Brexit: Pension and Employment Consequences
Great Britain’s exit from the European Union may have numerous consequences on the cross border aspects of pension and employment law. Sitting in the "Brexit Lounge" the question is "what’s next?" and "when?"
The magnitude of possible consequences is apparent in view of the fact that 2,500 German undertakings with 400,000 employees are invested in the United Kingdom. Approximately 282,000 German nationals are working in the UK, of which 136,000 are in possession of a British passport. The number of such passport applications has increased significantly demonstrating the anxiety of German workers in the UK after the Brexit referendum. Approximately 115,000 British nationals are currently working in Germany and 2 million in the EU. 1 Approximately 2.2 million EU nationals work in GB, which represents 6.6% of the entire work force currently residing in the UK.2 These figures alone show: Brexit will have a huge impacton the employment in the UK and to a lesser extent on the employment in Germany and the EU.
Current Situation (no legal change, yet)
The referendum to leave the European Union (EU), while having enormous political effects, does not involve any direct legal consequences, yet. The preconditions of any legal changes in the UK would be a respective formal request by the British government and negotiations concerning an exit, which would come into effect two years after the formal request, unless the parties have agreed otherwise. At least until then the law of the EU and the UK law derived therefrom will continue to constitute applicable law. The European Court of Justice (ECJ) will continue the EU friendly precedent at least until the legal Brexit. As long as "she is in, she is in" with all legal consequences. When "she is out, she is out" with all necessary legal and practical consequences.
Any changes to British employment law derived from EU law would require a new act of Parliament. Without such legislative act the pension and employment law remains as is. Also, the single market and the four basic liberties: free movement of goods, free movement of workers, right of establishment and free movement of capital, will remain in place in the EU as long as there is no conflicting legislation in the EU. However, if there is no new agreement with the UK at the time of the legal exit, she will be treated as a third country and no longer be in possession of such free movement liberties.
What’s the employment law after Brexit in the UK?
- A fair share of UK labor law is not derived from the law of the European Union, but is genuine UK law. For example, protection against unfair dismissal, the law on notice periods, the law on minimum wages, whistleblowing, the law on labour disputes and the law on trade unions and collective bargaining are all applicable regardless of EU law.
- Another share of UK labour law is derived from EU law, e.g., a part of the protection against discrimination, working time regulations, family-friendly rights such as maternity leave or parental leave, the law on general terms and conditions and TUPE (Transfer of Undertakings Protection of Employment). Those rights have been implemented in UK law decades ago and remain in force for the time being, but could be changed through respective legislation. However, although especially the protection against discrimination is borrowed from EU law even long before the incorporation of EU law, it has been, based on the model of the United States, national UK legislation which itself has strongly influenced EU law.
- After the legal exit, the court system would no longer be determined by the European Court of Justice as the court of last resort. The courts and the employment tribunals of the United Kingdom could replace the jurisdiction of the European Court of Justice with future effect. However, it is questionable if they will do so, provided that the rulings of the European Court of Justice are based on European law, which has been implemented in the United Kingdom (e.g., vacation pay, absence due to illness).
- The right of free movement for employees from other member states of the EU into the UK could be infringed by UK legislation after the exit. There are efforts to link immigration to an “Australian points system”. However, this should not affect employees from the EU already legally living and working in the UK although this is less than guaranteed.
- It is possible, but not self-evident, that labour law regulations will be changed radically. UK and EU law have been closely intertwined for decades, hence substantial changes could only be enforced against the will of the respective political opponent and the relevant social partner. There is and has been a tendency of liberalization in the UK, and some pronounced British criticism of EU bureaucracy. Thus any changes in UK employment law will probably include a reduction of employee protection laws. Such development would even reduce the employment law burden on German firms investing in the UK.
Under the EU regime it was no problem for EU workers to move to England and apply for a job, as well as UK workers could move to another EU state and apply for a job without any restrictions. Such freedom of movement was almost like moving around in their own home country unrestricted. Similarly it was no problem for German undertakings to second EU nationals to the UK and vice versa UK nationals to EU member states. In the future there seems to be a tendency in England to be able to curb such liberties for EU nationals while UK workers should still maintain their freedom of movement status. The EU would probably insist on reciprocity.
