Your US clients should assess potential impact of Brexit

28 March 2016

Elizabeth Lang

Employment partner Elizabeth Lang tells California's Daily Journal how Brexit would impact US companies and what management should do now to assess personnel and business practices.

On June 23, the United Kingdom will hold a referendum on whether the UK should remain in the European Union. The question posed will be: "Should the United Kingdom remain a member of the European Union or leave the European Union?" Voters will be given two options: "Remain a member of the European Union" and "Leave the European Union." The prospect of the U.K. leaving the EU has been dubbed "Brexit," and the continuing uncertainty raises issues for U.S. companies with subsidiaries or personnel in the U.K. and Europe. The U.K. has been a member of the EU since enacting the European Communities Act in 1972, which cedes legislative sovereignty in specified areas to the institutions of the EU. EU legislation is a significant source of existing U.K. employment law, particularly in relation to working time, agency worker rights, collective redundancy consultation, discrimination, business transfers and family-friendly rights; and these laws have largely become part of normal U.K. working life. Other employment rights, relating to dismissals, industrial relations and whistleblowing for example, do not stem from the EU.

What would happen to U.K. employment law in the event of Brexit depends, to a large extent, on the nature of the post-Brexit legal relationship negotiated between the U.K. and the EU. Several relationship models have been proposed, based upon and named after a variety of existing arrangements that the EU currently has with Norway, Switzerland, Turkey, South Korea and the World Trade Organisation. Each of the models differs significantly on a variety of issues, of which minimum standards governing employment relationships are just one element.

For example, if the U.K. followed the Norway model, and remained a member of the European Economic Area trade agreement, then it would need to retain a large proportion of the EU's employment legislation, whereas if it followed other models, it would have more scope to determine its own employment legislation. It is possible that the EU would require the U.K. to retain certain employment law provisions as part of any renegotiated relationship, perhaps in order to prevent the U.K. from undercutting EU member states through what could be regarded as unfair competitive advantages. Ultimately, the U.K.'s sovereignty over employment law issues may in practice be conceded as part of a wider trade agreement.

If the U.K. public voted for Brexit and the Parliament simply repealed the European Communities Act, then all of the EU employment legislation passed under it would cease to have effect. In contrast, other employment legislation not emanating from the EU would remain in force. This would cause a measure of confusion and legal uncertainty. Therefore, it is considered that the most likely approach - especially given that the U.K. must remain in the EU for a minimum two year 'notice period' following a vote to leave - would be a series of piecemeal changes to address specific laws individually over time. U.S. operations in the U.K. would have time and notice to adapt to any changes that might be ushered in, but should be aware that responding to such changes could involve a material administrative burden.

While Parliament might be presented with the opportunity to rewrite U.K. employment law, given that much of the present EU employment legislation is entrenched in U.K. working life, it appears unlikely that there would be any sweeping changes. It would be politically challenging to remove minimum entitlements of employees (for example, to a minimum amount of annual paid holiday), and indeed in many areas, such as paid holiday entitlement and parental leave, U.K. legislation actually exceeds the minimum protections imposed by the EU.

Changes to the range of protections originally enacted due to EU legislation would likely be subtle. For example, tweaks that could be made by the government (depending upon the political landscape), might include a decision to cap the amount of compensation an employee could be entitled to in the event of unlawful discrimination, or to amend the law on the protection of employees upon the transfer of a business to enable employers to harmonise the terms and conditions of the new and existing employees in a faster and more effective way.

In addition, upon Brexit the U.K. would no longer be bound by the decisions of the European courts. However, when interpreting legislation originally enacted during EU membership it is likely that, particularly in the short-term, the U.K. courts would still treat any European court decisions as persuasive.

Free movement of people between member states is one of the central concepts of the EU. A citizen of the EU has the right to work and reside in any member state, enabling a mobile and integrated workforce. Negotiations between the U.K. and the EU to determine the post-Brexit relationship would include determination of whether the free movement provisions would still apply to U.K. citizens. If the U.K. joined the European Economic Area, free movement of people also applies to EEA members. Alternatively, if the U.K. wished to remain in the single market but outside the EEA, like Switzerland, it would probably have to agree a free movement treaty with the EU as a whole, or separate treaties with individual European countries.

Were the U.K. to opt for a complete exit from the EU, movement and immigration could become subject to additional restrictions. An EU citizen could be required to apply for a visa to enter and work in the U.K. in the same way as non-EU citizens, rather than having an automatic right to reside in another member state where local conditions are satisfied. The same could also apply to U.K. citizens living and working in EU member states. This would represent a material change for employers in the U.K., including US employers.

It is expected that the government would, subject to conditions, honour existing residence rights. However, Brexit has the potential to cause significant difficulties for U.S. companies with subsidiaries or personnel in Europe by restricting the mobility of employees, complicating the recruitment of employees and reducing the talent pool. The nature and extent of such difficulties would not be known until the nature of the U.K./EU post-Brexit relationship was agreed, and so any changes would take effect gradually giving time for those affected to prepare. In the meantime, the biggest concern remains economic uncertainty; foreign companies may be less willing to invest in the U.K. until the situation becomes clearer.

It is hard to predict the future for employment and immigration law. Many uncertainties remain, but in the event of Brexit it appears that changes would be neither immediate nor radical. Despite this, U.S. companies would be well-advised to assess internally the potential impact of Brexit on personnel and business practices (notwithstanding the significant unknowns) and continue to monitor political developments in the U.K. 

This article was first published in the Daily Journal and is re-published with kind permission.