What Will Change in UK Employment Law as a Result of Brexit?

​Key changes to employment law resulting from the recent U.K.-EU Trade Deal and the U.K.'s exit from the EU will affect HR professionals, general counsel and others. Here are some frequently asked questions about the deal.

Is there anything in the U.K.-EU Trade and Cooperation Agreement about employment law?

Yes, there is. While there is nothing that directly alters the rights of U.K. workers or obligations of U.K. employers (such as discrimination law, holiday pay, health and safety, and whistle-blowing), the agreement does set out the principles governing changes in EU and U.K. employment law in the future, now that the U.K. is not bound by EU directives nor subject to the jurisdiction of the Court of Justice of the European Union (CJEU).

One of the conditions for a trade deal that is free from tariffs and quotas was a commitment by both the EU and the U.K. to ensure a level playing field in policy areas such as employment, tax, social policy and the environment. This is to ensure that there is open and fair competition between the U.K. and the EU.

As a result, both parties to the deal agreed that the high levels of employment protection that had been a part of U.K. law as of Dec. 31, 2020 (when much of U.K. employment law was underpinned by EU directives) cannot be lowered in a manner affecting trade or investment between the parties. In addition, the U.K. and EU agreed that they both shall continue to strive to increase their respective labor and social levels of protection. This principle is described as the "nonregression" principle:

"A Party shall not weaken or reduce, in a manner affecting trade or investment between the parties, its labor and social levels of protection below the levels in place at the end of the transition period, including by failing to effectively enforce its law and standards…"

"The parties shall continue to strive to increase their respective labor and social levels of protection…"

The overall effect of these terms is that neither the U.K. nor the EU can dismantle workers' rights wholesale without consequences. If the U.K. seeks to do this, and the measures taken have "material impacts" on trade and investment between the U.K. and the EU, the EU can retaliate by imposing, for example, its own tariffs on U.K. goods and can refer the matter to dispute resolution under the agreement. This involves arbitration by a panel of arbitrators, rather than adjudication by the CJEU. These are referred to as rebalancing measures. See "What happens in practice if either the U.K. or the EU considers that the other has failed to comply with its specific obligations relating to labor and social levels of protection?" below for further details.

Is the way in which employment law rights are enforced relevant?

Yes. There are detailed provisions relating to enforcement that could turn out to be one of the most influential aspects of the agreement on U.K. employment law.

Both the U.K. and the EU have agreed to maintain "a system for effective domestic enforcement and, in particular, an effective system of labor inspections in accordance with its international commitments relating to working conditions and the protection of workers."

They have also undertaken to "ensure that administrative and judicial proceedings are available that allow public authorities and individuals with standing to bring timely actions against violations of the labor law and social standards; and provide for appropriate and effective remedies, including interim relief, as well as proportionate and dissuasive sanctions."

We have quoted these obligations in full because a failure to effectively enforce the U.K.'s law and standards covered by the agreement is a potential breach of the nonregression principle.

We believe there are grounds for considering that the U.K. does not currently meet this requirement in full, as it arguably does not have an effective system of labor inspections or an effective system for the enforcement of employment laws by public bodies. This was a point that was highlighted in "Good Work", the final report of the Taylor Review of Modern Working Practices. Following the recommendations made in this report, the U.K. government has proposed legislation that sets up a single enforcement body to widen and co-ordinate better state enforcement of employment rights and provide better support for businesses to comply with the rules.

These obligations in the agreement relating to enforcement may also limit the U.K.'s ability to reintroduce fees for Employment Tribunal claims, which were quashed following a decision of the Supreme Court in 2017.

They may also mean that employers should in certain cases be ordered to keep paying a dismissed claimant before his or her final claim is heard, as a means of giving interim relief, which is currently only available in limited circumstances. This point was considered in Steer v. Stormsure Limited, where the Employment Appeal Tribunal held it was probably a breach of the U.K.'s obligations under the ECHR not to allow this remedy for discrimination claims.

What does this mean for existing workers' rights that stem from EU law?

All of the U.K. employment law that stemmed from EU law (such as the Working Time Directive) was already in effect, cut and pasted into U.K. law by the European Union (Withdrawal) Act 2018, which created the concept of "retained EU law." So in the immediate future, U.K. employment law will not change and is unaffected by the agreement. But following the end of the transition period on Dec. 31, 2020, the U.K. now has greater scope to make changes.

When interpreting retained EU law, the U.K. courts will have to follow EU case law in effect on Dec. 31, 2020, unless the Supreme Court or the Court of Appeal—and equivalent courts in Scotland and Northern Ireland—have given a contrary ruling since then.

The principles and decisions of the CJEU made on or after Dec. 31, 2020 are not binding on any U.K. tribunals or courts, but they may consider them where relevant.

It is possible that a decision by a U.K. court could result in a significant divergence of the sort that could breach the nonregression principle and thereby trigger the rebalancing measures referred to above, although this would seem to be an unusual and unlikely event. The nonregression principle is far more likely to be breached by Parliamentary legislation than judge-made law or changes to the way the U.K. courts interpret retained EU law.

