How does the UK's vote to leave the EU affect employers?

The UK electorate’s vote to leave the European Union came as a massive surprise and lit the blue touch paper to the country’s political fireworks. However organisations will want to know how things will change for them.

Owain Thomas assesses the situation:

 

The impact of the UK’s vote to leave the European Union is already being felt by businesses – with the massive economic upheaval hitting investment and recruiting decisions and defined benefit pension scheme values.

However, with the current political vacuum likely to continue at least in part until prime minister David Cameron is replaced in September, HR leaders should be using this time to prepare for the longer term effects.

Employment law is another critical area expected to be affected by the UK’s EU departure, along with the aforementioned pensions, recruitment and immigration.

Some businesses have reacted already by announcing hiring or investment freezes until some stability is restored, but with a potential two-year-long negotiation to be navigated once the formal process of leaving the EU is eventually announced, it could well be a long wait.

Chartered Institute for Personnel and Development (CIPD) chief executive Peter Cheese noted it was important that the government and UK businesses took time to properly assess the long-term impacts of any decisions they took going forward.

“The impact of a leave vote is much bigger than simply changing the political landscape of the UK. It stands to have a significant impact on the world of work and future planning within organisations,” he warned.

“We need a broad and thorough consultation between government, organisations and employees across all sectors and representative bodies. It is important that the government takes the time to really understand the impact of any proposed changes and works with businesses to minimise risk to individuals, organisations and the economy.”

Flexible labour market

Cheese explained that the UK’s flexible labour market did enable employers to access or bring in skilled and unskilled workers from outside the UK to help support business growth and address labour shortages.

“It is important that this is not forgotten in any reform of the immigration system. Alongside the significant technicalities of a re-negotiation of a new relationship with the EU and possible further political change, it is vital the government continues to focus working with all constituencies on the very real and strategic challenges that continue to threaten the UK’s prosperity in future years, namely the productivity, skills and employment agendas,” he added.

Preparing for this whirlwind of change will be essential, even though the final destination is still unknown.

This means it will be a particularly tough balancing act for business leaders to formulate strategies that are flexible enough for a range of scenarios.

As Mercer talent partner Mark Quinn explained: “The immediate implications for companies and employees will depend on their circumstances.

“In the short term, companies should be analysing exposure they have to the UK and Europe in respect of their workforce’s organisational profiles and their reward plans. While we don’t know yet what restrictions will be imposed on, say, the free movement of people, it is evident that political, economic, legislative and market uncertainty is unlikely to clear any time soon. Strong employee communications will be critical for companies over the coming months,” he added.

 

Employment Law

A large proportion of UK employment law is founded through EU directives, but it is unlikely that much of this will be dismantled for political and cultural reasons, especially as many organisations have now made these policies critical parts of their employment practices.

However, there are some areas which could be targeted. A number of employment laws fall into this category, such as many of the anti-discrimination rights, transfer of undertakings regulations (TUPE), family leave entitlements, collective consultation obligations, duties to agency workers or working time regulations such as the 48-hour working week restrictions.

It also appears as though the European Court of Justice will be removed as the ultimate legal oversight for UK law.

While this would likely be welcomed by leavers, for UK businesses trying to operate within the EU or gain access to the single market it could prove a hindrance as they will become tied to two different sets of laws with no guarantee of a level playing field.

Shoosmiths employment partner Charles Rae explained: “Much of the UK’s employment legislation pre-dates the EU imposed ones, and has instead been built upon by later EU requirements, so the foundations are already in place.

“For instance, the UK already had race and disability discrimination rules before the EU wide requirements were introduced. Many feel that more likely than repealing laws, the government would take the opportunity to smooth off some of the less popular requirements set down by the EU, for example restrictions on changing terms and conditions following a TUPE transfer.

Freedom of movement

“We may also find that freedom of movement within the EU leaves uncertainty as to the status of EU nationals who already work in the UK (and vice versa). Many businesses rely on EU workers and will want to be satisfied that their right to remain in the UK (and to therefore provide their services) is not going to be adversely affected.

“Equally, it isn’t clear what a Brexit will mean for EU nationals currently working in the UK. Many potential solutions have been mooted, such as a compromise that would see current EU migrants given a set period of time to remain in the UK during which they can apply for citizenship, in return for UK citizens currently abroad to remain where they are on the same basis,” he added.

