EU rule on lay-offs will affect UK

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So a new European Union directive could come as something of a shock to the banks, bringing the law in the UK more closely into line with that of other European nations and further away from the laissez-faire US model.

The Information and Consultation Directive is expected to be ratified by the European Parliament this week. It will initially require companies with more than 150 employees to inform and consult staff representatives before they undertake activities that affect the employees or their rights. Among such activities are mergers and acquisitions, restructurings and redundancies.

Tom Flanagan, head of the employment and pensions practice at Stephenson Harwood, says this will make a 'massive difference' to the way that redundancies are made.

UK law currently requires that employee representatives are consulted before redundancies, where the loss of more than 20 jobs is planned. But the penalties for not doing so are slight and in practice 'consultation' often amounts to little more than informing employees of a decision that has already been reached.

Under the directive, consultation will need to be more than just symbolic, says Flanagan, who has given advice to the European Commission about the issue. It will also need to take place much earlier, as companies decide whether to make redundancies at all, and with a view to reaching agreement.

If proper consultation does not take place with employee representatives, there is a possibility that they could take out an injunction against the employer to prevent them taking place.

The UK will have until 2005 to put the directive into effect. But Flanagan says employers should make preparations well in advance, to ensure that they have satisfactory arrangements in place. Otherwise, less flexible arrangements may be imposed on them.

'Just because employees are not collectively oriented now, it does not mean that they will not be in the future,' says Flanagan. If employee representatives do not exist, he says that staff will be able to argue that they have not been consulted, and will perhaps use this as a bargaining tool to increase redundancy pay-outs.

Some banks are already alert to the danger. UBS Warburg established a London Staff Committee in September last year, with a view to satisfying the European legislation. The committee has nine management and 15 employee representatives. All were asked to nominate themselves, and in situations where there was more than one nominee there was a ballot.

UBS Warburg's committee has a limited role. 'We will not discuss salary rates or individual compensation,' says Sandy Campbell, UK head of human resources. 'But we think that it is good practice to consult employees on matters that may affect them, such as changes to non-monetary benefits, or business developments.'

Although consultation with employees is better established in retail banking, Campbell thinks that UBS Warburg is probably 'ahead of the curve' when it comes to investment banking. Flanagan agrees. US banks in particular balk at the notion of consulting employees, he says.

Goldman Sachs, Merrill Lynch and Morgan Stanley declined to say whether they have employee representative committees in place in London. But all have experience of works councils elsewhere in Europe.

The 1999 European Works Council Directive requires all companies with more than 1,000 employees in the EU to set them up. Morgan Stanley, for example, set up a European works council three years ago.

But this is concerned only with issues involving more than one country. Redundancies that are made in a single European country are not covered by the directive.

Banks headquartered in France and Germany are likely to be most at ease with the new directive. German and French law already requires large firms to discuss planned redundancies with employee works councils.

In France, failure to do so can lead to imprisonment. France's new Social Modernisation law, which is likely to come into force at the end of January, also makes it illegal to select individuals for redundancy on the basis of their skill set. As a result, redundancies are seen completely differently. Legitimate criteria include length of tenure and the number of children an employee has.

'When we make a decision on redundancies anywhere in the world, we are mindful of the social consequences and how it will affect our relationship with our employees in Paris,' says a spokesman at a French investment bank.

Many people see advantages to this approach.

Bertrand Richard, managing vice-president of the Paris office of the executive search firm Korn/Ferry, says: 'All the big financial services employers in France have works councils. This is good. It stops them from doing crazy things. They cannot decide to recruit 200 people one day and to get rid of them six months later.'

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