The Leave vote in the June 23 UK referendum on membership of the European Union is set to trigger a period of uncertainty for global employers operating in Europe. This is because no-one knows quite what the UK’s withdrawal process will entail and what form the UK’s trading relationship with the EU will take in the future. This briefing summarises what we think are likely to be the key questions global employers will need to address over the coming months.
We will send further regular updates as the implications become clearer, giving answers to outstanding questions as they emerge. Please do feel free to speak to your regular contact or call or email any of us listed below if you would like more information.
Will anything change straightaway?
No. There are unlikely to be any immediate changes for companies with operations in the UK. The UK currently remains in the EU, subject to existing EU rules, and the withdrawal process is likely to take some time (two years being seen as a minimum). Nevertheless many employers have already been developing contingency plans, which they will now need to put into effect.
What impact will there be on my ability to second EU nationals to the UK, and on my ability to employ UK nationals within the EU?
There may be some change in due course, at least for EU nationals not already within the UK and UK nationals not already within the EU.
It is difficult to see how, politically, the UK Government would be able to accept the continuation of existing principles of free movement, as immigration was a key element of the Leave campaign.
However, unless the principle of freedom of movement is accepted as part of the negotiations between the UK and the EU, there will be some change to immigration arrangements. It is nevertheless highly unlikely that there would be any change to the status of EU nationals currently in the UK while withdrawal negotiations are taking place, and Leave campaigners have repeatedly said they would not remove EU nationals who are already in the UK at the time Brexit is implemented. It is thought that similar principles are likely to apply to UK nationals working within the EU.
The position is less clear in relation to anyone who is seconded into the UK after a Brexit is implemented. It is possible that the UK would seek to differentiate between nationals of different member states (so that restrictions are potentially placed on nationals from newer member states rather than, say, German or French nationals). However, if immigration arrangements are agreed as part of an overall UK/EU trading arrangement, the EU can be expected to be unsympathetic to this approach. In these circumstances, it is possible that all EU nationals would need immigration clearance before taking up employment in the UK. This would be unattractive to employers and will also pose serious administrative challenges to the UK immigration authorities. Equivalent requirements may be imposed by EU member states on UK nationals wishing to work within the EU.
Immigration issues are unlikely to be an issue in the short-term. But if it is necessary to enter into long-term secondment arrangements in the near future, employers may wish to reserve a power to adjust the secondment arrangements if there is a change to immigration requirements. We would expect employers to agree to use reasonable endeavours to arrange for seconded employees to obtain any required permission to work, perhaps coupled with a right to relocate and/or terminate the employment if the permission cannot be obtained (we would expect employees to ask to be compensated if terminated in these circumstances).
What are the implications for EU social security arrangements?
The EU operates common rules to protect social security rights for employees moving within Europe. These provide that employees are only covered by the social security rules of one country at a time and have the same rights and obligations as nationals of that country.
It remains to be seen whether, and if so how, this regime might be affected in relation to EU nationals coming to work within the UK or UK nationals working in the EU.
Could access to healthcare be affected?
Access to healthcare for secondees and expatriate employees may also need to be considered if the UK leaves the EEA and the current European Health Insurance Card regime ceases to cover UK nationals working in the EU, and vice versa. It is likely that a broadly similar arrangement would be agreed (and similar arrangements already apply between the UK and a number of other (non-European) countries).
Will there be fundamental changes to employment laws in the UK, making it cheaper to employ people?
There may be some change over time but major adjustments are unlikely. European law has become a key part of the fabric of the UK’s domestic employment law, both statutory and case-law, over many years and notwithstanding the suggestion of some Brexit campaigners that a Leave vote gives an unrivalled opportunity to deregulate domestic employment laws, it is unrealistic to expect there will be wholesale change.
Areas that could be the focus for change include various recent European developments which have been viewed as controversial in the UK. These include the rules on agency workers, working time and aspects of holiday pay law, not least the accrual of holiday pay during periods of sickness. And, from a sector-specific perspective, the UK (having already launched a, subsequently discontinued, legal challenge to their validity) may look to disapply the rules on bonus caps within the financial services sector (although many of the other new rules on remuneration in the financial industry, such as increased deferral or clawback arrangement will remain as they derive either from international initiatives or local ones, i.e. not from EU ones). There might also be a focus on aspects of more long-standing European legislation that are thought to be unduly restrictive, such as restrictions on the ability for consensual harmonisation of terms and conditions following a TUPE transfer. So we may see a degree of “pick and choose” emerging.