The fundamental freedom of movement of workers is guaranteed in the EU by European Union Law pursuant to Article 45 Treaty on the Functioning of the European Union (TFEU). It grants every EU citizen the right to move freely, to stay and to work in any other member state. In relation to free access to the labor market Article 45 TFEU also guarantees non-discriminatory treatment of workers who are legally employed in a member state other than their own. Discrimination on the basis of nationality, residence and/or language is not permissible. It also includes equal treatment in basic employment conditions, remuneration and dismissal. Certain rights are also extended to family members.
In case of Brexit such freedom would cease to exist for UK nationals. Should there not be any agreement in place at the time of Brexit, Germany and the UK would treat each other as third countries which would customarily mean that employees seconded to the other country would need a visa. Possible options to overcome such scenario would be:
- "Norwegian" solution: UK remains in the European Economic Area (EEA) together with Norway, Iceland and Liechtenstein. Most if not all EU Rules on freedom of movement would remain applicable.
- "Swiss" solution: Single case solutions by numerous bilateral agreements between the UK and the EU concerning free movement of workers. Such agreements might be less liberal than the EEA membership. Secondments would probably be treated less favorably.
- "Third country" solution: In the absence of any agreement between the UK and the EU the UK would become a third country state. This means British employees would be subject to the same restrictions as workers from African or South American countries, if the UK does not manage to negotiate better i.e. more flexible terms. The present visa rules in the UK for third country workers require a so called Tib-2-visa. This would require a college degree and a minimum annual gross salary of £ 20,800 (starting April 2017 £ 30,000). After five years of stay in the UK a permanent permit can be issued.
UK citizens immigrating to Germany have to file for the European "Blue card" which requires a German or an acknowledged college degree and a minimum annual gross salary of € 49,600. Alternatively, such workers have to adhere to the strict rules of workers secondment.3 Less qualified British citizens are subject to strict new German rules. 75% (81% starting April 2017) of all EU citizens currently working in the UK would not fulfill better trained membership criteria. Germans would fulfill only 31%.4
Corporate and Co-determination Issues
Under the freedom of establishment pursuant to Art. 49 TFEU and provision of services according to Art. 59 TFEU, UK companies have been allowed to establish "businesses with administrative seat" in the other EU member states without having to found relevant national corporations as subsidiaries of their British parent company.
Thus UK companies like the "Limited Company" (Ltd.), the "Limited Liability Partnerships" (LLP) and the "Public Limited Company" ("the Limiteds") have been allowed to establish "Limiteds" with their main business and effective administrative seat in Germany but under UK corporate law although the general German rule for companies with their administrative seat in Germany is German corporate law including the employee co-determination law which is applicable at the administrative seat („Sitztheorie").5
Such "Sitztheorie" applies to all third country states with their effective seat in Germany. Therefore, only because of the EU freedom of establishment the"Limiteds" could as an exception from the German rule avoid the German co-determination issues in the past even when the undertaking had more than 2,000 employees (parity co-determination) or more than 500 employees (third parity co-determination).6 Should this not be confirmed by agreement the undertakings would have to be transformed into legal entities according to German corporate law and then fall under German employee co-determination or become partnerships with unlimited liability automatically or withdraw from the German market. Consequently Germany would no longer be obliged to acknowledge the particularities of British "Limiteds" in accordance with UK law. At the beginning of 2016 almost 9,0007 British "Limiteds" were registered with their administrative seat in Germany which may have to be converted.
This problem applies with great economic effect to British banks which so far would just establish "Euro Passport Branches" in Germany and remain under the supervision of their home banking authorities in the past. Without the European passport solution German branches of British banks will need to be incorporated according to German law (e.g. as a GmbH or AG) with all necessary capital funding principles. The same would be true vice versa for UK subsidiaries of German banks.
