Voting for a 'Brexit'? Employment law implications if UK exits European Union

Introduction
Legislative challenges
Case law
In context: TUPE and holiday pay
Possible outcomes
Comment

Introduction

Prime Minister David Cameron has promised that, if the Conservative Party wins the next election, he will seek to renegotiate the conditions of the United Kingdom's EU membership and put the new terms to the public in an 'in-out' referendum in 2017. If he makes it that far, what will be the implications of a vote for a so-called 'Brexit'?

In particular, what will happen to all EU-derived employment law: discrimination rights, holiday entitlement, duties to agency workers, data protection obligations, works councils and myriad other matters that have become entrenched in the UK legal system? Perhaps someone should tell Cameron – not to mention UK Independence Party supporters – that there are good arguments to suggest that very little would change.

Legislative challenges

To some extent, what happens to UK employment law will depend on how the government tries to extricate itself from the European Union. European law has been incorporated into UK law in a variety of ways. Some UK laws are secondary legislation – that is, regulations introduced by a government minister under powers granted by the European Communities Act 1972 (the statute enacted to incorporate EU law). One example is the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). Other UK implementing legislation, such as the Equality Act 2010, is primary legislation (ie, an act of Parliament).

If the government simply repealed the European Communities Act, the regulations passed under it (eg, TUPE) would probably fall away. In contrast, freestanding acts of Parliament (eg, the Equality Act) would remain in force. The result would be inconsistent and confusing for businesses. Repealing all primary and secondary legislation in one swoop would result in an avalanche of legal changes for employers and their staff. A more realistic approach following an exit from the European Union would be to maintain the status quo and address particular laws individually over time. This could be done by repealing them or merely tinkering to make them more palatable to the UK business environment.

If this happens, a major issue will be the post-exit treatment of European Court of Justice (ECJ) decisions. Presently, UK courts must interpret EU-derived legislation in accordance with ECJ rulings and a body of UK case law has built up that does so. On leaving the European Union, the ECJ would no longer have jurisdiction and its future decisions would not be binding on UK courts. However, it seems likely that if the United Kingdom were to retain any laws originating from the European Union (which is probable), the UK courts would still take account of future ECJ judgments as persuasive – albeit not binding – when ruling on those laws. In this case, the ECJ would continue to exert an appreciable influence.

Case law

A further complication concerns pre-existing case law. Past ECJ rulings have become entwined with UK court decisions and legislation. For example, ECJ decisions on what amounts to a TUPE transfer, that sex discrimination includes gender reassignment and that pregnancy discrimination is unlawful without the need for a comparator have been written into the law. Additionally, when taking into account ECJ decisions, UK courts have incorporated them into their own jurisprudence. For instance, the leading Supreme Court decision on the types of factor that might justify age discrimination depends on ECJ reasoning. Sometimes, UK courts go a long way to make UK legislation consistent with ECJ rulings. Prominent examples include recent cases on holiday pay in which the courts have read additional wording into the relevant UK legislation to give effect to ECJ decisions.

Past decisions remain binding on lower courts, subject to their ability to distinguish them because the particular facts of the case are different. Possibly, UK courts would treat the fact that they are no longer obliged to apply ECJ judgments as a materially different circumstance justifying a complete departure from previous rulings. However, it seems more likely that they would continue with many established doctrines (if for no other reason than to preserve legal certainty) – possibly retreating from more extreme decisions that have required words to be read into legislation.

In context: TUPE and holiday pay

TUPE
Take the example of TUPE. One of its most frustrating aspects for employers is the difficulty for transferees in harmonising the terms and conditions of transferred staff with those of existing employees. This originates from the ECJ decision in Daddy's Dance Hall ([1988] IRLR 315), which held that the EU Acquired Rights Directive – the EU law from which TUPE derives – transfers employees to the new owner of the undertaking on their existing terms and conditions, which can be changed to the extent allowed by national law, provided that the reason for the change is not the transfer itself. Employees cannot agree to a transfer-related change of terms because their rights under the Acquired Rights Directive cannot be waived. Changing the terms of transferred staff in order to harmonise such terms with those of other employees is always viewed as a transfer-related change.

