On 23 June 2016, the UK voted to leave the EU. Some months later, we still have little idea as to what the relationship between the UK and the EU will look like after the UK’s departure.

Whilst some areas of UK employment law are outside the scope of EU law and regulated by UK legislation, other areas have been heavily influenced by the EU. In this article we consider which areas of employment law are likely to be affected and whether we can expect to see significant changes in the legislative framework. While the impact of a Brexit on UK employment law will obviously depend on the specific arrangements put in place to formalise a Brexit, it is possible to identify certain possible areas of change.

What is likely to remain in place?

Some UK employment legislation, such as the National Minimum Wage, the Equality Act and the law relating to (unfair) dismissal, are outside the scope of EU law and these are obviously unlikely to change. However, other areas have been heavily influenced by the EU, such as certain family-friendly rights (including some parental leave legislation), working time, collective redundancy consultation and business transfers. UK law in these areas is based on EU Directives or case law, but this does not necessarily mean that it will change following the UK’s exit from the EU. Because many EU employment laws have become entrenched in the UK’s legal and ideological framework, our view is that the UK government is unlikely to want to make drastic changes, at least in the short-term.

In some areas, the UK often provides employees with protection in excess of EU minimum requirements and change is therefore unlikely. For example, the UK Government has chosen to provide greater rights than required under EU legislation in respect of TUPE, family friendly rights such as shared parental leave and collective redundancy consultation. TUPE has been extended through the introduction of the “service provision change” to apply to contracting and to change of service provider. Given the number of businesses whose operating model relies on outsourcing it is unlikely that there will be a complete repeal of TUPE although there could be some relaxation in TUPE requirements. Government policy on employment rights will to some extent reflect societal views that family life should be protected, as well as the belief that it is preferable for people to be in work rather than reliant on benefits so it seems that sweeping changes to these rights are unlikely.

What might be areas of change?

If changes are to be made, our view is that the most likely candidates are those laws that are considered to impose the greatest burden on businesses, especially if there is economic volatility. So legislation relating to agency worker rights, collective consultation and working time rights might be areas which would be considered for reform. Perhaps the most obvious legislation for complete revocation is the Agency Workers Regulations 2010 (SI 2010/93) – these regulations are complex, unpopular with businesses and have not yet become embedded in a way that might make them politically difficult to remove.

Annual leave and holiday pay calculation may also be reformed as recent Court of Justice of the European Union (CJEU) decisions regarding calculation have proved difficult and confusing to implement in practice. The confusion relates to how annual leave accrues during sick leave and how holiday pay is calculated if an employee receives commission along with basic salary. The CJEU has not provided practical guidance so reforms at a national level could make this easier to administer for employers.

However, while legislation can be changed, some rights will have been incorporated into individual employment contracts and these cannot be affected unless amended by agreement of the parties.

The way in which CJEU rulings post-Brexit will be handled is also a source of uncertainty. UK court decisions that have followed CJEU rulings will of course remain good law, unless there is new legislation that overrules them. If EU-derived legislation remains in place, the UK courts are likely to attach weight to CJEU decisions that interpret that legislation although they will not be bound to follow them. There may even be re-litigation of settled principles. The uncertainty this would cause has prompted some commentators, such as Stephen Laws of the First Parliamentary Council 2006-2012, to suggest that a bill could apply a “transitory patch” that would keep some things in place until comprehensive solutions can be produced.

It is also worth noting that UK employment law presents a compliance challenge to employers, particularly small employers, because of its technical detail. Barring compelling political pressure, the UK is unlikely to burden employers by making changes to the basic structure of the current legislative framework.

Looking outwards, after leaving the EU, the UK will still wish to retain strong trading relations with the EU which will require the UK to demonstrate minimum employment protections in order to remain a viable trading partner. If the UK decides to follow the Norwegian model then the status quo will remain entirely in place as being a member of the EEA will require the UK to retain most of the key aspects of EU employment law.

