UK: Planning For An Independent Scotland - Employment & Pensions Issues

It is less than two months now until the referendum on Scottish independence.

So far as lawyers are concerned, Scotland is already a separate legal jurisdiction.  However, subject to some very minor differences, Scotland's employment law is sufficiently similar to the law in England & Wales that the majority of employers are able to operate both north and south of the border with little regard for the border itself.

Plainly, all of that will change in the event that Scotland becomes an independent country.

From an employer's point of view, planning for this eventuality is not entirely straightforward.  The Westminster Government has said that it is not willing to "pre-negotiate" the terms of Scotland's independence; so even if there is a "yes" vote on 18 September, we do not know any of the details of how an independent Scotland would function.  However, it seems certain that employers will have to confront at least some of the following issues:

  1. Taxation:  As an independent country, Scotland will have its own exchequer.  Employers would therefore need to run a separate payroll for operations where employees will be taxed in Scotland.  Where employees undertake only some of their duties in an independent Scotland, it will be necessary to decide where their employment taxes should be paid.
  2. Currency issues: The Scottish Government envisages that an independent Scotland would continue to use sterling in a formal currency union with the rest of the UK; a position not supported by the UK Treasury.  If an independent Scotland were to adopt a different currency, then employers with Scottish operations would be exposed to exchange rate risk in respect of those operations including in respect of salaries and other labour costs. 
  3. Pensions: There have been vast quantities of material produced analysing the issues that independence would present for both state pension and private pension provision, and it is fair to say that there are significant challenges and unknowns in both areas.  Focusing on private sector occupational pension schemes, the key uncertainty is in relation to what tax treatment Scotland will provide in relation to such schemes.  Other key issues affect defined benefit pension schemes and could have unappealing consequences.  It is not, for example, clear what type of pension protection regime would be put in place by Scotland to deal with underfunded pension schemes of insolvent employers (as these would presumably no longer be covered by the UK Pension Protection Fund).  Defined benefit pension schemes also risk becoming 'cross border' schemes overnight which would trigger various consequences including, most significantly, a requirement to fully fund the pension scheme from day one of independence.
  4. Conflict of laws: Immediately after becoming an independent country, Scotland would carry over its existing employment law unchanged.  However, from that point onwards Scottish employment law would diverge from the rest of the UK.  The Scottish Government has already indicated that it would make certain changes to employment law, such as abolishing "employee shareholder" status and reinstating the 90 day consultation period for redundancies affecting 100 or more employees.  Where employees undertake some duties in independent Scotland but are not based there exclusively, it will be necessary to decide which legal system governs the employment relationship.  This is much easier said than done and, in the event of a dispute, the rules concerning the territorial reach of UK employment law are complex and depend very much on facts pertaining to each employee.
  5. Immigration:  This may be a particular issue if an independent Scotland is not initially successful in joining the European Union.  The White Paper produced by the Scottish Government sets out an intention for an independent Scotland to have a points-based immigration system, but beyond this we know little of how easy it would be for employees to live and work in an independent Scotland.

The difficulty with all of these issues is that there is a limit to the amount of planning which an employer can undertake at this stage.  The full details of the functioning of an independent Scotland will only become known in the event of a "Yes" vote.  However, the Scottish government envisages that the country would become independent on 26 March 2016 – i.e. only 18 months after the referendum, which does not leave very much time for employers to make the necessary preparations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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