U.K. courts and tribunals will have to follow the usual domestic rules on precedent: employment tribunals, the Employment Appeal Tribunal and the High Court will be required to follow existing rulings of the Court of Appeal and ultimately the Supreme Court on the interpretation of retained EU law. Where a point arises on which there is no ruling by the U.K. Supreme Court or Court of Appeal but there is a CJEU ruling, it is likely that the tribunals and lower courts will follow the CJEU ruling.

This means that for now this retained EU law will remain the same, but it may in the future diverge in some respects as a result either of new legislation or rulings by the U.K.'s senior courts that differ from rulings of the CJEU.

Is the U.K. government free to change U.K. employment law in the future, without seeking consent from the EU?

The short answer is yes, in principle. The U.K. can change its employment laws if Parliament passes the necessary legislation. The agreement specifically recognizes each party's right to determine the labor and social levels of protection it deems appropriate and to modify its law accordingly, but in a manner consistent with its international commitments, which include the commitments made under the agreement itself.

However, if the nonregression principle is breached, and/or U.K. or EU law diverges in a way that materially impacts trade and investment, there are consequences under the agreement. See below.

Have the parties agreed to comply with other international agreements?

Yes, they have. Both parties recognize that their agreement must take place in a manner conducive to sustainable development and to that end have agreed to adhere to the implementation of relevant internationally agreed principles such as Conventions of the International Labour Organization (ILO) and the European Social Charter of the Council of Europe.

The U.K. has also made a commitment to respect the rights set out in the European Convention on Human Rights (ECHR) in the part of the agreement dealing with law enforcement and judicial co-operation on criminal matters, and this commitment will be relevant in all areas including employment law. This stops short of the original wording proposed by the EU, which would have required the U.K. to give effect to the EHCR in its domestic law. Without that requirement, the U.K. can amend or replace the Human Rights Act 1998 (which incorporated the ECHR into the U.K. legal system), but this would need to be done in a way that continues to uphold the principles of the ECHR. A failure to do so would risk jeopardizing the law enforcement and judicial cooperation aspects of the agreement.

Which U.K. employment laws may now change?

We think it unlikely the government intends to make significant changes to existing employment law in the immediate future. However, some changes could be made in the months ahead, such as:

• Compensation for discrimination cases: While compensation for ordinary unfair dismissals is capped at a maximum award of 88,519 pounds (approximately $120,102—or a year's pay, if less), dismissals that are unlawful because of discrimination do not have a limit on compensation. The amount that a tribunal can award a successful employee depends on the losses suffered and, in particular, on how long it is until a suitable replacement job can be found. The U.K. Parliament has until now been unable to introduce a cap on compensation because it would contravene EU directives. Now that the U.K. is no longer bound by EU directives, a cap could be introduced. However, the requirement for effective remedies in the agreement may arguably restrict this.
• Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE): There are several difficult areas within the TUPE regime, which could not be changed while the U.K. was bound by the Acquired Rights Directive. Now that the directive no longer applies, changes may be introduced, for example, to make it easier for employers to change terms and conditions of employment following a TUPE transfer or change the way in which objections to a proposed transfer may be raised by employees.
• Holiday pay: A string of U.K. and EU cases over the past 15 years have produced a number of difficult questions and inconsistencies relating to employee holiday entitlements. Most notable is the question of how to calculate holiday pay: the approach has, broadly speaking, been to calculate a day's pay based on basic salary only, whereas the CJEU has been clear that the Working Time Directive requires a wider range of payments, such as commission, to be taken into account in the calculation. Now that the U.K. is no longer bound by that directive, there may be scope to clarify these issues in U.K. law, by amending the Working Time Regulations 1998.

What about forthcoming EU directives? Will the U.K. Parliament be obliged to pass laws to give effect to these?

No. EU directives are, simply put, instructions by the EU to each member state that it should pass certain laws. For example, the Race Equality Directive requires member states to make laws that prohibit direct and indirect discrimination based on racial or ethnic origin. Failure to do this is a breach of EU law, and the CJEU has the final say as to whether a member state has not complied with a directive. Directives often represent minimum standards expected of member state laws: the Working Time Directive, for example, requires that member states allow for at least 20 days' paid holiday for each full-time worker, whereas U.K. law (the Working Time Regulations 1998) requires employers to give at least 28 days' paid holiday to each full-time worker, inclusive of public holidays.

