CJEU raises questions over retaining investigation data in HR reports
Flexibility curtailed but not lost as UK consults on zero hours reforms, and
Global reach of DIFC courts confirmed in landmark ruling
A ruling by Europe’s top court on the General Data Protection Regulation (GDPR) will make it harder for employers to keep information on investigations involving staff on their personnel files indefinitely, according to an expert. The Court of Justice of the European Union has ruled that holding information about an investigation where no evidence of wrongdoing was found may not meet the public interest test that an ongoing investigation or a conviction would justify, if that information is being kept for HR rather than investigative requirements. It comes after the court was asked to rule on whether the retention of arrest information relating to a police officer constituted a breach of GDPR rules, after the officer had been denied promotions because the information was kept in his personnel file. Privacy expert Malcolm Dowden said that the ruling suggests that “data subjects may have strong grounds for requesting erasure. In relation to public authorities, when a single public authority acts both as employer and as investigating body, the transfer of investigation data into HR files engages GDPR and must be supported by a clear, proportionate legal basis.”
Proposals on how UK employers should implement new protections for zero- and low-hours workers coming into force in 2027 leave “some room” for flexibility, an expert has said. The UK government has launched its long awaited consultation on how it will implement new rights for those on zero- and low-hour contracts under the Employment Rights Act (ERA) that are due to take effect next year. The consultation, which closes on 25 August, seeks views on the detailed regulations needed to give effect to three new statutory rights: the right to be offered guaranteed minimum hours; the right to reasonable notice of shifts; and the right to payment when shifts are cancelled, moved or curtailed at short notice. These rights will also extend to agency workers. While the reforms are intended to address “one sided flexibility” in the labour market, the consultation indicates that the government is still considering how businesses may retain flexibility within the new framework – a move which Employment law expert Jon Fisher said potentially leaves employers with “some room for continued flexibility in workforce models”.
Courts in the Dubai International Financial Centre (DIFC) have the power to investigate a judgment debtor’s assets even if the assets are located outside the DIFC, a recent ruling has confirmed. The judgment issued by the DIFC Court of Appeal ends recent attempts to argue that the DIFC courts’ enforcement powers, specifically its power to examine a judgment debtor on their asset position, were limited to assets located in the DIFC. The implication is clear: when enforcing a judgment in the DIFC court it is possible to take steps to ascertain a judgment debtor’s asset position globally. The position was clarified in a case involving the Danish Customs and Tax Administration (SKAT). Pinsent Masons acted for the administration in the case.
Most countries are keen to get inward investment – capital from foreign people or companies that can support economic activity in their country. There aren’t many big road, rail, mining or technology projects that don’t involve cash from abroad. But too much foreign investment, or the wrong kind, can be a problem too, a threat to national interests or in some cases even an undermining of sovereignty. That’s why most countries have foreign direct investment or FDI regimes which control who can invest in what. Australia has proposed a radical overhaul of its regime, making it easier for some people to invest and harder for others. Sydney based Joni Henry told me all about it and started with the rationale for having FDI regimes at all.
Joni Henry: An FDI regime, or a foreign direct investment regime, is there to monitor and regulate foreign investment into a country and the harms that they're looking for. The really obvious ones, espionage and sabotage, you know, spies and bombs. So making sure that bad state actors aren't getting into defence buildings with spyware or putting malware into infrastructure such as, you know, electricity lines or telecommunications, that they can be brought down by sabotage. So that's the obvious one. In Australia we call those sort of national security risks. In Australia we also have this concept of not being contrary to the national interest and that's a much broader and amorphous and difficult to work out, test, and I suspect other countries have similar wide ranging and changing tests for their FDI regimes, and that does change over time.
At the moment in Australia, there's a lot of community concern, for example, about foreign investment into existing residential housing because there's such a housing crisis. So the government has used the national security tests here to stop foreign investors investing into existing residential housing, but are also making it easier for them to invest into new housing to promote infrastructure. So that way they're reflecting both the political issue and a community sensitivity issue as well with the FDI regime.
Matthew Magee: So what are the proposed changes in Australia? It's about classifying investments as high or low risk and making regulation and control proportionate to that risk, says Joni.
Joni: There's really three main changes. The first is promoting a streamlined and faster approval process for low risk investments and that also comes with more flexibility and reduced regulatory burden for those low risk investors. The second one is a much more closer scrutiny of high risk investments in critical or sensitive areas of Australia's economies. So things like those critical minerals, things like our critical infrastructure, critical technology, some of those we know already because they're already regulated like our critical infrastructure. Some of them we can guess that we know what the critical minerals are likely to be because there's a critical mineral strategy and some of this critical technology, we suspect it's AI and data centres, but we haven't yet been given the definition. And then the third major change, which is aligned with the second, but it's broader in application is greater enhanced enforcement powers. So that allows stronger scrutiny, the ability to go in and do something when things have gone wrong.
