United States: Brexit: Some Potential Implications For Employers

Last Updated: July 18 2016
Article by Tahl Tyson, Thomas Griebe and Heather Peck

On June 23, 2016, the people of the United Kingdom—more precisely, the island of Great Britain (comprising England, Wales, and Scotland) and Northern Ireland—voted, pursuant to a referendum called "Brexit," to leave the European Union (EU).

The UK is a Member State of the EU, and so is subject to EU law, in addition to UK law that does not conflict with that of the EU. Thus, an employer with workers anywhere in the UK currently must comply with EU laws, including EU Directives and European Court of Justice case law, as they have been specifically implemented in the legal system of each EU Member State.

What does Brexit mean for U.S.-based companies employing people in the UK, or with UK or European expansion plans? No specific legal changes will occur for some time. Following the Brexit vote, there will be a period of time before the treaty clause to leave the EU is legally triggered, which will then start a two-year period of notice-running.

Moreover, it is impossible to determine now what those changes will be. Because of various economic, cultural and political factors, however, we view it as unlikely that there will be significant wholesale changes to employment laws even after an exit is complete. Indeed, future trade agreements between the UK and the EU will almost certainly require compliance with fundamental EU labor law principles.

Thus, we expect the most likely changes will center around the more commercially unpopular EU-derived laws. These include recent legal developments around holiday pay and accrual, and the challenges presented by the EU-mandated "TUPE" law, which prevent harmonization of the terms and conditions of employees who transfer to a new employer automatically in situations including certain mergers and acquisitions.

Additionally, we anticipate changes to certain aspects of the Working Time Regulations and the Agency Worker Regulations, which affect how to hire temporary workers through employment agencies. In group companies with European Works Councils ("EWC"), UK members will likely no longer be entitled to participate, and the remaining EWC members would in turn lose their right to be informed about the plans of UK-based headquarters.

There are further potentially profound political and economic complications given the different Brexit voting outcomes for Scotland and Northern Ireland, which voted to remain, and England and Wales, which overall voted to leave, although London was strongly for remaining. The United Kingdom could itself unravel; if Scotland and Northern Ireland become independent, they could align with the EU and with England and Wales in different ways. This could potentially result in different immigration laws and further differentiated employment laws, and employment tribunal and court systems.

Potential immigration law changes, as well as anxiety about potential changes to freedom of movement within the EU, could affect workforce stability. Employers need to anticipate the potential impact of economic changes or concerns about the future of the UK.

We discuss below some specific areas of anticipated change.

Immigration

By virtue of its membership in the EU, the UK benefits from "freedom of movement," a pillar of the EU single-market economy. Freedom of movement permits UK employers to hire employees from any EU country or the European Economic Area without requiring work or residence visas, and EU-based companies to hire UK citizens without the need for residence or work visas.

Freedom of movement will likely be one of the most important issues negotiated for the UK's exit from the EU. Any change to freedom of movement would create obstacles to managing a cross-border workforce.

Current Law

Freedom of movement, as noted above, entitles EU citizens to free movement to look for a job in another EU country. It also permits EU citizens to work in the other EU country without needing a permit, to reside there for that purpose, to stay even after employment has finished, and to treatment similar to host-country nationals with respect to access to employment, working conditions, as well as other social or tax advantages. The freedom of movement applies to those seeking a job, those working in another EU country, and those returning to their home country after working abroad, as well as their family members. The campaign to leave the EU portrayed current limitations to the freedom of movement as inadequate. In fact, immigration was one of the fundamental drivers of the "leave" campaign (particularly with respect to the EU migrant/refugee crisis), and the campaign argued in favor of a need to reclaim control of UK borders.

Potential Changes

Once the UK leaves the EU, it will have the ability to adopt laws that are inconsistent with the freedom of movement, in which case EU citizens will no longer have an automatic right to work in the UK and vice versa. This would limit businesses' access to talent and constrain the career movements of many individuals. Thus, many observers believe that the UK will have to negotiate with the EU to balance the competing concerns of limiting immigration with the financial benefits realized through London's role as a global business and financial hub.

Any agreement between the UK and EU regarding immigration could be similar to the agreements between the EU and Norway or Switzerland, two other European countries that are not members of the EU. Norway has agreed to comply with the freedom of movement, but can deviate from other EU priorities. Switzerland has entered into a series of trade agreements that ensure the freedom of movement, but with room for some deviations. Both Norway and Switzerland pay into the EU budget but do not have voting rights for forming EU policies.

U.S.-based companies with operations in the EU, including the UK, should consider how limits on the freedom of movement may impact their people and operations. Some qualifications of workers from the UK (and vice versa) will presumably not be recognized anymore. This could also have an impact on staffing and recruiting. As a result, expatriate and secondment templates, policies and procedures may need to be made more flexible to take into account the potential for changes and to provide reassurance for those being asked to work abroad. Such options could include retention bonuses and, if feasible, commitments to redeploy such assignees in the event they can no longer work in the host country to which they have been assigned.

