are tools used as a means of reducing employment taxes and avoiding fulfilling legal employment rights and obligations. Not only will the new requirements ensure the right tax and National Insurance is paid by those working through intermediaries, but that unfair commercial advantage is reduced.

It may appear that the new regulations simply present an arduous task to already overstretched workers, both in HMRC and the intermediaries, who have to go through the paperwork of dozens of employees, but what is the alternative? With public opinion so firmly against tax avoidance, small and large, if the government stood by and allowed more and more people to abuse the system we would lose all confidence in our government’s ability to implement change.

Too often the government publically condemns the actions of a group or individual, only to prove their inability to act, or do anything other than express disapproval. This repeatedly costs the government public faith. Although the majority of people understand that some political restraints exist.  People start to feel cheated, like the government they voted into power are failing to serve their best interests. Regulations like this, although a small step, is still one towards progress. The fact that the government has chosen to issue penalties to those who fail to comply, further demonstrates their resolve to crack down on abuses to the system. Failure to comply with the reporting regulations will have negative consequences for both clients and intermediaries. If the client gives the intermediary incorrect information HMRC can treat the client as the employer of the worker for Income Tax and National Insurance purposes, and failure on the intermediaries behalf to provide the completed report by the outlined deadlines will result in penalties – £250 for the first offence, £500 for the second and £1,000 for the third and later offences.

For a small business these costs could surmount to the point where an inability to correctly file paperwork threatens the existence of a business. Cooperation on behalf of HMRC and the intermediaries is highly beneficial for both parties, but we are of the opinion that the system itself needs reworking. The most efficient way to ensure the compliance of intermediaries and prevent future issues, would be to synthesise the process of capturing the required information during the application process and alerting the intermediaries when someone’s details are about to expire or need renewing. Human error is not something that can be entirely controlled or avoided but it can be managed. For local authorities who have a large dependence on temporary staffing, the workload required to process these checks would take a minimum of 20 working days a quarter – something that the hard pressed public sector clearly has no time to do, so an automated way of doing this is necessary, especially for local government who would come under massive fire for harbouring tax avoiders

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