What does the Brexit trade deal mean for employment law?

The UK and EU have published the text of their Trade and Cooperation Agreement (the Agreement), alongside a summary issued by the UK government and an explanatory brochure from the EU Commission.

As predicted, in return for a tariff and quota-free trade deal, the UK has agreed that it will not reduce employment law rights below the standards that exist on 31 December 2020 - but only if this affects trade or investment. The UK is free to choose to diverge from future EU employment laws but the EU may, within certain constraints and subject to an arbitration process, apply “rebalancing measures” if it obtains proof of a material impact on trade or investment.

On related topics, EU to UK data transfers 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 (see our data privacy team’s article for more detail). Certain visa-free travel will be permitted for business purposes, and there is also a deal on social security co-operation (see below).

Commitment not to reduce employment rights

The Agreement provides that the UK and EU must not weaken or reduce the level of employment rights in place as at 31 December 2020, in a manner affecting trade or investment. This includes by failing to effectively enforce its law and standards.

This commitment extends to fundamental rights at work, health and safety standards, fair working conditions, employment standards, information and consultation rights at company level and restructuring of undertakings. There are also separate commitments in the road transport section of the Agreement to comply with rules on working time, rest periods, breaks and tachographs for drivers transporting goods between the UK and EU. The Agreement goes on to say that both sides shall continue to strive to increase their respective labour and social levels of protection.

These provisions clearly restrict the UK’s ability to make major changes to employment law. It is not, however, a complete prohibition because a weakening of employment rights is disallowed only when this affects trade or investment. Major changes, such as removing working time or agency worker laws altogether, are very likely to affect trade as this would give UK employers a clear competitive advantage. More minor changes, such as amending a particular aspect of holiday rules, would arguably not affect trade in the same way.  

This “non-regression” clause is not subject to the Agreement’s main dispute resolution mechanism. Instead, a panel of experts 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 the parties try to resolve the matter between them. Although the UK is no longer subject to court action before the European Court of Justice (ECJ), this procedure provides a new way for the EU to challenge the UK’s compliance. 

It is worth noting here that the influence of the ECJ over employment law has not completely ended, because arrangements in the UK-EU Withdrawal Treaty commit Northern Ireland to continuing to abide by various EU Equal Treatment Directives and to interpret them in conformity with post-Brexit ECJ decisions.

The Agreement commits both sides to maintaining a system for effective domestic enforcement, including effective systems of labour inspections, court action and remedies. It is arguable that the UK does not currently have an effective system of labour inspections, a matter which could be raised by the EU, although the UK has committed to setting up a Single Enforcement Body to widen and co-ordinate better state enforcement of employment rights. The obligations relating to court actions and remedies might also limit the UK’s ability to reintroduce fees for Employment Tribunal (ET) claims, or to amend remedies for breach of employment rights such as by introducing a cap on compensation for discrimination. 

The requirement for effective remedies in the Agreement also refers specifically to interim relief - where an ET can require an employer to keep paying a dismissed claimant before their final claim is heard. While this is not currently available in the UK for discrimination cases, the Employment Appeal Tribunal (EAT) found in a recent decision that this was in breach of the European Convention on Human Rights (ECHR), although not a breach of EU law. The specific reference to interim relief in the Agreement, combined with the UKs commitment to continue to respect the rights in the ECHR (see below), means this could be an area for future disputes.

Future EU laws - the rebalancing provisions

The EU had originally proposed that the UK should be required to stay in alignment with new EU employment rights, but the Agreement does not require this. Instead, it provides that, if the UK diverges significantly from the EU in relation to employment rights in a way that materially impacts trade or investment, the EU can take “appropriate rebalancing measures” (including tariffs) subject to an arbitration process. Any alleged impact on trade or investment “shall be based on reliable evidence and not merely on conjecture or remote possibility”.

This means that the UK is not required to “follow the ECJ rule book” in the sense of having to align its future employment law with EU Directives or ECJ decisions in order to continue with tariff-free trade. Significant divergence could ultimately result in tariffs, but only if the divergence results in competitive advantage for which there is actual proof.

A level playing field?

The idea behind the non-regression and rebalancing provisions is to ensure a so-called “level playing field” between UK-based and EU-based employers, so that neither can unfairly undercut the other by means of lower, cheaper, employment standards.

The idea of an EU-wide level playing field on employment law is arguably illusory. There are no EU minimum standards on wage levels or dismissal costs (let alone rates of taxation and social security contributions). It is doubtful that the areas in which the EU has legislated (e.g. working time, business transfers, discrimination) have in themselves really created a level playing field to begin with. Nonetheless, the Agreement is based on the understanding that the standards in existence on 31 December 2020 will operate as the baseline, and that significant future divergence could ultimately attract tariffs.

What happens to existing EU-derived employment law?

