Guide to avoiding auto-enrolment pitfalls

Auto-enrolment is fiendishly complicated.  Here are five employment law tips on pitfalls that you might face, and how to avoid them.

  1. Probation Periods

Many probation periods in senior employment contracts are either for 6 months (or 3 months, extendable by a further period of 3 months) and state that the employee has no access to a pension scheme until that probation period is completed. However, under the new auto-enrolment regime, eligible jobholders must be auto-enrolled within 3 months of commencing work.

OUR ADVICE: Ensure that eligible new staff who join you are auto-enrolled within 3 months of joining, regardless of the length of their contractual probation period or whether their probation period has been extended.

  1. Inducing Out

You must not offer inducements to eligible employees to opt-out. A clear example of this would be to say to a member of staff: “if you want a pay rise then you need to opt-out”. However, inducements could arise in a more subtle fashion, e.g.:

  • An employment agency charges a higher rate for individuals who are pension scheme members, which makes them unattractive to an employer client compared to another agency worker who has opted out. The opted-in individual might not be aware of the charging structure but could notice that his/her colleagues who have opted out are getting more work.
  • For some individuals, even though opting out might make sense for them due to their personal circumstances, you must not point them in that direction. Any such decision must be made independently, and not at the suggestion of an employer.

OUR ADVICE: Be careful not to induce, and ensure that managers are appropriately trained in this area.

  1. Salary Sacrifice

Employers commonly offer staff the opportunity to contribute to their pension scheme via a salary sacrifice, i.e. a salary reduction is applied, which then goes into the individual’s pension pot.

Salary sacrifice is separate to auto-enrolment, but the two processes may run in parallel. Salary sacrifice must not be stated to be a pre-requisite of entry to a scheme.

OUR ADVICE: Ensure that eligible employees who turn down the opportunity to participate in a salary sacrifice scheme are not precluded from being auto-enrolled.

  1. “Maxing Out”

Where an individual has “maxed out” his/her pension allowance the effect of him/her enrolling into another scheme can result in substantial penalties.  Where an employee is maxed out on their pension and you decide to make an additional payment in lieu of such contribution via payroll consider carefully how long that entitlement will run for and its legal status.

OUR ADVICE: Consider inserting a warning about this when you inform staff about auto-enrolment, but be careful that it does not amount to an inducement.

  1. Status

Failure to apply the correct status (i.e. employee, worker, independent contractor) could result in you incorrectly failing to enrol an eligible employee. For example, an individual who is purportedly an independent contractor could in fact be your employee, and would therefore be potentially eligible to be auto-enrolled.

OUR ADVICE: Assess your workforce to ensure that you are clear on their correct status as independent contractors, workers or employees.

If you need advice or have any questions in relation to the above, please contact David Greenhalgh on 020 3 603 2177.

This article/blog is for reference purposes only. It does not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking or deciding not to take any action.