Background Following the UK’s vote to leave the European Union (EU) by a narrow majority (52% in favour), there has been a frenzied period of speculation as to what a Brexit will actually mean. Businesses around the world, especially those with staff based in the UK, are still considering what plans they should be making and how they can best ensure stability for their workforces. In this article, we explore some possible implications for employers arising out of a Brexit. We also suggest some practical steps that they can consider taking now to put themselves in the best possible position. What happens next? The UK has not actually left the EU as a result of the Brexit vote. For the time being, nothing has changed and all legal rights should continue unaffected. The exit process will be triggered formally when the UK serves notice of its intention to withdraw from the EU. This is expected to be done in accordance with Article 50 of the Treaty on European Union, which provides for a period of up to two years for the negotiation of the UK’s withdrawal terms before exit. This period can only be extended with the unanimous consent of all EU member states. Theresa May, the newly-appointed British Prime Minister, has indicated that she intends to trigger Article 50 before the end of this year. However, she is likely to seek informal talks with other EU leaders before triggering Article 50, in order to assess the UK’s bargaining position and ensure that she starts the formal exit process at the optimal time. In all likelihood, discussions have already begun between UK representatives and their counterparts at EU institutions. These discussions will be focussed on the UK’s post-Brexit relationship with the EU; most significantly the terms of a UK-EU trade deal. Quite what that deal will look like is uncertain. There will be significant tension between the UK’s desire for continued tariff-free access to the EU single market and the political imperative for the UK Government to be seen to take steps to control EU-UK migration, which was one of the key factors underlying the Brexit vote. Achieving both of these goals will be very difficult. In shaping the UK’s post-Brexit relationship with the EU, there are various models to draw from. At one end of the spectrum is the World Trade Organisation model. This would be the “purest” form of Brexit, needing no formal agreement and allowing the UK complete control over immigration. However, it would involve a significant deterioration in UK-EU trade terms and is widely viewed as an extremely unlikely outcome. At the other end of the spectrum, the “Norwegian model” would involve the UK remaining as a member of the European Economic Area (the EEA) and allow the UK continued tariff-free access to the EU’s internal market. However, it would also require the UK to abide by a significant portion of EU law, accept the free movement of EU citizens and make a sizeable contribution to the EU budget. It is likely that the final outcome will be somewhere between these two scenarios. In any event, it is likely to take a number of years (most estimates are between two and five years) to re-shape the complex web of legal, trade and political relationships that have been created over the UK’s 43 year membership of the EU. In the intervening period, during which the UK’s future position will become progressively clearer, it will be more or less businessThe exit process will be triggered formally when the UK serves notice of its intention to withdraw from the EU. This is expected to be done in accordance with Article 50 of the Treaty on European Union, which provides for a period of up to two years for the negotiation of the UK’s withdrawal terms before exit.
as usual. In particular, the UK will remain a member of the EU and EU law will remain applicable in the UK. Effects on Businesses The effect of a Brexit on any business will depend on some key factors: ■ Is the business in a regulated sector, such as financial services or pharmaceuticals? If so, there will be uncertainty for some time about the extent to which the UK operations of the business will be subject to different regulation from those in the EU. ■ Does the business rely on movement of employees around the EU, including to and from the UK? Any EU citizen can freely move to and work in any other EU country: at some point in the future this may cease to apply in relation to the UK. ■ Has the business used the UK as the headquarters for its European operations? Some of the advantages of this may go as a result of the UK’s exit, such that businesses may wish to consider another location. Alternatively, the UK government may introduce significant new incentives (such as extremely low corporate tax rates) which tip the balance back in favour of remaining domiciled in the UK. ■ Does the business trade with or within the EU or use the EU as a base for trade with other countries? The UK may take some time to replicate, through bilateral trade deals, the benefits it currently enjoys as an EU member. On the other hand, the UK may be able to secure new trade deals with other countries (perhaps including India, China and the USA) which ultimately put UKdomiciled businesses in a better trading position than those based in the EU. How will UK employment change? Until exit negotiations are concluded, there is unlikely to be any immediate change to UK employment laws as a result of the decision to leave the EU. David Davis, the UK’s new Secretary of State for Exiting the EU, has said that “regulation already in place will stay for the moment, but the flood of new regulation from Europe will be halted”. He has also said that: “it is not employment regulation that stultifies economic growth, but all the other market-related regulations, many of them wholly unnecessary. Britain has a relatively flexible workforce, and so long as the employment law environment stays reasonably stable it should not