Update on European Works Councils - will Brexit frustrate your EWC?

In this article, we provide an update on the state of play as we enter March 2019, building on our earlier article. We then discuss what course of action businesses should take as we approach the projected date for the UK’s departure from the EU on 29 March.

New “known knowns”

Changes to UK EWC legislation

Parliament has now approved the Employment Rights (Amendment) (EU Exit) Regulations 2019 (the “Regulations”). These amend the UK’s EWC legislation in the event of a “no-deal” Brexit.

In summary, and contrary to the Government’s commitments to preserve all UK employees’ rights, the Regulations will:

• end the right of employees to request information on whether their employer falls within the scope of the EWC Directive and, if so, request the establishment of a EWC; and
• end the application of the UK’s EWC legislation to UK-based businesses or non-EU-based businesses that had designated a representative agent in the UK before Brexit. (The Regulations nonetheless preserve protections from detriment and unfair dismissal for UK representatives participating in bodies operating under other member states’ laws.)

The Regulations preserve the application of the UK’s EWC legislation only to businesses that:

• are non-UK-based;
• are non-EU-based;
• have a UK undertaking that, at the date of Brexit, happened to employ more employees than any other group undertaking in the EU; and
• that undertaking was already responsible for operating their EWC other than as a result of it being designated to do so.

We are unaware of any business meeting the above criteria, notwithstanding our extensive experience advising on EWCs. In effect, therefore, the Regulations end the UK’s legal framework for operating EWCs.

Brexit likely to frustrate existing “Article 6” EWC agreements

The ending of the UK’s legal framework for operating EWCs and the UK’s withdrawal from the EU’s legal framework lead to the question of what will happen to existing UK law-governed “Article 6” EWC agreements.

We believe the UK law doctrine of “frustration” provides the answer. This applies where a supervening event occurs that is not the fault of either party and significantly changes the nature of a party’s obligations from what they could reasonably have contemplated when reaching agreement. In this situation, the agreement is treated as frustrated and both parties are discharged from further performance of their obligations.

The High Court’s recent decision in Canary Wharf (BP4) T1 Ltd v European Medicine Agency indicates that Brexit is likely to frustrate UK law-governed “Article 6” EWC agreements, even though the European Medicine Agency’s lease at Canary Wharf would not be frustrated on the facts of that case. This is for the following reasons:

• Unlike for the European Medicine Agency performing its duties, it is conceptually impossible for the undertaking with responsibilities arising from the EWC Directive to be located outside of the EU.
• Also unlike for the European Medicine Agency, undertakings in the UK may be unable to perform their responsibilities arising from the EWC Directive after Brexit if they rely on cross-border cooperation mechanisms only available through the framework of EU law.
• Most importantly, the High Court held that the withdrawal of the UK from the EU pursuant to article 50 was not a foreseeable event until rather later than 2011.

But even if your UK law-governed EWC agreement is frustrated then - unless the exclusion of UK employees removes your business from the scope of the EWC Directive - you should not treat Brexit as a basis for ending your other non-UK European employees’ EWC rights. This means that you should appoint a new representative agent to take over responsibility for operating your EWC from Brexit, and it should be instructed to continue information and consultation on the same basis as before Brexit insofar as that is possible.

How to appoint a new representative agent

Businesses with EWCs currently governed by the UK’s EWC legislation are strongly advised conditionally to appoint a new representative agent in a state that will remain a member state of the EU with effect from Brexit. This will avoid the application of default rules for determining the governing law of your EWC arrangements, based on which undertaking in a member state happens to employ most employees. Ireland is the almost exclusive destination of choice given its common law legal system, use of the English language and business-friendly environment.

Some businesses have already designated new representative agents in Ireland in light of Brexit. Some of these designations have gone unchallenged, but Lewis Silkin is currently acting before the UK courts in HPE (EWC/19/2018) in which Unite the Union is questioning the right of non-EU-based companies to redesignate. Unite has hinted that UK-based companies conditionally designating might also be challenged in due course. The decision in HPE will provide critical guidance on avoiding legal challenges to relocating your representative agent.

We have grounds to believe that the decision in HPE will be delivered before 14 March 2019. Given that the appointment of a representative agent is a unilateral act by management, we strongly recommend that appointments are delayed until after 14 March. Other recent developments mean that we should know by that date whether:

• the withdrawal agreement negotiated between the UK and the EU has finally been approved by the UK Parliament, which would delay the need to appoint a new representative agent until at least 31 December 2020; and
• if that agreement has not been approved, whether Brexit itself has been delayed, and with it the need to appoint a new representative agent.

Suggested approach for your business

The best approach for your business will depend on its exact circumstances. Specialist advice should be obtained given the potential criminal penalties, including imprisonment, for individuals who are responsible for their business failing to comply with its legal obligations.

We also suggest that UK law-governed “Article 6” EWC agreements should, if possible, be novated with your EWC’s consent from your existing UK entity to your new chosen representative agent with immediate and unconditional effect from Brexit, in order to minimise the risk of future disputes.

Nonetheless, we suggest the following general approach can be adopted between 14 March 2019 and 11pm on 29 March 2019 if there is going to be a no-deal Brexit. Note that each suggestion can be implemented unilaterally without employee representatives’ consent:

• If your business operates under an old UK law-governed “Article 13” or “Article 3” EWC agreement, to the effect that it is exempt from complying with the EWC Directive, it is unlikely you need to act at all as there is no requirement for such an agreement to be governed by the law of a member state of the EU. Brexit is unprecedented, however, and could be argued to affect that status given the desire of many employee representatives to end such agreements if at all possible. We therefore suggest making a conditional designation of an Irish or other representative agent, in order to protect your business if Brexit is ultimately found to have undermined its status.
• If your business does not have any kind of EWC agreement and is not in a special negotiating body process, we suggest you designate or conditionally designate an Irish or other representative agent.
• If your business is in a special negotiating body process, we suggest you conditionally designate an Irish or other representative agent to take over responsibility for it with immediate and unconditional effect only from Brexit. Any agreement you enter into before Brexit should detail what will happen to it upon Brexit.
• If your business is currently operating a EWC under the UK’s subsidiary requirements, we suggest you conditionally designate an Irish (or other) representative agent to take responsibility for operating an EWC under the subsidiary requirements of Ireland (or other country) with immediate and unconditional effect only from Brexit.
• If your business is currently operating a EWC under a UK law-governed “Article 6” EWC agreement, we suggest it: (i) documents why it considers that its existing EWC agreement will be frustrated; (ii) duly appoints an Irish or other representative agent to take responsibility for its transnational information and consultation obligations with immediate and unconditional effect only from Brexit; and (iii) instructs it to continue information and consultation on the same basis as before Brexit insofar as that is possible.

Our team of UK and Irish qualified EWC specialists will update this note again around 14 March 2019 once the final “known unknowns” have become clear. We advise, however, that you immediately start preparing the above documentation given the high risk of a no-deal Brexit. We would be pleased to assist with tailoring such documentation or a novation agreement to your business’s particular needs.