Four key HR issues that enhance the value of Workforce Solutions companies

Getting the right workforce strategy in place is critical. 

If workforce solution businesses are readying for a sale or investment, there are four HR issues that investors and purchasers tend to focus on to make sure protection is in place and the business is operating correctly. If problems are found, they can inevitably hold up a deal and affect shareholder value and pricing. That is why a pre-sale or investment review can be invaluable in identifying and addressing any issues before they snowball and detract from equity value. 

On the flip side, a purchaser, having just purchased a workforce solutions business, will want to ensure that the business is protected and aligns with its workforce strategy.   

There are lots of different issues to think about - from hybrid working through to diversity and inclusion (D&I) and environmental, social and governance (ESG). However, there are four key risk areas that are continually flagged as being the most significant to investors and purchasers: business protection, holiday pay, national minimum wage (NMW), and worker status. We outline below the steps that can be taken to minimise risk. 

Business protection

Having the right restrictive covenants, confidentiality and intellectual property (IP) obligations, and data protection approach in place is vitally important.

Restrictive covenants

• Are they drafted correctly? Are the durations reasonable?  
• Is there an over reliance on non-competes – can non-dealing/non-solicitation covenants do the job instead? 
• Have senior employees signed up to restrictive covenants since promotion? (Remember that reasonableness is judged at the point the covenants were entered into.)
• For some individuals, would a longer notice period (and therefore a garden leave period) be more beneficial to the company than trying to rely on a non-compete, especially if non-competes are reformed?
• Are the covenants "future-proofed" in light of restrictive covenant consultation and potential reform of non-competes? Is there a provision permitting amendment?
• Are HR procedures robust? For example, if an employee is to move to a competitor, immediately writing to the competitor puts them on notice of the restrictions (therefore they are on the hook for a potential inducement of breach claim).

Confidentiality

• Do the confidentiality provisions sufficiently define the information the business considers to be confidential or are they generic provisions?
• Do the covenants align with new (post Covid-19) working practices? Does the workforce also work from home locations?
• Have IT alerts been set for bulk data uploads/print activities? Or (at the extreme end) consider seeding databases with fake client email addresses to monitor suspicious activity. 

Professional networking

• Does the business establish ownership over LinkedIn contacts and include obligations in respect of deleting LinkedIn contacts on leaving the company?
• Are professional networking policies in place to set parameters around acceptable behaviours?

IP

• Is IP that is created by founders and consultants protected?  Remember, this IP does not automatically vest in the company

Data protection

• Do contracts contain standard contractual clauses to cover the transfer of data abroad when, for example, it is being used by consultants?

And finally, consider linking business protection to incentivisation - for example, strengthening forfeiture provisions in commission schemes in the event of breach of restrictions. 

Holiday pay

• Does the workforce accrue the correct amount of holiday? Should they be accruing holiday throughout the engagement or just while on assignments? This is a tricky area to navigate - and attracts a lot of investor/purchaser attention.
• Is the correct reference period for holiday pay calculations used? This changed from 12 to 52 paid weeks in April 2022. However, some businesses might use a % accrual or pay rolled-up holiday. Are the risks of this understood? Are checks and balances in place? There is a lot of litigation in this area at the moment, so it is important to keep on top of the legal changes as this has investor/purchaser focus. (For example, the Supreme Court is expected to give its decision in the Harpur Trust case shortly.)
• Is regular commission and regular overtime is included in the four weeks statutory holiday pay?

National minimum wage (NMW)

• For junior staff check that, when overtime is discounted, they are not paid less than NMW. At the senior end, check that where pay is taken via dividends that nominal salary does not fall below NMW.
• Where salary sacrifice schemes have been implemented, check that the correct paperwork is in place. There needs to be a contractual "giving up" – that is, a sacrifice – in return for the benefit. Often NMW or PAYE issues arise because the right paperwork is not in place.

Worker status

• Review classifications in light of recent case law. Misclassification gives rise to significant employment and tax issues.
• If you do engage workers, also keep in mind that their potential employment rights go beyond just NMW and holiday pay – there are lots of other rights and entitlements for workers which should not be overlooked. 

Attracting people to stay

• If readying for sale and investment, how can businesses attract people to stay? 
• Businesses are launching a variety of creative employee propositions to create highly attractive places to work. Some examples of approaches to consider are:
• More flexible working hours - for example four-day working weeks are grabbing press attention at the moment, where staff condense 100% of the work in 80% of the time.
• Share options (such as enterprise management incentives, or EMI) are now being offered to a wider category of staff. In addition, remember forfeiture provisions in these schemes are also useful in protecting the business.
• Employee ownership models are generating interest and work well for people businesses. These are  popular because of the tax perks and flexibility (for example, there can be full or partial exit solutions, so founders do not have to sell 100% of their shares to a trust but  can retain part equity). 
• Save as you earn schemes – buying shares with savings for fixed price.  
• Salary sacrifice schemes are beginning to become more popular within workforce solution companies.
• There has been a revival of company car schemes, with a spotlight on electric vehicle car fleets for more senior employees. This is attractive because of government grants/tax benefits and helps delivery against corporate responsibility pledges to cut carbon emissions.

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