Matthew: These are pretty sweeping changes, so why are they happening now? Joni says it's part practicality and part reaction to the world around us where geopolitical risks seem to be on the up.
Joni: For the first change that streamline investment, I think the thing is to make Australia continue to be attractive for global capital. It's competitive out there, there's lots of places where global capital can go to. Australia is a small country, it's got a great history of attracting foreign investment, but it needs to continue to do so. And there's a real sense that the current regime is catching too much and it seemed to be a bit of a tick the box exercise in imposing a lot of red tape where there's not a lot of risk. So I think it's looking at proportionate risk based regulation.
And then the second one is the flip side. The government wants to be looking properly at the high risk investments. They want to move their focus and move the money and time that they're spending on foreign investment regulation to those really high risk ones. And the reason for that is the same issues that all governments are facing at the moment, the uncertainty, the strategic, political and defence risks are much more heightened. The technological changes have made national security issues more complicated, more complex in a way that we really haven't seen I think since the 80s with those sort of nuclear arms race. There does seem to be state based global competition for certain resources now, particularly in that tech sector and the sort of critical minerals that undermine that. So I think that's the reason they want to spend a lot more focus on those sort of areas, to make sure that Australia has a seat at the table and its strategic and political interests are protected.
Matthew: These proposals would have very different effects on an investor based on whether they were classed as low or high risk. Joni outlines how that decision will be made and says the impact on each group will be significant.
Joni: To be a low risk investor and qualify for these streamlined approaches, it's a 3 tier test. Who, what and how so who you are, you need to be an investor that's received approval in the past 24 months. You can't be subject to extrajudicial direction. That's diplomatic speak for saying that your home country can't be telling you how to invest and you have to have a good compliance history. The what is what you're investing in. So it needs to be non critical, non sensitive investments. So that's things like manufacturing, retail, commercial real estate, non critical mining, new housing developments, those sorts of things. And then the how is it needs to be straightforward transparent transaction structure. The government needs to be able to see who controls you and know that you're not structuring for tax avoidance or minimisation.I think for existing repeat investors, those who are considered low risk will have a great impact. Their regulatory burden will go down, their approval timeframes will go down. They will be targeting a 30 day approval timeframe for those low risk investments. They will have much more certainty on their investments into Australia. Their regulatory burden will be significantly reduced. So for those investors, it's great. They should be getting ready because they'll only be allowed to use that if they've got clear transaction structures. So they can't be using like really complex investment structure like global group company investment structures that are opaque. The other people are the high risk ones. So anyone that's looking at investing into those critical national security, national interest assets, they're going to have to be thinking quite carefully about how they're going to do that. They need to be aware that those investments will attract greater scrutiny. They'll need to be thinking quite carefully about the structures that they're using for their transactions. So anything that looks like they're structuring their transaction for tax minimisation, anything that looks opaque or be shifting the tax payable from where the resources to a sort of low tax or no tax regime that will be looked at really closely. So making sure that their overall structures they're looking good and also being aware that they'll need to be aware of the underlying government policies in the areas in which they're investing. So for the data centre and AI investors, for example, they'll need to also be making sure that they're investing in accordance with the government AI national plan so that they're compliant with the policy. So it's sort of just getting ready for these additional areas.
China’s status as an economic superpower has been built on decades of manufacturing, producing many of the world’s goods more cheaply than rivals using abundant Chinese resources and embedding Chinese manufacturers at the heart of supply chains all over the world. So two new laws that could introduce friction into those supply chains should make the manufacturing world take notice. China has passed one law on supply chain security and another on improper extra territorial jurisdiction that not only will raise the compliance burden for companies using Chinese manufacturers but actually create a conflict of law, where international companies could have to choose between breaking Chinese law or breaking the law in their own countries. London-based sustainability expert James Hay explained what has changed.
James Hay: China already has a backdrop of national security existing anti foreign sanctions laws. What's changed recently is that China has elevated supply chain security to a point of national security and has also passed new regulations essentially trying to counter the application of certain foreign laws that have improper extraterritorial application to Chinese companies. China has published these two new regulations. The first of those essentially says that supply chains are now a point of national security in China and therefore we will be more closely scrutinising the security of those supply chains and also how foreign companies interact with Chinese companies. The Chinese government will publish a list of critical sectors and so the protections under these regulations will only apply to those sectors. We're not sure exactly yet what those critical sectors are going to be. However, we can speculate and most obvious I think would be defence related sectors and that's because China's existing anti foreign sanctions laws already cover defence related industries. There are other areas that we think will be covered such as semiconductors and advanced electronics, renewable energy components, certainly rare earth processing would be a strong candidate for the list and also potentially pharmaceutical and chemical supply chains.
