Brexit's Implications for International Employers

June 20, 2016

By Suzanne Horne & Hannah Harris

On June 23, the U.K. will vote on whether it should remain a member of the European Union. While U.S. lawyers may feel one big election has been more than enough to focus on, international employers do need to be aware of the key considerations of a Brexit vote and how it would impact them.

If there is a Brexit, it is impossible to know precisely where that would leave U.K. employment law. Much would turn on the type of withdrawal.

A two year negotiation period (at a minimum) would ensue. During this time, the U.K. would negotiate the terms of its departure and new trade arrangements. It is only at this stage that we will understand the nature of the withdrawal. The most likely options and implications are these:

The Norwegian, Icelandic and Liechtenstein model (remaining a European Economic Area/European Free Trade Area state) — This would likely minimize trade tariffs, but at a cost. Essentially, the U.K. would remain subject to much of the EU legislation, but with no voice in the decision-making process and no right of veto. Politically, this option is likely to be extremely unpopular, and does not afford the government independence from the EU legislation or the European Court of Justice (ECJ).
The Swiss model (developing a series of bilateral agreements with the EU) — Depending on the strength of the U.K.'s negotiated position, it may be limited from taking unilateral legislative action on economic or socio-political issues. For example, there remains uncertainty surrounding Switzerland's position on immigration. In 2002, the country signed up for a bilateral agreement on the free movement of persons throughout the EU. In a referendum in February 2014, Swiss voters backed a popular initiative "against mass immigration" which was presented by the populist Swiss People's Party. The Swiss government is currently negotiating with the EU to determine how this impacts its bilateral agreement and its ability to legislate to introduce domestic immigration quotas.
The Turkish model (negotiating to remain part of the Customs Union without full membership of the EU) — This would severely limit the U.K.'s ability to negotiate other international trade deals that would open it up to increased trade from outside of the EU. The solution may be a comprehensive trade agreement which covers many sectors and industries, but which reduces costs and limitations on the U.K. compared with the cost of membership currently.
Total withdrawal from the EU — In this eventuality, substantial changes to U.K. legislation could happen quickly. If the government repealed the European Communities Act of 1972 (the enabling act which allows domestic implementation of EU Regulations), then all legislation made under it would no longer be effective. This would result in a great deal of political and commercial uncertainty, and seems an unlikely outcome. For example, Canada's trade deals with the United States show that losing this bargaining power could be costly for the U.K.

Key Implications for International Employers

Although a Brexit would not immediately revoke EU-derived U.K. legislation, the requirement for the existence of some laws would fall away, and the government would put forward proposals for consultation on which legislation it wishes to retain, amend or revoke. Here's what this would likely mean for international employers:

Global Mobility Programs and Posted Workers

A Brexit would give the U.K. greater control of its borders, but could have widespread practical implications for many businesses which employ EU citizens to work in the U.K., as well as for multinationals that operate establishments throughout Europe and who send expats to the U.K. under their global mobility programs. It is unlikely that changes to immigration, particularly in relation to EU nationals working in the U.K., would be implemented overnight due to the inherent complexities of effecting change, but the implications would be significant.

The War for Talent and Resourcing

On a related point, at present the right for EU citizens to move freely across the EU means that international employers looking to hire top talent can select from a wide pool without dealing with the complexities of specific EU member states' immigration laws. The current position means that employers do not need to use their costly global mobility programs, but can plug resourcing needs by employing less expensive labor supplied by EU citizens from Eastern Europe. A Brexit is likely to change these practices.

Employment Litigation

While the U.K.'s Equality Act of 2010 is an example of primary legislation based on the EU Equal Treatment Directive and the EU Race Directive, the U.K. has had its own discrimination laws since the 1970s. Case law from Europe and the ECJ has directly influenced U.K. laws. For example, the U.K. no longer has a statutory cap on compensation for discrimination claims following the Marshall decision from 1993, and it continues to wrestle with the boundaries of associative discrimination seen in cases such as Chez last year. In the event of a Brexit, the U.K. may look to introduce a cap on discrimination claims and re-visit legislation to limit the implications of some of these decisions. Therefore, the international employer will need to consider the finer details of any changes and analyze any impact on actual or potential employment litigation.

Hours and Pay Practices

The EU Working Time Directive introduced regulation of working hours and holiday in the U.K. Although not popular with employers due to the complication of calculations and limits on working hours, the U.K. has relied heavily on employees' being permitted to sign opt-outs to working hour restrictions. However, a string of European decisions (and the need to read U.K. laws in accordance with EU legislation) has resulted in greater employee rights: for example, the need for employees on long term sickness absence to accrue holiday; and the inclusion of commission and guaranteed overtime in the calculation of holiday pay. While the decisions of the ECJ would no longer be binding, it is likely that a post-Brexit government would consider repealing or legislating against less employer-friendly elements of the working time laws. Therefore, the international employer will need to carry out a review of its U.K. policies, procedures and standard documents.

Financial Services Employers

In 2013 the U.K. mounted a legal challenge against the EU's cap on bankers' bonuses contained in the Capital Requirements Directive. Under this directive, bankers' variable pay must not exceed 100 percent of their fixed remuneration in a given year, or 200 percent with agreement of the bank's shareholders. In 2014 the U.K. was forced to withdraw this challenge. Of all sectors that may be impacted by a vote for Brexit, it is international employers in the financial services sector that are likely to be most impacted, since there could be not only a sea-change in regulation applicable to their business and their employees, but also a change in the location of the workplace if there is an exodus of financial services employers from the U.K. to the Eurozone.

Doing Deals involving U.K. Employees and Those Assigned to U.K. Businesses

International employers and investors involved in M&A deals and commercial property transactions will be familiar with EU derived TUPE rules, which are widely considered to be one of the more complex pieces of employment legislation in the U.K.. However, they are now an integral part of the U.K.'s legislation. Therefore, potential changes post-Brexit are likely to be limited to the restrictions on dismissing employees and/or harmonizing terms and conditions of employment following a TUPE transfer, and potentially the repeal of the U.K.-specific service provision change laws. As a result, international employers will need to plan their approach to people issues on these deals accordingly.

Data Protection and Privacy

EU-derived data protection laws impact how the international employer transfers HR data out of the EU. This area will see increased regulation when the General Data Protection Regulation (GDPR), adopted this year, comes into force in 2018 along with the consequential cost to those operating in Europe. Therefore, a Brexit vote would create significant uncertainty over the future of this legislation, and impact preparations by international employers to prepare for the legislative changes.

Watch This Space

As set out above, the impact that a Brexit would have on U.K. employment legislation will largely depend on the type of exit which is negotiated and the outcome of extensive consultation. Nevertheless, international employers should have an eye to U.K. developments next week because a Brexit vote will have significant implications for them and the workforce.