Now that the U.K. is not a member state of the EU, and now that the transition period has ended, the U.K. is not required to make laws to reflect any new EU directives introduced after Dec. 31, 2020. However, it may choose to do so to some extent, and many directives that cover new ground as far as EU employment law is concerned will already be reflected in U.K. law, at least in part. This is the case for a number of new EU employment directives that are due to be implemented by member states in 2021 and 2022, such as:

• Transparent and Predictable Working Conditions Directive ((EU) 2019/1152): This directive, which is due to be implemented in August 2022, requires member states to confer a number of rights on workers, including the right to a written statement of employment terms for employees and other workers (which is already the case in U.K. law), and the right to request a more stable and predictable contract (which the U.K. Government already plans to introduce).
• Work-Life Balance for Parents and Carers Directive ((EU) 2019/1158): This directive, which is due to be implemented in August 2022, will require members states to legislate for various types of parental and carers' rights and flexible working arrangements. Much of these requirements are already in current or proposed U.K. legislation that goes further than the directive in terms of certain protections, but not as far in other areas such as the U.K.'s requirement for a qualifying period of service for paid paternity leave.
• Whistle-Blowing Directive ((EU) 2019/1937): This requires EU member states to ensure that whistleblowers who report concerns about potential breaches of EU law are not subject to retaliation by their employers for having done so. Unlike some of the EU member states, the U.K. has had whistle-blowing legislation in force since 1998. Minor amendments to U.K. law would be needed to align fully with the terms of the directive when it comes into force on Dec. 17, 2021. In any case, it will be relevant to companies with operations across Europe and particularly those that maintain a single whistle-blowing policy and procedure across all group companies globally.

There could be an argument that by failing to keep its legislation in line with new EU directives the U.K. might breach its duty under the agreement to "continue to strive to increase [its] labor and social levels of protection" and if a "significant divergence" consequently arose between the EU and the U.K. affecting trade or investment between the parties, this might trigger the rebalancing measures under the agreement, which are discussed below. However, we think this is unlikely to arise in practice, especially as the U.K. in many respects confers better protections (e.g., whistle-blower protections and the minimum wage and gender pay gap reporting).

What happens in practice if either the U.K. or the EU considers that the other has failed to comply with its specific obligations relating to labor and social levels of protection?

There is a special procedure for dealing with this type of breach of the agreement, which is different from the normal arbitration process for other breaches, although both mechanisms share some procedural rules.

Where either the EU or U.K. breaches the nonregression principle (e.g., it reduces employment protections below the level as at Dec. 31, 2020 in a way that affects trade or investment), a panel of experts drawn from both the U.K. and the EU will decide whether a party has failed to comply with its obligations. The panel can become involved after a 90-day consultation period, during which time the parties should try to resolve the matter between them. If the matter is not resolved, the panel of experts is charged—after following a prescribed procedure—with delivering a report stating whether a party has complied with its obligations.

If the panel finds that a party has breached the nonregression principle, the parties will consider how to remedy the situation. This may involve the party in breach changing its laws to provide additional labor protections so that the playing field becomes level again. If the parties don't agree, then the panel will decide what measures should be taken to bring the U.K. or EU laws into line. There is a possibility of the party in breach being required to pay compensation to the innocent party while the U.K. and EU laws diverge in a way that affects trade or investment, but how this might operate is not clear.

An additional enforcement mechanism embedded in the agreement is "rebalancing measures" such as the imposition of tariffs on goods—potentially stricter than under the World Trade Organization rules—which can be taken by either the U.K. or the EU if material impacts on trade or investment arise because of significant divergencies in labor or social levels of protection between the U.K. and EU. The measures taken must be those that are "strictly necessary and proportionate in order to remedy the situation" and must be based on "reliable evidence and not merely conjecture or a remote possibility." The imposition of such measures is subject to the right of the other party to refer the matter to an arbitration tribunal to decide whether the requirements for the imposition of the rebalancing measures have been met.

The issue in determining whether rebalancing measures can be taken is whether the divergence affects trade or investment between the parties. Any legal changes, or failures to keep up with EU legislation that substantially reduce the cost of doing business in the U.K. relative to the EU are likely to distort trade and/or investment. So, doing away with the TUPE regime or the Agency Workers Regulations 2010 altogether or failing to mirror new EU legislation to protect workers on unpredictable contracts would probably be considered to affect trade and investment. On the other hand, altering the troublesome rules on holiday pay necessitated by the Working Time Directive, as interpreted by the CJEU, would probably not have that effect and result in rebalancing measures.

We think that the existence of this potentially serious sanction may have the effect of ensuring that the U.K.'s employment laws stay broadly—but not in every detailed respect—in line with the EU's employment laws. But of course this is wholly new territory and we will have to wait to see how this new and innovative legal mechanism is operated in practice.

Transferring personal data between the EU and the U.K.—What has changed for data protection?

The General Data Protection Regulation (GDPR) sets out a regime in which personal data, such as private and sensitive information about employees, can move around the European Economic Area (EEA) as a single territory without additional protections, such as those which are necessary for transfers outside of the EEA.

Now that the U.K. is no longer in the EEA, it is treated as a "third country" under the GDPR regime. However, EU to U.K. data transfers, including personnel data, can continue for an interim period of four months—extendable to six months—during which time the EU is expected to issue a formal "adequacy" decision. This means that the EU is satisfied that U.K. law is adequate to protect the rights of individual data subjects. During the interim period and once an adequacy decision is in force, U.K. employers will not need to rush to put in place standard contractual clauses or another transfer tool that is required for other third countries, such as the U.S.

Ed Livingstone and Jane Mann are attorneys with Fox Williams LLP in London. © 2021 Fox Williams LLP. All rights reserved. Reposted with permission of Lexology.