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Employment law – A drain on the balance sheet?

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cut red tape

The impact of employment regulations on businesses has been an issue of great debate for many years. Dan Martin spoke to some of sister site AccountingWEB’s business members for their views on the true cost of red tape.


“Too costly for employers” was the reason given earlier this week by the government when it announced the scrapping of controversial plans to force employers to pay sick pay to workers from the first day of an illness instead of the current three days. If the UK’s business lobby groups are to be believed such comments from ministers are hard to come by as they introduce rule after rule which do prove costly for employers.

It has to be noted that the government has made moves to slash the metres of red tape which companies claim they are being stifled by. Deregulation commissions, simplification of business guidance schemes and new regulations introduced on the same day are among the measures thrown at firms to quell their concerns. Speaking in May 2005 just days after Labour’s third election victory, Gordon Brown said he and his colleagues would usher in a “new model for business regulation” that focused “on only what is essential”.

But despite such efforts, a straw poll of some of AccountingWEB’s business members reveals most believe the negative effects still far outweigh the positives.

Balance sheet drain

Any boss who ignores regulations which will benefit their employees would be foolish. At the heart of any successful business is the people it employs but what most companies bemoan is the costs which result from complying with such regulations.

Several attempts have been made to put a figure on the cost of red tape. Among them are British Chambers of Commerce (BCC) data which claims regulations introduced since 1997 have cost businesses £50 billion and figures from the Federation of Small Businesses (FSB) showing small firms spend up to two and half days a week complying with rules.

In addition, the government’s own figures show a net burden of £15 billion per year for new regulations introduced between 1998 and 2004, while AccountingWEB member Nigel Best, who works as finance director of equestrian products retailer Robinsons, believes the burden of regulation he is forced to deal with has risen by 25% over the past three years.

Pages and pages of research have also been produced to illustrate the disproportionate effects of regulations as you move down the business size ladder. For the nation’s small and medium sized enterprises (SMEs), which account for around 98% of all businesses, the problem appears to be particularly acute.

David Shephard, self-employed accountant, AccountingWEB member and FSB regional policy adviser for Devon, says the burden of regulation is indeed worse for small businesses than their larger counterparts. “For big firms, complying with rules is easy as they have large human resources departments,” he claims. “But for an owner manger of a small firm who has to wear 200 different hats and be a specialist in every field, the time spent complying proves very costly.”

“For an owner manger of a small firm who has to wear 200 different hats and be a specialist in every field, the time spent complying proves very costly.”

David Shephard, AccountingWEB member

Among the most complex of all employment regulations are rules relating to employee recruitment and dismissal. Business groups complain that ensuring correct procedures are followed when taking on and dismissing workers are the bane of many a manager’s working life. Recruitment agencies are at the centre of such regulation and James Berry, finance director of Warwickshire-based Flex Recruitment, says the time his firm is forced to spend on processing each applicant has increased “dramatically” over recent years. “Whereas in the past, checking right to work and identity rules took minutes per candidate, this is now taking about an hour,” he claims. “Since we review approximately 8,000 candidates per year this is a significant increase in costs and administrative workload.”

It has to be acknowledged that some people believe businesses overestimate the true cost of regulation. Responding to research which showed 90% of businesses believe a new bank holiday will have a negative impact on productivity, AccountingWEB member and accountant Tim Sainsbury said: “Whenever a proposal like this is put forward, the first comment is always ‘jobs will go’. When it comes to the crunch, the work still needs to be done and jobs largely remain in place. I have clients who repeatedly say ‘this latest legislation will cripple us, we might as well pack it in now!’. The years go by and these same businesses are still around.”

“Whereas in the past, checking right to work and identity rules took minutes per candidate, this is now taking about an hour.”

James Berry, AccountingWEB member

Focus on the employee

Greg Hall, finance director at foreign currency specialists Xchange Business, raises a point which is prevalent among the views among many 21st century business owners: “Employees do need protection from overbearing employers,” he says, “however, that balance seems to have moved in favour of the employee.”

That is not to say that everyone agrees with such a view. The government has recently proposed the closure of a loophole which allows employers to include the UK’s eight annual bank holidays in employees’ statutory 20 days leave entitlement. Aimed at benefiting the lowest paid workers, if the process went ahead all full-time workers would be entitled to 28 days off a year by October 2009.