This is unaffected by the deal. Under the EU Withdrawal Act 2018 (EUWA), as amended this year, EU-derived domestic legislation in effect immediately before 31 December 2020 simply carries on as part of the UK’s domestic law. This means that legislation such as TUPE and the Working Time Regulations do not just vanish but continue in force.

Any UK domestic legislation implementing EU rights must continue to be interpreted in conformity with the relevant EU law. Despite the new freedom to diverge, we could therefore in fact see some UK-court-led convergence rather than divergence. In 2019, for example an ET found that its obligation to interpret TUPE in line with the EU Acquired Rights Directive meant that workers transfer under TUPE as well as employees. Cases of this sort may continue, as courts and ETs continue to read words into UK legislation to bring it in line with EU requirements.

But there will be some new rules. Firstly, the Court of Appeal (CA) and Supreme Court (SC) do not need to follow existing (i.e. pre-2021) ECJ decisions and can depart from them if it “seems right to do so”:

• Take the ECJ’s recent decision in UQ v Marclean Technologies about an employer’s collective redundancy consultation obligations under EU law. If dealing with a claim about collective redundancy consultation after 31 December 2020, an ET would still have to try to read words into our UK legislation to give effect to the Marclean decision and the EAT would need to do the same. The CA and the SC, however, could decide not to follow Marclean.

• The freedom to diverge from existing ECJ decisions extends even to those that have already impacted UK laws. So, it possible that some of the decisions on calculating holiday pay that have been particularly problematic for employers could be overturned. The SC is due to consider three holiday pay cases in 2021, which may give some indication of the higher courts’ willingness to depart from ECJ rulings. Overturning an existing ECJ decision seems unlikely to amount to a breach of the UK’s commitment not to reduce employment rights, as it would be difficult to show that this affected trade or investment.

The second novel feature is that UK domestic legislation implementing EU rights will become better insulated from a legal challenge over potential deficiencies or divergent wording:

• Claims can no longer be brought against the UK government based on any alleged failure to implement EU law properly (Schedule 1, paragraph 4 of the EUWA).

• The EU Charter of Fundamental Rights, which could previously be used to disapply UK legislation, is no longer part of UK law (section 5(4) of the EUWA).

These provisions mean that UK domestic legislation still needs to be interpreted in conformity with any EU rights it was supposed to implement, but it cannot be struck down or challenged in the same way as before. Arguably, however, this will make ETs and courts more inclined to find a conforming interpretation.

What about new ECJ decisions?

The starting point is that courts and ETs are no longer bound to follow new ECJ decisions (issued in 2021 and beyond) but may have regard to them where relevant (sections 6(1) and (2) of the EUWA). This is likely to cause disputes in any ET case on a topic where the ECJ hands down a new and potentially relevant judgment, since one side will be arguing that the ET should pay no regard to it while the other will be arguing for conformity. 

Could a decision to ignore a new ECJ decision amount to significant divergence of the sort that could trigger the rebalancing measures discussed above? This seems unlikely as it would be difficult to prove a material impact on trade.

ETs must still, however, read UK legislation in conformity with the EU law it was intended to implement (see above). Ultimately, all the ECJ does is interpret what the relevant EU law means. Given the lack of guidance on what ETs should take into account in deciding how to regard or disregard ECJ decisions, and that a failure to follow a potentially relevant ECJ judgment is likely make their decision appealable, we expect ETs to take a cautious approach and follow new ECJ rulings in most situations.

What about new EU directives?

The UK is free to ignore any new EU Directives. There are three new EU employment Directives due to be implemented over next two years and in practice we have already adopted or plan to adopt many of the measures contained in them:

• Whistleblowing Directive (due to be implemented December 2021). Unlike many EU member states, the UK already has whistleblowing legislation, although it would need adapting to align fully with the Directive. For example, it would have to oblige employers to give feedback to whistleblowers and protect a wider range of whistleblowers including freelancers and shareholders.

• Transparent and Predictable Working Conditions Directive (due to be implemented August 2022). The UK has already implemented one of the requirements in this (extending the right to a written statement to all workers, not just employees), and has promised to introduce another one (the right to request a more stable and predictable contract) in the next Employment Bill. To align fully, the UK would also need to make some further changes – for example: banning long probationary periods; providing for reasonable notice of shifts and compensation for short-notice shift cancellation; and taking measures to prevent abuse of on-demand contracts.

• Work-Life Balance for Parents and Carers Directive (due to be implemented August 2022). The UK is proposing to introduce carers leave in the forthcoming Employment Bill and already goes further than the Directive as regards flexible working rights. To align fully, the UK would need to adjust its regime, including scrapping the service requirement for paternity leave and making shared parental leave operate so that it can be exercised independently by partners.

If the UK’s decision not to adopt these Directives in full results in a significant divergence on employment rights in a way that materially impacts trade or investment, then the EU can trigger the rebalancing provisions, but only if it can establish proof of such impact.