In January 2014 the government amended TUPE (for further details please see "TUPE reforms implemented"), to make it easier for employers to change terms post-transfer by incorporating a provision allowing for contractual variations, provided that they are agreed between employer and employee, due to an "economic, technical or organisational reason entailing changes in the workforce". A separate provision was added allowing changes if the terms of the contract permit a variation. However, these new provisions are limited and unlikely to permit changes made simply for harmonisation purposes.

What would be the position if the United Kingdom left the European Union and amended TUPE so that transferees could harmonise terms between transferred staff and their own employees? How would UK courts then treat Daddy's Dance Hall and UK decisions which followed it, such as the judgment of the House of Lords (now the Supreme Court) in Wilson v St Helen's Borough Council ([1998] IRLR 706)? Wilson emphasised that the purpose of the Acquired Rights Directive and TUPE is to safeguard the rights of employees on a transfer, and allowing contractual variations for a reason connected with the transfer would undermine that purpose. The reasoning of the House of Lords relied not only on Daddy's Dance Hall, but also on provisions that are still part of TUPE and which transfer employees on their existing terms. Allowing variations simply for the purpose of harmonisation – even if TUPE were ostensibly altered to permit this – would force the courts to distinguish between a superior court's interpretation of the overriding purpose of TUPE and a conflicting new statutory provision.

Holiday pay
Another issue on which the United Kingdom might want to legislate to deal with difficult ECJ decisions is holiday pay. When the United Kingdom implemented the EU Working Time Directive through the Working Time Regulations 1998, it provided that statutory annual leave must be taken within the relevant holiday year and is lost if not taken. However, various ECJ decisions, such as Stringer v HMRC ([2009] IRLR 214), have provided that workers on sick leave continue to accrue holiday and, on termination of employment, are entitled to be paid in lieu of holiday that they were unable to take due to sickness absence, even if this relates to previous holiday years. To deal with the mismatch between the Working Time Regulations and the ECJ decisions, the Court of Appeal in NHS Leeds v Larner ([2012] IRLR 825) held that additional words could be read into the Working Time Regulations. Thus, Regulation 13(9) – which states that "leave to which a worker is entitled under this regulation may... only be taken in the leave year in respect of which it is due" – should be read as if it subsequently stated "save where the worker was unable or unwilling to take it because he was on sick leave and as a consequence did not exercise his right to annual leave". The United Kingdom, if outside the European Union, may well want to provide that holiday does not carry over into other holiday years, even if the employee has been prevented from taking it by sickness. However, the courts would then have to grapple with the Court of Appeal's decision in Larner.

Possible outcomes

In cases such as the above, the ensuing period of uncertainty could prove a real headache for businesses. Employers would be unable to predict with any confidence whether the courts would feel obliged to follow or depart from existing precedents. There might be several conflicting lower court decisions until a case came before the Court of Appeal or Supreme Court and a binding precedent was set.

Would any of this matter if the United Kingdom were to get rid of all legislation of EU origin? Once deleted from the statute books, the related court decisions would be of merely historical interest. It seems unlikely that all EU law will be consigned to the United Kingdom's legislative dustbin, for two main reasons.

First, both employers and employees consider much of the body of EU law to be a good thing. Most employers will not argue that they should be free to discriminate, or even that there should be no right to paid holiday. Even TUPE is not universally hated, as the recent consultation on improving it showed.

In reality, a handful of laws would probably be scrapped due to unpopularity (the Agency Workers Regulations being the most likely example) and some fairly minor modifications might be desirable for certain others. Removing entire laws would be much easier from a legal perspective, because it would not give rise to the uncertainties discussed above; but on a practical level, it would engender many other issues. Even if employers and employees wanted to discard all existing EU legislation, large numbers of commercial agreements have been based on it. Abruptly terminating TUPE, for example, would cause havoc with commercial outsourcing arrangements, which all contain provisions based on the assumption that TUPE will operate to transfer the employees if the agreement terminates (and have been priced accordingly).