This final point may in the end have the biggest effect on businesses as freedom of movement rules restrict the ability to hire key staff or expand where desired.

Mercer’s Quinn urged employers to start taking these possibilities into account now and to understand their own situation as much as possible.

“It’s likely that restrictions will be placed on EU workers within the UK workforce so companies should review their workforce plans; particularly retail, leisure and services employers who employ a large number of EU citizens,” he said.

“New bi-lateral agreements may be required for those organisations off-shoring from the UK into the EU and we will also have to wait and see if non-UK multi-nationals will think it still appropriate to have their European headquarters remain in London,” he added.

Banking bonus

The banking sector is one that has been heralded as particularly at risk from the UK’s departure from the EU. However, it is one market that may benefit most from the ability to repeal EU law – in this case, the cap on bankers’ remuneration.

Chancellor George Osborne led the eventually unsuccessful challenge to the EU-wide cap on senior bankers’ reward, and it is not beyond possibility that this would be lifted in an attempt to persuade banks and major financial institutions to maintain their headquarters and major operations in London.

This may not be welcomed by customer and regulators however.

Quinn continued: “We may see an end to the bonus caps and other EU-sponsored controls although the Financial Conduct Authority and Prudential Regulation Authority will want to ensure that the direction and spirit of the Financial Standards Board’s requirements continue to be fully met in the UK.”

Overall, he added that “the restrictions and changes in the UK labour market for key skills at both executive and employee levels will impact on competitive pay levels in the UK and, of course, there may be an increase in costs for UK workers living and working within the EU, so companies will have to respond.”

 

Pensions

Workplace pensions, whether (defined benefit or defined contribution) are heavily dependent on economic activity such as stock market and government debt value fluctuations.

For employers, the biggest concern will be defined benefit (DB) schemes where the liability rests with the scheme sponsor.

Financial markets were taken by surprise with the referendum result and have since dipped significantly, meaning scheme liabilities have grown in the immediate aftermath.

With Article 50 and its two year negotiating period not likely to be enacted until at least September, this means the next round of triennial valuations could well be affected.

Hargreaves Lansdown head of retirement policy Tom McPhail explained: “Final salary scheme sponsors (employers) and trustees should brace themselves for some unwelcome news on scheme valuations. If these numbers feed through into scheme liabilities it could exacerbate the deficits which already exist in many schemes.”

This was echoed by PwC pensions credit advisory service head Jonathon Land who agreed it would require strict monitoring by employers and trustees.

“Ultimately what this means for defined benefit pensions schemes in the UK will depend on the relative impact of any economic changes on both the employer and the pension scheme,” he said.

“For employers there will be winners and losers and it will be important for trustees to monitor the employer covenant closely and determine quickly which group the company that supports their pension scheme is in.”

For defined contribution (DC) schemes the risk lies with the employee.

Given that many employees are likely to be unfamiliar with making investment decisions, it will be important for employers to carefully consider what to communicate with them.

Regulation

Where pensions regulation is concerned, most of the legislation affecting the UK is being implemented by Westminster.

This should mean legislators will be able to adapt or reign-in new rules while the country is familiarising itself with the new position.

However as Xerox HR noted, the ramifications for UK pensions will start to become clearer over the longer term.

“Much of the UK legislation on pensions is enshrined by EU law, but Brexit is unlikely to see this dismantled,” a spokesman said.

“Indeed, if the UK joins the European Economic Area then adoption of the EU pension legislation may be a requirement. Much will depend upon the degree of integration that the UK seeks to maintain with the EU (and the EU allows the UK to maintain) and the results of the negotiations on this issue.”

 

Employee fears

It is also important not to forget about the employees who will be affected by the changes coming through.

As Simpson Miller partner and employment solicitor Aneil Balgobin highlighted, it may reflect well on employers to remember the vulnerability of their staff and seek to communicate openly and provide as much support as possible.

“Employers will have been making emergency plans for weeks and months; employees will no doubt feel less prepared for the impact a Brexit might have on their jobs and that reality is about to hit home,” he said.

“Employers need to be swift in reassuring staff who could feel destabilised and may be looking outside Britain for a more secure role – triggering a talent drain at a time when many companies need their core capacity the most.”