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Act now to comply with an EU directive that will require employee representation in business decisions.
The European Union (EU) continues to extend its reach when it comes to regulating business activity in member states. With bated breath, companies await each new trickle of news on how EU-wide industry regulations will affect their business practices.
An important new development emerged in July when the United Kingdom (UK) released its draft regulations to transform the EU’s Directive on Information and Consultation (IC), issued last year, into national law.
The EU directive requires employers to inform and consult with their workforce—through employee representatives via “works councils” or other forums—on employment-related matters such as job security, work organization, and terms and conditions of employment. Member countries have until March 2005 to pass legislation complying with the directive.
Observers have been keenly interested in how the United Kingdom would interpret the directive because it is one of only two member states—Ireland is the other—that has no history of statutory IC requirements. The two countries have an open, flexible business climate—which has partly been responsible for attracting the bulk of U.S. foreign direct investment in Europe—that runs counter to many EU directives regulating industry.
“Employment lawyers believe that this [directive] is going to represent a sea change and a huge cultural change for companies in Britain because the consultation issue is anathema to many of them,” says Keith Corkan, partner at Rosenblatt Solicitors, an employment law firm in London.
Businesses—both UK- and U.S.-based—reacted to the UK draft regulations with some resignation.
“It doesn’t surprise us that something like this should come out of Europe,” says Ralph Tribe, vice president of HR for Europe at Seattle-based Getty Images in London. But, he says, “It doesn’t please us terribly.” Getty Images, the world’s largest provider of stock photography and images, employs 1,700 worldwide, with more than 500 in the United Kingdom.
“Like many other employers, we are in favor of direct communication with the workforce, and not so much in favor of communication that requires representation because it creates a layer between you and the workforce,” Tribe explains.
Still, the advice of management consultants and employment lawyers is to accept the regulations and, more importantly, to start preparing for them now. That advice applies particularly to HR executives in nearly 7,000 U.S. companies with operations in the United Kingdom and Ireland, where major changes will be needed in employee relations policies.
Longer term, HR professionals operating in countries other than Ireland and the United Kingdom will be affected as well. (For more information, see “The Rest of Europe.”)
Currently, legislation in the United Kingdom requires employers to consult employees only in specific circumstances, such as mass redundancy or business transfers. Legally requiring widespread consultation of employees and the provision of information on matters affecting the company in which they work is new territory.
Because of this, the EU directive allows for a three-year phase-in period in the United Kingdom and Ireland. Businesses with 150 or more employees must comply by March 2005; those with 100-149 employees must comply by March 2007; those with 50-99 employees have until March 2008. The directive will not apply to businesses in the United Kingdom with fewer than 50 employees.
Once companies are subject to the directive, they can be compelled to set up an IC arrangement if workers request, in writing, that such an arrangement be developed.
As a result of such requests, businesses in the United Kingdom may be forced to set up a council of workforce representatives—one for every 50 employees, up to a maximum of 25 representatives—and meet with them on an as-yet-undetermined basis to inform and consult with them on employment matters, which could include layoffs, mergers, use of equipment and changes in work hours, for example.
“The new plans mean employees have the chance to be informed and consulted on management decisions affecting their future,” the UK Department of Trade and Industry said in a statement.
Companies and employees have six months to negotiate an IC arrangement, which must be approved by half of the workforce. If the parties fail to reach an agreement after six months, more restrictive “default” parameters spelled out in the EU directive automatically kick in.
The default provision “goes beyond employment issues to include business strategy such as plant closures, expansion overseas, introduction of a product line and so on,” says Corkan, who serves as deputy chairman of British American Business Inc., a transatlantic business organization with more than 800 member multinational companies. “Also, there will not only be an obligation to consult but to reach agreement with employees, and that is more onerous.”
Incentives to Act Quickly
While companies can wait to implement IC arrangements, they have strong incentives to act now.
For example, companies that develop IC arrangements that are approved by a majority of the workforce prior to the deadline are more likely to have those programs stick: Such arrangements need be altered only if 40 percent of the workforce petitions in writing for a change.
By contrast, companies that have no IC arrangement in place by the deadline could be forced to develop one if as few as 10 percent of employees—ranging from a minimum of 15 employees to a maximum of 2,500 employees—requests in writing that such an arrangement be developed.
“One of our issues with the legislation is that 10 percent of your workforce is a ludicrously low threshold—it’s a very small minority,” says Tribe.
Another incentive to act quickly is that employers who negotiate IC arrangements after March 2005 will be required to air complaints in front of the Central Arbitration Committee, an independent body with statutory powers to mediate disputes between trade unions and employers. Employers found in breach of the arrangement could face fines up to roughly $120,000. Those who have IC structures in place before the deadline can set up their own dispute resolution procedures.