be a problem for business.” Overall, it therefore seems likely that UK employment law will remain relatively stable in a post-Brexit world, certainly in the short term. However, looking forward, it must be borne in mind that many key areas of UK employment law are derived from EU law. These include family-friendly rights; anti-discrimination laws; the protection of employment rights on the transfer of a business (the so-called ‘TUPE Regulations’); and the right to paid holiday. In theory, the UK Government could repeal all of this, but this seems unlikely for three reasons: (1) because, as a condition of any trade deal between the UK and the EU, the EU may insist on a certain threshold of employment rights being maintained in the UK, not least because the EU will not want the UK to be more competitive than EU member states by applying lower employment standards; (2) because the UK Government will not want to abandon employment protections that are either popular with voters or regarded as sensible and fair by both employees and the business community alike; and (3) because abandoning a raft of employment laws in one go would be complex, time consuming and lead to increased uncertainty for businesses. Therefore, it is likely that the UK will retain a considerable part of EU-derived employment law with only piecemeal amendments. Nonetheless, there may be some concrete decisions for the UK Government to take in relation to UK employment law. These will stem from the fact that some EU-derived employment laws (such as the TUPE Regulations (see below)) have been implemented in the UK by means of ‘secondary legislation’ introduced by a government minister under powers granted by the European Communities Act 1972 (the ECA). If the ECA is repealed (which will almost certainly be the case upon Brexit), then all secondary employment legislation made under it would fall away unless deliberately retained. This contrasts with the situation regarding
so-called ‘primary legislation’, such as the laws governing discrimination and equal pay, which would remain in force until repealed. In practice, this means that the UK Government will need to make a case-bycase decision upon Brexit about what parts of secondary employment legislation to keep. For administrative ease (and to ensure stability), the government may simply opt to preserve all secondary employment legislation or the vast majority of it in the immediate aftermath of a Brexit, but there will doubtless be a detailed review of all EU-derived employment laws at some point. The UK employment landscape is, therefore, unlikely to change dramatically and any change is likely to be gradual. However, areas where we may eventually see changes to employment law in the UK following Brexit are as follows: Free Movement of People Free movement of people – along with the free movement of goods, services and capital - is one of the four freedoms of the EU’s single market. It gives all citizens of EU countries the right to move freely, to stay and to work wherever they wish within the EU. Without doubt, the most important implication of Brexit in an employment context is how Brexit will affect this right. Until the UK formally leaves the EU, all EU citizens (including those working in the UK) should continue to have free movement within the EU. However, in due course, if/when the UK leaves the EU, Brexit will potentially affect EU nationals who work in the UK but do not have the right to live and work permanently in the UK and it will also potentially affect UK nationals working in the other EU countries. Absent any other arrangements being put in place, the freedom of EU nationals to live and work in the UK would end upon the UK leaving the EU and EU nationals would be subject to UK immigration controls that apply to non-EU nationals. Therefore, it is anticipated that transitional arrangements will be put in place to enable EU citizens working in the UK to remain following Brexit. However, it is not yet certain whether this will apply to EU citizens who have already been in the UK for five years (and, therefore, qualify for the right to remain permanently in the UK), those living and working in the UK on the date of the Brexit vote (in June of this year), or those living and working in the UK on the date that the UK leaves the EU. Quite what arrangements will be put in place will depend on the nature of the future relationship between the UK and the EU. However, EU nationals working in the UK can draw comfort from the fact that the UK Government will be mindful to protect the rights of UK citizens working in other EU countries and the EU will expect any such protections to be reciprocated for its citizens working in the UK. In the longer term, many businesses which rely on large numbers of unskilled workers from the EU (for example, in farming and manufacturing) are likely to be most affected by restrictions on EU nationals working in the UK. Such UK businesses actively recruit workers in the EU due to the lack of demand from UK workers to carry out such jobs. Restrictions on the freedom of movement may lead to the need to increase wages to attract job applicants. Businesses which rely on skilled workers from the EU may also face difficulties in recruiting and/or retaining such individuals. Such individuals may be deterred from applying for (or remaining in) positions with UK businesses due to the uncertainty surrounding their immigration status. For the time being, those EU nationals who qualify are likely to accelerate applications for permanent residence in the UK or British citizenship. Businesses may wish to consider assisting any of their key workers who fall into this category with such applications. In the longer term, many businesses which rely on large numbers of unskilled workers from the EU (for example, in farming and manufacturing) are likely to be most affected by restrictions on EU nationals working in the UK.