The scope to make these and other changes will be influenced by the nature of the relationship that is negotiated between the UK and the EU. If the UK wishes to try to secure broad access to the single market, it is likely to be expected to continue to apply EU employment rules. The EU will not permit social dumping – the last thing it wants is to allow the UK unrestricted access to the single market if it is able to apply more flexible employment laws than member states.
What does Brexit mean for pan-European employee representative bodies?
As stated above, if the UK wishes to try to secure broad access to the single market, it is likely to be expected to continue to apply existing rules. However, if European employment legislation were not to apply to the UK, there would be a number of ramifications.
It is currently unclear what will happen to a European Works Council set up in the UK because central management is in the UK, and whether there would need to be a full re-negotiation of existing arrangements, perhaps following the appointment by UK management of a representative agent in an EU country. In relation to European Works Councils set up elsewhere within the European Union it is likely that representation of the UK workforce would remain integrated within the European Works Council, subject to the terms of the applicable European Works Council agreement. A Brexit could trigger a new special negotiating body procedure and re-negotiation of the agreement where the European Works Council agreement, or applicable local law, require this. An interesting question may arise where, as a result of Brexit, the remaining workforce within the EU falls below the threshold for establishing a European Works Council. The consequences will need to be determined under the terms of the European Works Council agreement or, if not covered there, in accordance with the provisions on 'structural changes' contained in the European Works Council Directive, as implemented in applicable local law.
Likewise, the special negotiating bodies and employee representative bodies established in any SE or cross-border merger with a UK angle may need to re-allocate the number and allocation of seats, or re-negotiate existing co-determination agreements, subject to the applicable local law implementation of the ‘structural changes’ provisions of the EU SE-Directive.
I have a defined benefit pension scheme in the UK. What implications are there for pension scheme funding?
A sustained fall in asset prices would have a negative impact on scheme funding levels, and potentially affect the extent to which schemes can rely on investment outperformance in order to help remedy funding deficits over time. At the same time, as it is currently expected that the Bank of England will prolong low interest rates in response to market turbulence, the discount rates used when valuing scheme liabilities will continue to be low or indeed could fall further, thereby increasing the size of those liabilities and scheme deficits. In addition, the consequential implications for UK defined benefit pension schemes need to be considered carefully in relation to any restructuring or relocation plans in response to Brexit. For more on this and on the possible broader implications of Brexit on the regulation of UK pension schemes, see our briefing on the impact of Brexit on UK pension schemes.
Will we still be able to operate cross-border pension schemes?
Subject to any continuation of the UK in the EEA, or another form of participation in the single market, groups that have operated cross-border pension schemes based in an EU member state for their UK employees are likely to find that those schemes can no longer operate in the UK. The replacement or relocation of these pension arrangements will then become necessary. As schemes are most often used in the UK for members with defined contribution benefits, it will be rare for the unwinding of cross-border arrangements to trigger UK funding issues.
Will we need to undertake a whole-sale employment contract/policy review?
Not immediately. But once the likely path to exit becomes clearer and the consequent implications for business are more fully understood, it is likely to be necessary to undertake a comprehensive review of all contractual terms with staff. Although it is unlikely in an employment context that Brexit will give rise to a risk of contractual enforceability, there may be provisions in contracts (for example, relating to the scope of restrictive covenants or mobility provisions) that require adjustment. A broader review is likely to extend to relocation and expatriate policies, immigration requirements, an analysis of the scope and application of protective covenants in connection with business change and reorganisation, as well as a wider review of how staff are remunerated and incentivised.
Aside from this, Brexit could raise particular issues in relation to employees who divide their working time between the UK and EU member states, since EU law regulates which jurisdiction’s employment law should apply to employees in these circumstances. Careful review of the employment contracts of employees in this situation is therefore likely to be required.
What are the implications of Brexit for employee data privacy?
The new EU Data Protection Regulation, commonly known as the GDPR, comes into force in 2018. This will apply directly to member states. Depending on the precise timing of withdrawal, the GDPR may not apply to the UK and, even if it does initially apply, it will then cease to do so. The GDPR introduces more stringent regulation of personal data across the EU, including making specific and explicit consent to data processing a requirement and strengthening the regulation of the transfer of personal data outside the EU.
The UK Information Commissioner has made it clear that he expects standards equivalent to the GDPR to be applied in the UK post-Brexit to enable businesses to transfer their data from the EU to the UK in the ordinary course of business. Brexit is therefore unlikely to make a material difference to how EU-based employers transfer employee data into the UK.