“Employees do need protection from overbearing employers, however, that balance seems to have moved in favour of the employee.”

Greg Hall, AccountingWEB member

Although business groups claim the measures would lead to a £800 million hike in annual costs, AccountingWEB member Angela Hodgson says the proposal is a welcome step believing the benefits outweigh the costs on businesses. “Just think how much businesses have saved over the years in unfairly deducting public holidays from their employees’ leave entitlement in comparison to those employers who treat their employees more fairly,” she says. “And of course the benefit from having a properly rested workforce who haven’t had to squander their precious leave entitlement on public holidays. Next we’ll be hearing how not working weekends costs the Monday-Friday businesses millions!”

A listening ear

The FSB’s David Shephard admits his organisation and others like it are constantly “banging on” about the impact of red tape while urging the government to listen and then act. That’s the key demand of businesses who bemoan the impact of employment regulation.

Consultation is king for concerned companies and when firms feel they haven’t been properly involved in new regulations the strongest criticism of the government erupts.

Others call for a more focused approach. James Berry says the government should “declare a moratorium on any further legislation” as well as “focusing on compliance in areas where blatant disregard of regulations is practiced rather than attacking honest employers over minor technical breaches.”

“The government should introduce good quality guidance for complying with regulation.”

Ann Campbell, AccountingWEB member

Ann Campbell, finance director of Campbell Scientific, says the help provided to firms on compliance is insufficient. “The government should introduce good quality guidance for complying with regulation while making subsidised training available for small businesses,” she says.

To comply or not to comply

Research conducted by the Small Business Service in 2004 showed few SMEs identified genuine, tangible benefits of fully complying with legislation and did not equate it with being a “good employer”. Two-thirds of the bosses interviewed said although they had a relationship of mutual respect or family-type bonds with their employees, it had not been achieved by complying with employment legislation.

Comments given to AccountingWEB by Flex Recruitment’s James Berry backs up such findings. He believes that the multitude of regulations piled on businesses, particularly at the smaller end of the scale, are actually pushing many into non-compliance.

“I believe that the sheer volume and cumulative cost of all the changes that SMEs are expected to make has started to create an attitude of complete cynicism and indifference to compliance,” he says. “In many cases SMEs may choose to take on the risks of the penalties of non-compliance rather than bear the administrative load or the costs of implementation of the latest dose of legislation.”

“I believe that the sheer volume and cumulative cost of all the changes that SMEs are expected to make has started to create an attitude of complete cynicism and indifference to compliance.”

James Berry, AccountingWEB member

Berry claims he regularly sees evidence of such practices among the SME clients his company deals with. The issue is normally highlighted, he says, when candidates apply for jobs and their documentation is defective despite having already been employed elsewhere using the same documents.

No-one of course would encourage such actions as at the end of the day legal obligations must be followed but the weight of regulation, whether it’s a perceived view or one of fact, suggests deliberate non-compliance is occurring to some extent.

Key to non-compliance appears to be businesses bemoaning what is perceived to be constant government intervention. Nigel Best says he believes a “sense of reason” has been lost in many areas of employment law. “We are too focused on the small details, as there seems to be an inability to distinguish between the big issues and the smaller ones which are all treated with the same level of importance,” he says.

More radical commentators suggest the whole employment process should be left to employers themselves meaning government intervention would be severely limited. This however could lead to significant problems with the firms which chose not to respond. David Johnson, managing director of software company Telemere, sums up that quandary well: “I have mixed views about the need for businesses to handle what most would regard as government responsibilities,” he says. “On the one hand it is direct tax on the business in terms of time and money but on the other I do feel that the tasks are probably carried out more satisfactorily than if they were left to the government machine. One has a greater control over those regulatory tasks which directly affect your business and workforce and consequently more control over the result.”

The future

Whatever way you look at it, employment regulation is necessary. The majority of the UK’s businesses are law abiding organisations willing to do the best they can for their staff. However, ensuring that such regulations do not impinge negatively on the way businesses operate is also likely to remain a constant niggle for regulators, whichever party is in power. But what will make the process easier is greater consultation. The major complaint from companies is ministers not involving them in the regulation setting process. Improving this could lead to the better relationship between businesses and the government which Gordon Brown craves.

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