An even more compelling reason to retain the bulk of EU legislation is that the United Kingdom would want to stay in a relationship with the European Union. It is the United Kingdom's biggest export market and, as such, the United Kingdom will want some sort of free trade agreement with it. Such an agreement between different countries is impossible without some legal convergence – the question simply becomes how much. Practically speaking, the options for the United Kingdom would be either to join the European Economic Area (EEA), like Norway, or to negotiate bilateral agreements with the European Union, like Switzerland.

EEA membership
The EEA is made up of the European Union and three of the European Free Trade Association (EFTA) member states: Norway, Iceland and Liechtenstein. As part of this arrangement, the EEA EFTA states are obliged to accept the majority of EU regulations without being part of the EU decision-making process or able to influence it. Norway, Iceland and Liechtenstein thus participate in most EU social and employment policy. For example, the EEA agreement incorporates many EU directives, including the Equal Treatment Directive, the Collective Redundancies Directive, the Part-Time Workers Directive, the Posted Workers Directive, the Parental Leave Directive, the European Works Councils Directive, the Acquired Rights Directive, the Working Time Directive and the Agency Workers Directive. Further, the influence of the ECJ would still be felt because the EFTA Court, which interprets the EEA rules, is obliged to follow ECJ case law. In Langeland v Norske Fabrikom ([1995/1996] EFTA Court Report 36), the EFTA Court ruled on the interpretation of the Acquired Rights Directive in respect of a Norwegian transfer of undertaking (overruling submissions made by the Norwegian government). In the same case, the EFTA court confirmed that it was obliged to follow the ECJ decision in Daddy's Dance Hall.

Bilateral agreements with European Union
The Swiss model does not offer much more hope to UK 'Eurosceptics'. Switzerland has more than 120 agreements with the European Union – many of which incorporate EU law – and Swiss legislation often follows EU law, even in sectors not covered by these agreements. In practice, Switzerland has data protection, TUPE, discrimination, collective redundancy and working time laws and the Swiss courts often follow ECJ case law.

Even the most fundamental goal of many Eurosceptics – to reduce EU immigration into the United Kingdom – may not be achievable under either of these types of arrangement. The free movement of persons is an integral part of the EEA agreement and Switzerland had also signed up to this principle. A recent Swiss referendum resulted in a vote to cap immigration (for further details please see "Switzerland approves initiative to stop mass immigration"), but this has put the entire basis of the bilateral agreements between Switzerland and the European Union at risk, and it is not yet clear what type of arrangement may emerge from the renegotiation.

Comment

It is doubtless true that, either as a part of the EEA or under bilateral agreements with the European Union, the United Kingdom would be able to negotiate some exemptions from EU employment law. However, the European Union would be deeply reluctant to permit 'social dumping' and allow the United Kingdom to undercut EU states through lower employment standards (eg, removing paid holiday or scrapping collective redundancy consultation) while remaining part of the free market. The EEA agreement and the agreements with Switzerland allow these countries to access the single market only in return for signing up to significant portions of European law. France and Germany are especially unlikely to allow the United Kingdom – as a key competitor and larger economy than the existing EFTA countries – to gain a competitive advantage through free access to the EU market with lower levels of employment regulation.

In short, even if the United Kingdom ends up leaving the European Union, it seems unlikely that UK employment law will be transformed in significant ways.

For further information on this topic please contact James Davies or Bethan Carney at Lewis Silkin by telephone (+44 20 7074 8000​), fax (+44 20 7864 1200) or email (james.davies@lewissilkin.com or bethan.carney@lewissilkin.com). The Lewis Silkin website can be accessed at www.lewissilkin.com.