Anti-discrimination and Family Friendly Rights An overhaul or complete watering down of antidiscrimination and family friendly rights in the UK is unlikely as this would prove politically unpopular. There would, of course, also be strong resistance from trade unions. However, one possible change would be the imposition of a cap on discrimination compensation which (unlike unfair dismissal compensation) is currently uncapped. Another possible change would be to allow positive discrimination for particular underrepresented groups (for example, to force companies to increase the number of women in boardroom roles) which is not permitted under EU law. Transfer of Undertakings The Transfer of Undertakings (Protection of Employment) Regulations 2006 (the TUPE Regulations) implement an EU Directive known as the Acquired Rights Directive. The TUPE Regulations ensure that employees employed in a business in the UK automatically transfer with that business if it is sold/transferred (by way of an asset/business sale as opposed to a share/stock sale) and also ensure that the terms and conditions of transferring employees are preserved and protected as part of that process. The regulations also apply upon a ‘service provision change’ (e.g. an outsourcing or insourcing arrangement). The TUPE Regulations have, since their inception in 1981, had their critics. However, the principle that the rights of employees should, in such circumstances, be protected has been established for some time and provides businesses with a degree of certainty in this area. As a result, the UK is likely to retain the TUPE Regulations without substantial amendments. However, some changes are still possible and might include an amendment to allow employers to more easily harmonise terms and conditions of employment of transferred employees post-transfer to align them with their existing workforce. There may also be a watering down of the information and consultation obligations required in relation to a TUPE transfer. Collective Redundancy Consultation Collective redundancy consultation obligations (which are triggered when an employer proposes to dismiss 20 or more employees during a period of 90 days or less) have already been watered down by a previous UK Government. Therefore, their application does not present a particularly onerous burden for most large businesses. However, there may well still be pressure, particularly from smaller employers, to further erode these obligations. Possible changes may include removing the collective redundancy consultation obligations entirely or (more likely) increasing the threshold which triggers the obligations from 20 affected employees to, for example, 100 affected employees. Agency Workers The revocation (or amendment) of the UK’s Agency Workers Regulations is possible, as this piece of legislation is complex and has proved highly unpopular with employers in the UK. At present, after 12 weeks, agency workers in the UK are entitled to the same pay and basic working conditions as equivalent permanent employees. Revoking the regulations would prove attractive to employers as it would reduce the costs associated with using agency staff and provide greater flexibility. Holidays and Working Time Certain holiday rights derived from the EU’s Working Time Directive and EU case law have proved unpopular with UK businesses due to the added cost they give rise to. These rights, which may be removed, include employees’ rights to continue to accrue holiday during sick leave and the requirement to include overtime and commission in the calculation of statutory holiday pay. The removal of the 48-hour weekly cap on working hours is also a possibility, although the existing ability for UK employees to opt out may render this unnecessary. Remuneration and Bonuses CRD IV (the Capital Requirements Directive) places restrictions on remuneration and bonuses under EU regulations in the financial services sector. Unsurprisingly, this has not proved popular with those working in financial services. The removal of the “bonus cap” (currently limited to 100% of fixed remuneration or 200% with shareholder approval) is, therefore, a possibility. Any such removal could place
financial services providers in the UK at a competitive advantage over their EU counterparts as providers in the UK would be able to recruit the best talent by being able to offer greater financial incentives. However, the removal of such restrictions may be resisted by the UK Government in the context of the UK’s long-standing desire to maintain strong regulation within the financial services sector. European Work Councils A European Works Council (EWC) is an employee representative body set up to consult with employees on European-wide decisions such as transactions. A business can be required to set up a EWC if it has at least 1,000 employees across EEA member states and at least 150 employees in each of two or more of those member states. Subject to the outcome of negotiations between the UK government and the EU, the obligation to establish a EWC may be removed. Separately, where the management of the EWC is based in the UK, it may be necessary to change the location of the EWC to another EEA country. Businesses should also assess how Brexit will impact EWC employee representative thresholds, as discounting