A similar problem may arise in connection with cross-border mergers if no bilateral agreement is concluded before Brexit becomes effective. According to § 122b German Conversion Act (Umwandlungsgesetz – UmwG) on the basis of the European Merger Directive 2005/56/EG dated 26 October 20058 only companies from member states of the EU and the EEA may participate in such cross border merger, which is not possible for companies of a third country.
Unless the UK enters the EEA or manages to conclude a bilateral agreement with the EU or each of the member states comparable with the USA Freundschaftsabkommen (Art. 25 Abs. 5 Freundschafts-, Handels- und Schifffahrtsvertrag vom 29.10.1954, BGBl. II 1956, 487), there will be no more "Limiteds" in Germany after Brexit. So far Switzerland was not able to conclude such an agreement in spite of years of negotiations so that Swiss companies are not recognized in Germany either.9
M&A Transactions and Employment
According to media reports, the M&A transaction business especially in the cross border market has slowed down considerably in the UK during the first months after the referendum.10 Potential investors are or have been waiting in the "Brexit Lounge" for the "dust to clear up". Although the circumstantial economic conditions caused by a record low British Pound are quite favourable, there is no clear picture yet but only the hope that the level of cross border M&A activities may be restored soon,11 as a result of the decision of the Bank of England (BoE) to reduce interest rates to the record low of 0.25%, start buying bonds in the amount of up to £ 70 billion and announced a special program for British banks for up to £ 100 billion to motivate credit spending.12 According to an analysis made by the BoE, 250,000 jobs are in peril.13
Should the hope for more M&A business in the UK materialize, the question is whether there will be any significant changes to the applicable law in the employment field. In case of an acquisition by a share deal there should not be any significant change of rules as the EU regulations on employment law do not cover share deals. However, for an acquisition by asset deal the Acquired Rights Directive implemented in England in 2006 (Transfer of Undertakings – Protection of Employment – TUPE) is still applicable and also will be after Brexit if not changed by legislative act.
UK TUPE rules are similar to Business Transfer rules in Germany. Both statutes are derived from the Acquired Rights Directive (ARD) of 14 February 1977, (as amended and consolidated in Directive 2001/23 of 12 March 2001). Employers in the UK involved in business transfers i.e. the sale or purchase of a business or part of it, the contracting-out of services, a change in service providers for contracted-out services or the transferring of previously outsourced services back in-house must inform and consult appropriate employee representatives and the employees attached to such entity transfer together with the assets maintaining their rights and obligations except for their pension expectations according to regulation 10 (Pensions) TUPE; thereto ECJ Case C-164/00 and Case C-04/01.
The basic idea of employees following their business in the case of an asset sale is generally accepted in the British industry. However, some UK gold plate in the scope of application may be removed by a moderate legislative act. For example, the application of TUPE on almost any kind of service provision agreements or any kind of outsourcing or insourcing may be curbed. Also, some more business friendly parliamentary act may permit the harmonization of contract terms following a TUPE transfer.14 However, whether TUPE survives or gets a moderate haircut, is not clear yet.
Following Brexit the new UK Government may wish to simplify the legal situation for employers, which may lead to a relaxation of the restrictions on post-transfer contract terms and any information and consultation requirements in this respect. Thus employment law on transfer of undertakings may even become more lenient for German or EU companies entering the UK after Brexit.
Similar intentions have been reported with respect to the rules on collective redundancies implemented 1992 by the Trade Union and Labour Relations (Consolidation) Act. Thus, also in this respect an investment by German companies into the British Islands may be even more interesting under new relaxed employment rules. However, such considerations and implementation depend on the ruling party in the UK Parliament. While the Tories may tend to liberalise EU driven employment law, labour might to the contrary try to preserve or even improve employment protection as per EU legislation.
Works Constitution Aspects
Works constitution law has been in force since 2004 when the relevant European directive was implemented into the UK legal system. Employers with 50 or more employees must establish a works council if enough employees make a valid request. In practice, it has not come into effect because of a lack of valid requests. There are virtually no works councils.