What about the future direction of EU employment law? The EU Commission has just published a proposed Minimum Wage Directive, although it does not seek to harmonise minimum wages. The UK already has minimum wage laws and a (pre-Covid) policy commitment for the national living wage to rise to two thirds of median earnings by 2024. The EU Commission had also pledged to introduce a new Pay Transparency Directive to tackle the gender pay gap, although this now appears to be on hold. The UK already has gender pay gap reporting requirements which are due for review by 2022.

The post-pandemic EU agenda may not be that radical as countries focus on economic recovery, so it may turn out there is not great scope for the UK to diverge from future EU developments in any event.

Human rights and employment law

The Agreement includes a commitment from the UK to continue to respect the rights set out in the ECHR. This was a potentially controversial topic, as a previous UK Conservative government had proposed replacing the Human Rights Act 1998, which implements the ECHR, with a new UK Bill of Rights. 

While the commitments are included in Part 3 of the Agreement on law enforcement and judicial cooperation on criminal matters, they mean that the ECHR rights will continue to be relevant across all areas including employment law. The Agreement expressly refers to the obligation to respect fundamental rights and legal principles as reflected in the ECHR. 

Either party may suspend Part 3 if there are “serious and systemic deficiencies” by the other party as regards the protection of fundamental rights. A party may also terminate Part 3 immediately if the other party has “denounced” the ECHR (although this would not impact Part 2, which covers trade).

This stops short of the original wording proposed by the EU, which would have specifically required the UK to give effect to the ECHR in its domestic law and prevented the UK from reducing citizens’ ability to enforce those rights. It appears that the UK remains able to amend or replace the Human Rights Act under the Agreement’s current wording. This would need to be done, however, in a way that continued to uphold the rights in the ECHR rather than watering them down, otherwise the deal with regard to law enforcement and judicial cooperation would be in jeopardy.

Social security arrangements

There had been fears that the absence of a deal on social security coordination would have caused major difficulties for UK employers sending their employees to work in other EEA countries or Switzerland and/or employers with multi-state workers (i.e. those working in two or more countries). Specifically, uncertainty would have arisen as to the country or countries in which social security contributions should be paid from 1 January 2021.

As it turns out, the Agreement incorporates a detailed “Protocol on Social Security Coordination”. Yet unfortunately for so-called “detached workers” - UK employees who are sent by their employer to work temporarily in an EEA country or Switzerland (and vice versa) - the resulting position is complex and depends primarily on the country in which the employee is working.   

From 1 January 2021, the general rule remains that social security contributions are due in the country in which the employee is working. Under the special rules for detached workers, it may be possible to continue to pay social security contributions only in the UK notwithstanding that the employee is temporarily working in an EU country. Certain conditions must be satisfied, including that the period of work in that state does not exceed a specified maximum (generally two years) and the country in question has decided to apply the detached worker rules. 

If the country in which the employee is working has decided not to apply the detached worker rules,employee and employer social security will be payable in the country in which the employee is working. EU member states must indicate whether they will apply the detached worker rules by 1 February 2020. There is transitional protection for any secondments that begin before 1 February, under which the existing rules will continue to apply provided that the country concerned has not already opted out of the detached worker rules and there is no change in the circumstances of the secondment. 

The new rules on detached workers are not a concern for UK employees temporarily seconded to Ireland (and vice versa) since the UK and Ireland have made a separate, reciprocal social security agreement which preserves the current position. In addition, the new rules will not apply to secondments or assignments which began before 1 January 2021 provided there is no change in the employee's circumstances.

UK employees working in two or more EU countries or Switzerland should continue to only pay social security in the UK, provided they carry out more than 25% of their work in the UK. 

HMRC has provided guidance on the new rules, although this will need to be updated as the approach taken by the individual EU countries becomes clear. In terms of the practicalities, the employer and employee will still need to apply to HMRC for an A1 or E101 certificate as appropriate.

Conclusion

While the UK government has succeeded in negotiating the freedom to diverge from EU employment law, employers should not necessarily expect significant gaps to open up very quickly. The EU and UK employment law agendas are not that far apart in the immediate post-pandemic future. ETs are likely to be cautious, at least initially, and respect most new ECJ decisions.

Employers should, however, expect and prepare themselves for an extensive new scope to litigate and relitigate points that, until now, were considered settled. It remains to be seen whether the UK higher courts will be inclined to set about overturning ECJ decisions and, if so, on what basis.

More immediately, employers should remember that European Works Councils can no longer be based in the UK and firms need to decide how to deal with their UK representatives. (Most have already put in place arrangements for this.)

The fact that the UK has secured a trade deal with the EU has not changed the most significant people-related impact of Brexit, which is the end of freedom of movement. The provisions in the Agreement on data transfers and social security will, however, be broadly welcomed.