UK employee numbers from the EEA workforce could bring the EEA workforce below the threshold necessary for establishing a EWC. Data Privacy Data privacy is clearly an area of importance to employers, who process the personal data not only of their employees, but also others, such as customers. The UK’s Data Protection Act, which governs the processing of personal data in the UK, was enacted to bring UK law in line with EU data privacy laws. By 25 May 2018, the UK is required to implement the new EU data protection framework in the form of the General Data Protection Regulation (the GDPR). Although Brexit provides the UK with more scope to dictate its own data privacy regime, it seems unlikely that the UK would repeal or significantly modify the Data Protection Act. Moreover, given the timing on implementation of the GDPR, the UK will (notwithstanding the Brexit vote) need to continue with its preparations for the adoption of a new EU-driven regime. Even if, following Brexit, the UK Data Protection Act were repealed or modified or the UK derogated from the GDPR obligations, UK businesses operating in the EU would still need to ensure that there is adequate protection regarding the processing of personal data satisfying the obligations laid down in the GDPR, as many of these obligations will apply to organizations located outside the EU which process EU citizens’ personal data. A departure from the EU’s approach in respect of data privacy laws would inevitably result in the European Commission considering the adequacy of the UK’s data privacy laws. This may then result in similar investigations to those we have seen in respect of personal data transfers from the EU to the US which has resulted in the newly adopted EU-US Data Privacy Shield, following the recent European Court decision in Schrems v Data Protection Commissioner ruling the Safe Harbor arrangement inadequate. A divergence between the UK’s and the EU’s data privacy laws could also result in UK businesses being required to take further steps to protect personal data when transferring personal data between the UK and EEA jurisdictions. Whilst mechanisms are currently available for the transfer of personal data outside the EEA, such as entering into model clauses (a standard set of terms issued by the European Commission for the transfer of personal data outside the EEA), the legality of these mechanisms (following the Schrems case) has already been challenged by national data protection regulators, which adds to the uncertainty for UK-based businesses which operate in the EU. According to the UK Information Commissioner’s Office (which enforces data protection rules in the UK), a focus on “international consistency” and “working closely with regulators in other countries” will continue to be the main objectives for the UK. Practical Tips for Employers ■ In addition to keeping standard checks on the immigration status of employees under review, employers should consider extending audits to a review of expatriate and secondment arrangements between the UK and EU member states to check when they end or how they can be
terminated and whether employees have been promised repatriation or redeployment to other countries. Employers may also want to take more active steps to ensure that they are able to retain key workers valuable to their business by encouraging such workers to apply for a registration certificate to prove their right to live and work in the UK and to assist them with their applications for permanent residence (for example, by paying for legal advice). Employers entering into long-term secondment arrangements should also ensure they have the ability to allow them to alter or terminate such arrangements in circumstances where immigration requirements preclude the continuation of the secondment. ■ Employers should consider whether there is a need to put in place retention agreements or new incentive arrangements for key employees who are thinking of changing jobs and/or country location as a result of the UK leaving the EU. ■ If a restructuring is necessary, employers should ensure there is sufficient time to implement any redundancy programs. ■ The result of the UK vote to leave may have led to tensions in the workplace which may manifest itself in ethnic minorities being subjected to discrimination and/or harassment. Employers should consider circulating anti-discrimination and anti-harassment policies to staff to remind them that such behavior will not be tolerated and will be the subject of disciplinary action. ■ Employers should ensure managers and others involved in the recruitment process do not discriminate against EU nationals in job applications on the basis that their long-term eligibility to continue working in the UK is unknown. Conclusion As explained above, it is unlikely that there will be any immediate changes in UK employment law as a result of the Brexit vote. Once the UK and the EU have concluded their negotiations, any changes are likely to be gradual following consultation with the business community, trade unions and other interested parties. In the meantime, there will be many uncertainties. Businesses, investors and their advisers will need to think creatively and imaginatively and prepare to respond in a flexible way as the situation develops over the next few years.