In spite of that, European Works Councils (EWC) have been established in a complicated procedure because there are practically no local works councils who could organize the elections for an EWC. Under European law, employers with at least 1,000 employees within the European Economic Area (EEA) and at least 150 employees in at least two member states must establish a EWC, or some other suitable transnational procedure for informing and consulting employee representatives, if enough employees across at least two member states make a valid request.
Due to the fact that there are practically no local works councils in the UK, this may be the first EU related legislation to be changed if not abolished without delay and UK nationals who were eligible for the European works council can no longer elect or be elected. British undertakings will no longer participate in the EWC system.
Company Pension Issues
The argument of some British business organisations that EU social and employment law imposes an unnecessary layer of red tape may to some degree also lead to amendments to company pension schemes.
However, the EU influence on company pensions was less stringent than in other employment areas. Thus no great change is to be expected for the UK company pension schemes. This may be different for cross border pension schemes which were heavily regulated by the so called Institutions for Occupational Retirement Provision (IORP) Directive21 mainly with respect to strict funding requirements. Such schemes must be fully funded at all times a burden which prompted British employers to stop using cross border pension schemes already in the past. This, too, might motivate the UK Government to statutorily relax such restrictions. However, it is quite uncertain what the reaction of European agencies monitoring IORP would be. One probable option would be not to let British employers become members in such cross border pension schemes.
In general, many considerations relating to post Brexit pension and employment law are highly speculative and (at least) depend on the political parties in the UK at the time of Brexit. It is to be expected that after a relatively long period of negotiations with tough initial language an EU "near" solution may be found as a compromise.
Merkblatt Bundesagentur für Arbeit S. 17.
Erf. Komm. Arbeitsrecht/Oetker, DrittelbG Einführung DrittelbG Rn. 3; Wlotzke/Koberski Mitbestimmungsrecht 4. Auflage 2011, § 1 MitbestG note 16 ff.
Drygala „Exit auch aus der britischen Limited“, LTO 2016, 2; Bode/Bron GmbHR 2016, R 129.
Kornblum, Was würde ein Brexit für die deutsche Limited bedeuten, Zeit online, 4. Juli 2016.
ABl. EU Nr. L310, 1; Kallmeyer/Marsch-Barner UmwG 5 ed. 2013, § 122a note 2; § 122b note 2.
Bode/Bron, Brexit als Risiko für die Anerkennung von Limited und LLP?, GmbHR 2016, R 129.
FAZ 25.07.2016 „Auf Schnäppchenjagd im Vereinigten Königreich“.
FAZ, same source.
Financial Times 5 August 2016 „Carney issues stark warning with package to ease British downturn“; FAZ 5 August 2016 „Notenbank kämpft gegen Brexit Schock“; BörsenZeitung 5 August 2016 „Bank of England feuert aus allen Rohren“; Handelsblatt 5/6/7 August 2016 „Notenbank in Not“.
Financial Times same source.
Social Security (Pension) Aspects
Until the legal exit social security matters are regulated in the EU-Directive VO (EG) 883/2004 of 1 May 2010.15 So far: Expectancies and waiting obligations fulfilled in any EU member states would be added for the purpose of calculating social security pensions.16
After Brexit social security for secondees would have to be reevaluated and the bilateral British/German social security agreement to be checked for applicability. So far it has been used in cases where the EU Directive does not apply.17 Commentators argue that the secondment practice will become more complicated and less flexible. Currently it is suggested that secondees should have their pension expectancy documented now. All documents concerning contributions into the German/British system should be confirmed by the agencies in the relevant member state. Social security agreements of workers from third countries are difficult to assess because the British-German Social Security Agreement (SVA) only regulated the bilateral relation between UK and Germany so that an Indian engineer working for a German car manufacturer in the UK may not be covered.18
After the legal exit a separate bilateral social security agreement on health insurance matters may be negotiated between the UK and Germany. Until the legal exit there are no changes regarding health insurance matters because these matters are as well regulated in the EU-Directive VO (EG) 883/2004 and additional in the EU-Directive 2011/2419 on the application of patients’ rights in cross-border healthcare.20