United States: "Brexit": What American Employers Need To Know

Following the United Kingdom's stunning decision last week to leave the European Union, many US employers with employees in the UK find themselves wondering:  What happens now? To be sure, "Brexit" was a monumental and astonishing result, which caught the world by surprise. We're here to explain what American employers need to know for the coming weeks, months, and years.

Change Will Take Time

While much of the initial panic over Brexit has focused on the immediate tangible global economic ramifications of the "leave" decision, the legal implications of the decision will likely not be felt in earnest for at least two years as the UK and the remaining EU engage in exit negotiations.  During this time, the UK and its courts are required to maintain the status quo and continue to obey all existing EU treaties, laws, and precedents. This period could be extended, which is why many believe it could take four or five years (or even longer) to fully resolve the UK's exodus from the EU. Simply put: employment laws will hold steady for some time – perhaps years.

When the UK does eventually withdraw from the EU, changes to employment laws, if any, will probably be minimal, and will likely take some time to occur. Many of the EU's laws and directives are enacted through primary legislation in the UK, which will not automatically fall away upon departure from the EU, or already existed in the UK in some form.

In other words, even after the UK's withdrawal from the EU is complete, it would require formal legislative repeal of existing UK law to effectuate any change.

This is unlikely to happen as it would largely be politically and commercially undesirable. For example, while rules governing holiday pay might be simplified to eliminate overcomplicated requirements, laws governing minimum wage, workplace discrimination, most elements of TUPE, and various leaves are likely to remain in full force even after the UK concludes the exit negotiation process. In short, nothing is going to dramatically change from a legal perspective for a significant period of time, and most changes that do occur are likely to be gradual.

Trade and Employee Movement May Be Significantly Impacted

Perhaps the greatest uncertainty resulting from Brexit is determining how trade and employee movement will be regulated between the UK and the remaining EU after the exit negotiation process is concluded. As a result of the referendum, the UK and the remaining EU will have to negotiate a new trading relationship to permit each side to sell goods and services to the other without being subjected to tariffs and other restrictions. Further, the UK will potentially lose one of the most important features of being an EU member state: the freedom of its residents to move among other member states to live and work with relatively few restrictions. Residents of the remaining EU member states could also face the same problem with respect to entering the UK.

While the EU has demanded that the negotiations on these subjects begin soon, it is unclear how quickly they will commence and which avenue the UK will ultimately pursue. Much will depend upon who is selected to become the new British Prime Minister and which course they advocate – this should be clear by early September 2016. Based on existing models, however, it appears there are three options for how the UK may proceed with respect to its trade relationship and country access vis-à-vis the EU. 

  1. Total exit: the UK leaves the EU and does not continue to benefit from the single EU market. The UK relies solely on the rules of the World Trade Organization, which include rules governing the imposition of taxes on goods and services. This would significantly limit the freedom of movement of persons between the UK and the remaining EU.
  2. The Norwegian model: the UK leaves the EU but joins the European Economic Area (EEA). The EEA is made up of all EU member states and three countries, which are not EU member states (Norway, Iceland and Liechtenstein). Under this model, the UK would generally have access to the single EU market, but would not be bound by several EU regulations. It would continue to allow for the free movement of persons between the UK and the remaining EU.
  3. The Swiss model: the UK leaves the EU and does not join the EEA. It enters various agreements with the individual EU member states to obtain combined access to the EU market and specific sectors of industry within it. This may limit the freedom of movement of persons between the UK and the remaining EU, although that is debatable – Switzerland has been required to accept free movement as a condition of its market access.

Which option is ultimately chosen will likely profoundly impact trade and employee mobility for US companies doing business in the UK and the EU. Under the "Total Exit" or "Swiss" models, access to certain UK and EU markets that were previously open to US companies doing business there may become much more limited or costly. Further, under the same models, a US company doing business in the UK or EU will likely need to comply with much more rigorous authorization requirements if it wishes to send its UK employees to work in other EU member states or send its EU employees to work in the UK. This will likely lead to significantly increased costs in both time and money. 

The Bottom Line

While there will inevitably be some changes to existing UK law as a result of Brexit, these changes will not take effect for at least two years from the date the exit negotiation process is triggered. Moreover, most changes to the law that do occur likely will not be drastic. 

In the meantime, American companies operating in the UK and EU should pay close attention to the exit negotiations once commenced. To the extent it appears that EU-UK trade or employee mobility will become heavily restricted, US companies may begin to consider scouting alternative European business hubs such as Dublin or Frankfurt for the relocation of their operations. As a corollary, US companies should also continue to monitor Brexit's effect on other EU members' future decisions to remain in the EU, as well as Scotland and Northern Ireland's future decisions to remain a part of the UK. 

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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