“Some companies are in a hurry to do some kind of agreement now so they won’t have all these enforcement mechanisms be applicable to them,” says Stavroula Demetriades, coordinator of the industrial relations area of the Dublin, Ireland-based European Industrial Relations Observatory (EIRO), which monitors European industrial relations.
Course of Action
Essentially, companies with 50 or more employees operating in the United Kingdom have three different options available to them:
“The key decision for U.S. businesses is to wait and see if 10 percent of their workforce is going to knock on their door and say, ‘We’d really like to have a works council,’” says Martin Hopkins, partner at Eversheds Human Resources Group in Birmingham, England. “Or, if you want to take the initiative and go to the staff and say, ‘If there is sufficient level of interest in this, we’d be delighted to work with you to establish a works council and to configure the rules in a way that suits the business.’ ”
Hopkins cautions on choosing the former: “If you get dragged kicking and screaming into the establishment of a works council then you will be worse off than if you had joined the process.”
Corkan agrees and advocates auditing your workforce to determine interest in an IC arrangement.
“The worst thing of all is to do nothing,” he says. “There is an opportunity to embrace these changes and set up a voluntary structure that meets with the existing strategy and culture of the company. If you negotiate at this stage, you have a certain amount of leverage against the default model, whereas if you leave it to 2005, you’ll be on the back foot and have to negotiate in a reactive way.”
The HP Model
Hewlett Packard (HP) took the proactive approach and became the first U.S. company in the United Kingdom to announce an IC framework, which was approved by its employees. At quarterly meetings, management consult and inform employee representatives on matters such as HP UK business strategy, financial performance, operational performance, investment plans, organizational changes and pertinent legislation affecting employment.
Employee representatives also will be consulted on layoffs, outsourcing, workforce agreements, and health and safety.
The move to be proactive was based on HP’s experience with works councils when it merged with Compaq Computer Corp. in May 2002. The merger triggered EU requirements mandating that companies with 1,000 or more employees in the EU, with at least 150 of those in two or more member states, consult with employee representatives on business decisions that may result in layoffs—something that occurred due to the companies’ merger.
Because of that experience, Wally Russell, HP’s European employee relations director, viewed the EU’s Directive on Information and Consultation as an opportunity for the company to gain a better footing in consultative matters.
“We decided to put a group together in a proactive manner,” Russell recalls. “What we have now is more than what the UK will require,” he says, noting that the company will hold quarterly meetings, even though UK regulations likely will require only annual meetings.
“My own preference is that we be the master of our own destiny,” explains Russell. “It’s something we’re going to have to do in two years, so let’s work together now to come up with a model that suits HP’s culture rather than have something legalistically imposed on us.”
HP employees elected representatives to the HP Consultative Forum from each of the company’s four major business units within the United Kingdom. In addition, four managers—the UK HR manager, the UK employee relations director and two other managers—sit on the forum.
“It is not a negotiating body,” Russell stresses. “We exchange views and take their views into consideration.”
Russell says management at HP Ireland is looking into establishing an IC arrangement there before the March 2005 deadline, but no final decision has been made. “We decided to do this in the UK first and see how it goes,” he says.
“I think most companies will follow the lead that’s been taken by Hewlett-Packard,” predicts Tom Hayes, chief executive of Brussels-based EIRI Associates, which consults multinationals and trade unions on industrial relations.
But some will take a different approach.
One company that has decided, for now, not to follow in HP’s footsteps is Getty Images. Tribe believes that Getty’s record on communication will stave off employee demand for a formal IC arrangement. “We would hope that when the legislation comes into being, 10 percent wouldn’t say they need some other way of getting information,” says Tribe. “People vote for trade representation or this type of arrangement if there’s something wrong. So we don’t want to give them a reason to need this kind of arrangement.”
However, Tribe is prepared should that day come. “If we did get 50 percent of our workforce behind it, and had to do something about it, we would, and we would make the best of it,” he says. “We would try to get something half-decent out of it that works with our culture.”
Indeed, most managers, including Tribe, view the directive as just another layer in the foundation of building sound employee communications policies, which they see as necessary to being a competitive employer of choice.
“Unless you’re horribly unenlightened, you realize that [competitive advantage] is about retaining your human capital, not screwing it,” says Tribe. “So in many respects this will just be an imposition, a minor irritation for businesses.”
Adrienne Fox is senior editor of HR Magazine.
HR Magazine: One Company's IC Experience
HR Magazine: The Rest of Europe
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