New reporting requirements on employee engagement in annual reports after January 2020

The landscape is changing for large private companies, in terms of corporate governance and the areas that they need to report on in their annual reports. This note is a summary of the new employee engagement reporting obligations that will need to be addressed in the annual report for the first time in 2020. There are a myriad of other new obligations. For a summary of these click here. There are additional requirements for quoted companies which are not dealt with in this summary. 

The Companies (Miscellaneous Reporting) Regulations 2018 (Regulations) introduce new requirements for content in annual reports. These apply for financial years beginning on or after 1 January 2019, so we should start to see the new content being included in annual reports from January 2020 onwards.

The requirement under the Regulations to report on employee engagement applies to all companies with more than 250 UK employees. The calculation for the number of employees is based on a monthly average number of employees during the financial year, excluding anyone employed to work wholly or mainly outside the United Kingdom. This is a different applicability test to the other new reporting obligations, the majority of which apply if a company is “large” (a test based on turnover and balance sheet total, as well as number of employees). If a company is a parent company of a group, the threshold for reporting on employee engagement is based on the number of employees in the group. The Regulations are not applicable to LLPs.

The Regulations specify that the directors’ report must have a statement summarising how directors have engaged with employees and taken account of their interests during the year.

This statement must describe the action by the company taken during the financial year to introduce, maintain or develop arrangements aimed at:

1. providing employees systemically with information on matters of concern to them as employees;
2. consulting employees or their representatives on a regular basis so that the employees' views can be taken into account in making decisions which are likely to affect their interests;
3. encouraging employee involvement in the company's performance by an employees' share scheme or other means; and
4. achieving common employee awareness of the financial and economic factors affecting the company's performance.

The statement must also summarise:

1. how the directors have engaged with employees; and
2. how the directors have had regard to employee interests and the effect of that regard on the principal decisions taken by the company during the financial year.

No disclosure is required for impending developments or matters in negotiation if, in the directors' opinion, disclosure would be seriously prejudicial to the company's interest.