Restructuring and Redundancy

In the UK, a redundancy is a form of dismissal from a job when the employer needs to reduce or change the skills composition of its workforce. Redundancy laws are purely UK-based; they are not derived from EU law. Thus, because it is purely a UK law, employers in the UK do not need to be concerned about changes to redundancy laws resulting from Brexit. However, they do need to be familiar with the redundancy-related laws so that, if necessary, they can properly manage changes to their workforce, whether in the UK or elsewhere in the EU.

Post-Brexit changes could also result in the UK offering new incentives to do business in the UK. Paradoxically, then, some companies may decrease staff in EU countries in order to increase operations in the UK, with implications for redundancy laws in the affected EU countries of operation.

Current Law

This is a complex legal area. Different legal requirements apply depending on the number of workers affected, the tenure of the individuals being made redundant, and whether the redundancies are occurring in the context of a transfer under the Transfer of Undertakings (Protection of Employment) Regulations of 2006, or "TUPE transfer." For example, for collective redundancies of 20 or more workers, there are specific consultation and notification requirements. Failure to collectively consult where it is required can give rise to claims for damages awards, which can be up to 90 days' full pay per affected employee. For individuals with more than two years of service, redundancy payments and unfair dismissal rights apply. In all cases employers cannot select employees for redundancy in a discriminatory way. Thus, for example, selecting individuals for redundancy because they are EU citizens in order to plan for future potential immigration changes would violate discrimination laws.

An employer may avoid having to pay redundancy pay if it offers suitable alternative employment. However, whether a job is suitable depends, in part, upon location. It is unlikely that alternative employment outside of the UK would be found suitable under applicable law for the purpose of depriving an employee of a redundancy severance payment. Conversely, under UK statutory unfair dismissal law, an employer must try to avoid a redundancy by looking for redeployment opportunities and thus avoid an unfair dismissal claim for those with more than two years of service. This obligation may require an employer to look group-wide for openings, even outside the country where the employing subsidiary is located. Assuming the worker has a right to work elsewhere and agrees to it, and potentially subject to applicable local works council approval, he or she could be entitled to be redeployed to a subsidiary in another country.

Potential Changes

As a direct or indirect effect of Brexit, there could be economic and organizational impacts that require restructuring or redundancy exercises.

U.S.-based companies with operations in the UK and elsewhere in the EU should consider the potential application of UK and EU restructuring and redundancy laws, and incorporate those requirements into any consideration of geographically changing operations or reducing staff.

Employers should not select employees for redundancy based on national origin or citizenship until and unless this is mandated by law.

Where multiple countries are involved in a restructuring or redundancy exercise, the project must be planned with a view to the very different and sometimes competing and complex legal requirements and timelines involved.

Privacy and Data Protection

The EU's Data Protection Directive (the "Directive') establishes the framework for the collection, use, and transfer of individually identifiable personal information about employees, including name, address, marital status, and salary. The laws enacted by the EU Member States to implement the Directive generally are more restrictive than U.S. privacy laws.

Current Law

Differences in how EU Member States implement the Directive have created complex inconsistencies, legal uncertainty and significant administrative costs and burdens. To address those issues, the EU promulgated the General Data Protection Regulation ("GDPR"), which went into effect on May 24, 2016. All EU Member States must be in compliance with the GDPR by May 25, 2018.

The GDPR establishes a harmonized data protection framework across the EU that is intended to make the rules for companies in the Digital Single Market more uniform and to strengthen citizens' fundamental rights in the digital age. Once fully implemented, the GDPR should eliminate country-specific differences in data protection requirements that increase compliance burdens, although local labor laws still could result in country-specific requirements for the processing of employees' personal data. The key compliance requirements include:

  • Identification of a permissible purpose for data processing;
  • Providing employees with a data processing notice;
  • Establishing procedures for employees to exercise their rights;
  • Developing a written information security program and a security incident response plan; and
  • Vetting vendors and entering into complaint vendor agreements.

Like the Directive, the GDPR prohibits transfers of personal data outside the EU unless the recipient ensures an adequate level of protection for the personal data. Under the GDPR, recipients can satisfy that standard (a) if they are located in a country for which the EU Commission has issued an adequacy determination, (b) by entering into the "Standard Contractual Clauses" approved by the Commission, or (c) by implementing binding corporate rules.

