Employment analysis

Publication | July 2018

Inside Brexit blog insights

For further insight and commentary on topics relating to Employment, please visit the Employment and Labour section of our Inside Brexit blog.

Are there any particular areas of employment legislation which may be affected by Brexit?

The UK will adopt all EU employment legislation in the European Union (Withdrawal) Act 2018 and it is unlikely that there will be a wholesale repeal of all such legislation in the short term. Indeed the Prime Minister has indicated that existing legal rights will be guaranteed during her period in office. However, in the medium to longer term it is possible that there may be some repeal or amendment of EU directive legislation and therefore changes to these rights. In particular, the UK government may well come under pressure from business organisations to repeal or amend those laws which are unpopular, such as the Working Time Regulations, the Agency Workers Regulations and TUPE. However, where rights under these regulations have become part of individual employment contracts, these will remain valid unless or until lawfully amended.

In theory large parts of the Equality Act 2010 derived from EU law, such as protection from discrimination on grounds of sexual orientation, religion and belief and age, could also be repealed but it is unlikely that the UK government will wish to be seen denying equality to these groups.

The Queen’s speech included reference to an Immigration Bill which the Government will need to introduce to end the free movement of EU nationals in the UK and make the migration of EU nationals and their family members subject to relevant UK law once the UK has left the EU.

What impact will Brexit have on the standing of CJEU rulings on employment matters?

Once again, all past judgments of the CJEU are to be given effect in UK law at the point of exit under the terms of the Repeal Bill. Past decisions of the UK courts which have followed rulings of the CJEU, such as those relating to holiday pay and collective redundancy consultation, will remain binding on UK courts – employment tribunals will not be able to depart from existing case law unless or until there is a change in the underlying legislation. However, future decisions of the ECJ will not be binding on the UK. Having said that, if the UK courts are interpreting EU-derived legislation which is retained, they are likely to be influenced by the CJEU's rulings.

What are the possible effects of Brexit on pensions, and in particular pensions equality law?

Much of our pensions legislation is derived from EU Directives or ECJ decisions, particularly that relating to equality and final salary scheme funding. Brexit would mean such legislation would no longer be subject to European jurisdiction, and Parliament could repeal any law it chooses. Brexit would thus enable the UK to amend pension legislation, potentially reducing member protections over time.

Following the ECJ’s decision in Barber v Guardian Royal Exchange on 17 May 1990, pension schemes were required to equalise the retirement age for men and women from that date. In addition, following legislation implemented under the Equality Directive, any age-related contribution rate structure must fall within narrow statutory limits set out in the Equality Act 2010. In 2015, in a case concerning civil partners, the Court of Appeal held that the survivor’s pension entitlement must comply with the EU law in force during the member’s service, so the exemption in the Equality Act 2010 was compatible with the Framework Directive. This meant that the survivor’s pension could be restricted to reflect the date that the relevant UK law came into force.

Although it is unlikely that equality legislation would be repealed as an immediate consequence of Brexit, the UK courts would have greater interpretative freedom, leading to a possible divergence between EU and UK law over time.

How might Brexit affect cross-border schemes?

The IORP Directive imposed certain requirements on UK pension schemes operating cross-border and accepting contributions from European employers for their members. One such requirement was for schemes to be fully funded at all times on their technical provisions (broadly, the costs basis upon which salary-related benefits are calculated). In the event of Brexit, these requirements need no longer apply (unless the UK remains an EEA member). The UK could then become more appealing as a country from which EU or EEA member states could operate cross-border pension arrangements.

What does the Brexit vote mean for employee share incentives?

The most important practical impact is that UK businesses which want to offer share scheme benefits to group employees in the EU may not be able to rely on relevant exemptions in the Prospectus Directive. This could make it more costly for UK companies to operate EU-wide employee share schemes because it would be more complex to ensure compliance with the Prospectus Directive.

The fact that other EU legislation will no longer apply to UK share schemes is, in general, unlikely to have much impact: for instance, the UK government will not repeal age discrimination legislation. The UK will also be likely to retain rules limiting the amount and form of variable remuneration paid to senior employees in listed companies and financial institutions though some of the detail might change.

How might Brexit affect executive remuneration?

Remuneration committees will need to exercise careful judgement when approving annual bonuses and LTIP vesting levels to ensure that any prolonged market volatility does not lead to outcomes that will be considered inappropriate by shareholders.

In addition, prolonged uncertainty/volatility will potentially make performance target setting more challenging. Remuneration committees will need to be very careful not to be seen to dilute future performance targets in a way that unduly benefits management and/or has the potential to provide windfall gains in the event that markets perform strongly in the early to middle part of next year (and beyond). If companies do want to adjust performance targets for future awards then this is also something which will require shareholder approval if the proposed new targets are not within the scope of the existing directors’ remuneration policy.