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What does Brexit mean for employers?

24 June 2016

The vote to Brexit leaves the UK with a huge amount of uncertainty, but one thing is clear: there is potential for significant change for employment relationships.  There has been a lot of alarm on this topic to date, but what is really likely to happen and how long will it take?

The pace of change

The result of the referendum has had an immediate and significant impact in some areas, particularly in the stock market and foreign exchange. Commentators are predicting large scale restructuring in particular sectors and some organisations are already taking steps to relocate staff. Increased market volatility is likely to reduce the value of assets in pension schemes and could cause hardships for both schemes and pensioners.

However, when it comes to the law itself, the pace of change is likely to be much slower.  Until the UK formally leaves the EU there is no immediate need (or ability) to make any changes.

Immigration control

Restricting immigration was a fundamental driver of the Leave campaign. However, there will be no immediate impact of the vote as the free movement principle will continue to apply until the UK actually leaves the EU. Ultimately, transitional arrangements are likely to be introduced to protect people from the EU and Switzerland already living in the UK to assist them to acquire permanent residence.

Reducing employment regulation by the EU was also a key driver in the Leave campaign. Now that the UK has voted to leave, it is inevitable that there will be a review of at least some aspects of UK employment law.

Employment law change

In theory, once the UK leaves the EU the government will have wide-ranging powers to reduce or even remove some employment rights. But the reality is that drastic change in employment rights is unlikely for a variety of reasons:

  • First, the UK Government will need to negotiate its trade relationship with the EU. If the UK wants to remain part of the EEA single market (rather than negotiate trade agreements separately with each member state), the EU is likely to require the UK to continue to be bound by European Directives on labour law. The alternative would allow the UK to potentially undercut EU states with more rigorous employment laws. Similarly, it will be difficult for the UK to have access to the single market without agreeing to free movement.
    It is therefore feasible that the UK could leave the UK and, like Norway or Switzerland, still have free movement. If so, there is unlikely to be any change to our obligations to comply with EU employment law or to our ability to control European immigration.
  • Contrary to popular opinion, a significant amount of employment law is entirely UK law. This includes our rules on unfair dismissal, our enhanced rights to maternity and paternity leave (which are more generous than the EU minimum), our shared parental leave and the National Living Wage. It seems unlikely the government will want to undo these existing UK rights.
  • A large number of employment laws which originate from the EU have become normal in UK culture and are unlikely to be scrapped in entirety. It would be politically and socially unattractive, both nationally and internationally, for the government to attempt to remove rights such as family leave, protection from discrimination and paid holiday.

We are therefore more likely to see changes that chip at the edges of employment law rather than a wholesale re-write. Exactly what will change will depend on the new Prime Minister and government and what is politically feasible and has public support. Changes are likely to focus on areas where the rules can be made simpler or more suitable for the UK workforce. By way of example:

Holiday pay

Recent decisions of the European court have caused significant confusion in the UK about how to calculate holiday pay and the idea that much of the UK has been incorrectly paying employees for holidays for decades. The European overlay has led to new litigation being passed in the UK to avoid flooding the courts with historic claims. We may return to a simpler calculation.

Agency workers

The UK does not use agency workers in the same way as Europe and the rules which allow agency workers the same rights as permanent employees after 12 weeks are unpopular with UK businesses.

Discrimination

One possible change in this area is the introduction of a maximum cap in the amount able to be claimed for breach of discrimination law. This could significantly reduce the financial risk of claims as well as the actual number of claims.

One thing to bear in mind is that the removal of European labour regulation may give the UK the opportunity to proactively consider the best employment laws for the UK rather than reactively focussing on European imposed rights and obligations. The UK has shown itself to be willing to go further than Europe in some areas of employment law already. For example, although it had been mooted that the additional protections given to UK employees on a service provision change under TUPE could be removed in 2015, ultimately the government decided to retain these provisions. We may see more of this going forward.

It seems likely that any changes to employment law will be principally driven by economic factors, such as our trading relationships and the need to promote business growth.

Pension impact

Similarly, the longer term impact on pension arrangements will depend on the impact of leaving the EU on the economy. If the UK economy is weakened then funding deficits in defined benefit schemes (and employer contributions) are likely to increase, particularly for those schemes carrying out actuarial valuations with an effective date in the next few months. Individual Members of defined contributions schemes may find their savings not meeting their expectations and have to retire later or on less money.

The terms of the negotiated exit will also be key to pension law. If the UK opts for an EEA status similar to that of Norway, most EU rules will continue to apply and the scope for change would be limited. If a more detached position is reached, then although UK laws derived from the EU will not automatically fall away, future governments will be free to amend or disapply the existing rules. For example, a decision could be reached that there is no requirement to equalise GMPs, or cuts could be made to the level of pension protection fund compensation. The rules for recovery of VAT would no longer be constrained by the EU rules and case law, and insurance companies could revert to different annuity pricing for men and women. It is even conceivable that UK pension schemes could be relieved of the obligation to be fully funded on a technical provisions basis. However it seems unlikely that all the current rules will be torn up: the broad legal and regulatory framework is likely to remain as it is for the foreseeable future.

Although today’s headlines are full of warnings and sensationalist headlines, the likely impact on employment relationships will be slow to be seen.  Depending upon the trading arrangements put in place going forwards, we may find there is little change, or otherwise that change is driven by economic factors rather than Brexit itself.

This article was written by Michael Powner.

For more information please contact Michael Powner on +44 (0)20 7203 5216 or michael.powner@crsblaw.com.