Potential Changes

Once the UK leaves the EU, it will no longer be required to align its data protection laws with the GDPR. However, it may be within its interest to do so to facilitate transfers of personal data from the EU to the UK. For example, if the UK were to join the European Economic Area (such as Norway, Lichtenstein and Iceland), it would be required to continue to comply with the GDPR, and there would be no restrictions on cross-border data transfers.

Alternatively, the UK may seek an adequacy determination from the European Commission, similar to the arrangement entered into with Switzerland. This would require a finding that the UK's data protection laws provide an adequate level of protection. If the Commission were to issue such a determination, it would allow the free transfer of personal data between the UK and EU.

The UK has been following EU data protection regulations for fifteen years, so it is likely that the European Commission would make a determination that the UK's data protection laws (unless drastically modified post-Brexit) provide an adequate level of protection. That said, U.S.-based companies with operations in the UK should assess whether there are significant transfers of personal data from Member States to the UK. Companies should also watch for guidance from EU regulators regarding compliance with the GDPR and examine any existing model contracts and binding corporate rules addressing data transfers to assure compliance and accuracy.

Employment Laws

It is unlikely that there will be immediate, significant changes to employment laws in the UK as a result of the exit. Indeed, many of the UK's fundamental employment laws relating to discrimination, equal pay rights, and parental leaves are homegrown or offer greater protection than that provided by EU directives, and therefore likely will remain unchanged. For example, the UK's requirement relating to annual leave is 28 days, which is more generous than the 20 days the EU requires. Additionally, there is a strong likelihood that the EU will require the UK to adhere to many of its employment laws if it wishes to be a member of the European Economic Area and/or European Free Trade Association. However, the UK may take this opportunity to change some regulations to balance frustration over any economic impact the businesses may feel once the UK leaves the EU. These laws are identified below.

Current Law

One area of potential reform may include the Working Time Directive. This Directive, implemented in the UK as Working Time Regulations ("WTR") in 1998, generally provides that unless an employer gets an employee's consent, the employer must ensure its workers work no more than an average of 48 hours per workweek. The Working Time Directive also requires employers to carry over leave time and the calculation of holiday pay. Recent EU and UK legal decisions mean that employers in the UK must now include overtime and commissions when calculating holiday pay contrary to its prior statutory law, and the rules around carryover of holiday have become much more complicated with a mix of EU and UK law applied.

Another area that is a potential target for reform following the UK's exit from the EU is the Agency Worker Regulations. These regulations mandate that temporary agency workers get many of the same rights as employees after working for a company for 12 weeks. This places a burden on employers seeking to use agency employees to fill temporary gaps.

The Transfer of Undertakings (Protection of Employment) Regulations of 2006 ("TUPE"), which is derived from an EU Directive, also is disfavored by employers due to its complexity. In applicable situations where an "undertaking" is transferred to a new entity, except where an affected employee opts out of the transfer, TUPE automatically transfers employment contracts to the transferee of the business together with associated liabilities and further places restrictions on the new employer's right to alter the terms and conditions of employment of the transferred employees. Notably, it can be illegal for a new employer to harmonize the employees' terms and conditions with its pre-existing operations.

Potential Changes

While changes are difficult to clearly forecast at this time, the UK likely will focus its changes on easing the rules and constraints under the WTR, TUPE, and the Agency Worker Regulations.

Ultimately, it is unlikely the amount of statutory annual leave will be reduced since the UK's leave provides more than EU law requires, although the UK could change its regulations pertaining to annual leave carryover during long-term sickness absence. The UK could also regulate the calculation of holiday pay to provide employers with a clearer understanding of how the pay is to be calculated, and to remove the obligation to include overtime or commissions in the calculation. Additionally, since many UK employees opt out of the 48-hour workweek regulation, there could be a push to change those rules.

Regarding TUPE, the UK may loosen the regulations, making compliance easier for businesses. Finally, some have speculated the UK could establish a compensation cap for financial loss in discrimination claims, similar to the cap on unfair dismissal claims.

Recommendations

Any specific legal changes from the UK's anticipated exit from the EU will take some time to appear. Nonetheless, employers operating in the UK and the EU should pay careful attention to emerging issues in their workplaces that may trigger new considerations in a post-Brexit environment. Given the sensitivity of immigration-related issues, employers should also be especially mindful of potential discrimination, bullying or harassment related to race and national origin in their workplaces and businesses, and consider reviewing related policies, including social media policies.

Conclusion

Brexit's impact on international business will be determined over the course of the next two years or longer. U.S.-based companies with operations in the UK and the EU should stay informed and be prepared to be flexible in creating solutions for any immigration, restructuring, redundancy, and data protection modifications that emerge, and carefully monitor other employment-related developments.1

Footnote

1. Britney N. Torres (Littler Sacramento), Melissa L. McDonagh (Littler Boston) and Laura Navarrete (Littler Global – Costa Rica) assisted in the preparation of this article.

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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