Matthew: So China is protecting assets and resources over which there is lots of competition and which are crucial for companies and countries trying to get strategic industrial advantage. But there's more to it than that. The new rules could make it impossible for companies in these sectors in places like the EU or UK to meet existing obligations on sustainability and reporting.
James: Foreign companies, say UK or European company, they are obliged by certain domestic regulations to integrate sustainability into their supply chains, whether that be to conduct sustainability due diligence on supply chain partners to ensure that goods they're putting on the market are not tainted by force of labour or other sustainability risks. Where this potentially conflicts with these new Chinese regulations is that there can be these blocking mechanisms whereby Chinese suppliers or even potentially Chinese subsidiaries of foreign companies are not permitted to comply with those foreign laws or from requests by non Chinese businesses. So, for example, if you are operating in one of these critical sectors and a foreign company requests certain information from you as a Chinese company, you will be prohibited in fact from providing that information.
And if you do provide that information, it may potentially be a criminal offence. So this is quite severe as a consequence and it can create circumstances where what we would presume to be legitimate information requests to comply with these foreign sustainable regulations as seen as prohibited actions in China. And so you can't really square those two things, right. They are in direct conflict, provided you know you are operating on one of these critical sectors.
Matthew: This puts companies in a real pickle, trapped between competing sets of legislation. So what can they do?
James: This isn't as simple as just rewriting a policy. You have to understand what is your legal exposure potentially under the Chinese regulations. What are your foreign compliance obligations? And then what is the most pragmatic solution? Are there alternative ways to get similar data or to carry out due diligence or do you have to, you know, tread carefully. The solution here is not as simple as just, you know, choosing not to do business with Chinese counterparts, which of course, in many supply chains is just not going to be a pragmatic solution at all. There are potential restrictions against foreign companies who, and this is what the Chinese regulations refer to as engage in improper market transactions. Now this is a sort of a generic way to describe by potentially boycotts or the termination of business relationships with Chinese companies because of course that would damage them commercially and that is seen again as improper market conduct by Chinese authorities. The regulations also introduce a civil rights of action in the event that a Chinese company is harmed by you complying with these foreign laws. So, for example, if you terminate a business relationship on the basis of compliance with one of these foreign sustainability regulations, that will cause losses to a Chinese company and they can actually claim damages against you for those losses. So it's not just about rerouting supply chains. Companies understand that there are legal liability risk that they have that they have to assess when figuring out how to manage these new conflicts between Chinese and foreign regulations.
I believe that companies should get on the front foot here, and we believe that companies should seek to identify their potential exposure so that when these list of critical sectors and list of foreign laws are published, they can react more quickly. That would involve mapping out their supply chain partners, identifying the different components that they may source from China, carrying out a risk assessment not just on the different value chains that they're involved in, but also the different areas where they source from China. So that when some of this uncertainty resolves, they could then figure out whether those areas that they flagged might be at risk either are now safe or do need further consideration.
Matthew: Who will be most affected here? As James says, there is not yet a final list of the sectors the laws apply to, but we can make some educated guesses as to what China will consider to be strategically important industries and resources.
James: There are certain sectors where China has got dominance over certain key components or raw materials that goes further down the value chain. The renewable energy sector is quite reliant on China for certain components, solar PV panels for example. China also has a very dominant position over rare earth processing. The export of rare earths themselves or ones based on them will obviously be inextricably linked through to China. There are also many sectors that involve advanced electronics that tend to be manufactured in China as well. So there are a wide number of industries where it would be very difficult, in fact, to diversify away completely from Chinese supply chains.
Matthew: This will not be an easy circle to square, says James, and companies should expect more rather than less regulation like this in the future.
James:This is very much a response to recent US laws that have either sanctioned US companies or have placed greater burden on US businesses seeking to do trade in China. This is not a new position that China has held. Certainly over the last five years they have passed increasing countermeasures across a wide range of areas. The reason why these new regulations are a particular interest to me as a sustainability consultant is because this is now impacting sustainability due diligence in supply chains, whereas previously the counter measures were more focused on ensuring that Chinese companies were not obliged to comply with foreign sanctions that China did not believe were legitimate. A lot is yet to be determined, however, the direction of travel, I believe is quite clear that China will seek to regulate its supply chains with greater scrutiny, particularly among those critical sectors, and also it is taking a much stronger stance against these extraterritorial foreign laws.
Well, thank you again for listening, for tuning in, for following us, for hopefully sharing with people that you think this might also be useful to. Remember, you don't have to wait to every second Tuesday to hear the news. You can read it every day from our specialist team of reporters at pinsentmasons.com, or you can get a personalised weekly update on just the things you care about at pinsentmasons.com/newsletter. For now and until next time, goodbye and thanks for listening.
The Pinsent Masons podcast was produced and presented by Matthew Magee for international law firm Pinsent Masons.