Data Protection

As far as data protection is concerned, it seems unlikely that the UK would repeal or significantly modify the Data Protection Act 1998 (DPA 1998), which implements the Data Protection Directive (95/46/EC) (DPD 1995) when it leaves the EU. The DPD 1995 directs that personal data must not be transferred to a country outside the EU unless that country ensures an adequate level of protection for the rights of the data subject. If UK businesses want to operate in the EU (or EU businesses in the UK), they will have to transfer personal data between the UK and EU member states and there will need to be adequate protections equivalent to the current ones. Although other solutions are possible (such as safe harbour arrangements or model clauses) they also have downsides, as is evidenced by the recent ECJ decision that the safe harbour arrangements with the US are not adequate1. If the UK does decide to abide by the EU regime, it will have to update the DPA 1998 to take account of the new General Data Protection Regulation, which is due to be implemented in 2018.

What will happen to EU citizens who work for UK companies and vice versa?

Following a Brexit, EU citizens will no longer have the automatic right to reside and work in the UK, and the same applies to UK citizens in the EU, unless they have already obtained permanent residency. Labour shortages, a loss of talent and mobility restrictions are all ways in which businesses could be affected depending on how the UK Government decides to regulate or remove EU citizens’ right to live and work in the UK. In reality, however, freedom of movement is likely to be an integral part of the negotiations around the post-Brexit relationship between the UK and EU and therefore the UK is unlikely to take any steps to curtail EU nationals’ freedom of movement rights in the short term. The extent of change to immigration law will depend on what the post-Brexit relationship entails. For example, if the UK were to join the EEA, the current rules would be required to largely remain the same, whereas alternative models hold more uncertainty. It is anticipated, however, that the government will honour existing residence rights for EU citizens residing in the UK (or at least put in place transitional arrangements) in return for the same treatment for the over two million UK citizens residing in other member states.

What employment issues should companies be thinking about now?

1. Review immigration status of your employees

In order to plan for worker mobility restrictions and labour shortages that may result from Brexit, it is important for employers to assess the workers status of their employees. The review should extend to employees in and from the EEA Member States of Norway, Iceland and Lichtenstein. Expatriate arrangements and whether these can be extended or whether they will have to be terminated on Brexit and the resulting risk exposure of termination will need to be reviewed. This will help inform employers of possible labour resourcing shortages as well as the need for possible redundancies.

Given the political uncertainty regarding the status of EU workers, employers may consider bringing in workers from EU while it is possible. Employers may also want to attempt to secure the UK immigration status of their employees by, for example, encouraging employees to apply for permanent residence once they have been in the UK for five years and have exercised their right to freedom of movement or who qualify on another basis.

2. Employee share incentives

UK businesses that offer share scheme benefits to group employees throughout the EU may have to rethink these arrangements, if the relevant exemptions under the Prospectus Directive are no longer be available. Ensuring compliance with the Prospectus may be difficult and costly and may mean that UK businesses may find it impractical to continue to offer such schemes to employees. Employers may wish to review their benefit schemes and attempt to ensure compliance in advance of the removal of the relevant exemptions.

3. Licensing

Passporting is a major issue in the aftermath of the Brexit vote. The FCA reported on 20 September 2016 that nearly 5,500 British registered companies use “passports” to access the EU markets. The loss of the passporting regime would not only harm British companies but EU companies as well. The FCA also reported that about 8,000 companies registered elsewhere in the EU use passports to access the UK. The loss of the passporting regime would therefore have a large impact on Europe as well as the UK. UK businesses involved in financial services that would be impacted by changes to passporting right may wish to consider moving their headquarters to an EU state in order to retain access to the EU market. However, depending on the size of the business this can be a costly and lengthy process. Given the current political uncertainty and the high chance that transitional provisions will be put into place to manage the significant changes to the regime, companies may wish to wait until more concrete proposals are known.

Moving from the UK

Businesses that do choose to relocate to the EU for various reasons will have a number of further considerations, including how to ensure continuity of business and minimising the impact on existing collateral, netting and hedging arrangements during business relocation.

Real estate and tax are practical consideration that will require significant advance planning. Lease contracts and planning permission will need to managed well in advance as well as the balance sheet impact of changes in taxation and loss of any EU tax benefits.