The UK’s planned exit from the European Union is fast approaching, and a new deal over the terms of that exit faces an uncertain future in the UK parliament. Whatever happens, there will be talent implications for employers and HR leaders in the UK and Europe. Below is our broad look at the background of the process and terms of the new deal, and what the potential consequences could be — viewing several key issues through the lens of HR, including immigration, employment law, and the risks of a no-deal Brexit.
- The UK will formally exit the European Union on March 29, 2019, marking the deadline for UK and EU negotiators to reach a deal on an orderly Brexit transition. UK Prime Minister Theresa May has reached a draft agreement with the EU that would provide for a 21-month transition period, after which the UK would be able to control immigration from the EU, while backstop measures would allow the UK to remain in the EU customs union and enable a soft border between Northern Ireland and the Republic of Ireland if a final trade deal is not reached by December 2020. The transition period could be extended once, into 2022, if the UK and EU agree to do so.
- May’s deal would preserve the free movement of labor between the UK and other EU countries for the duration of the transition period, while any EU citizens living in the UK before the end of that period would have a right to stay, but would have to apply for residency documentation. Afterward, EU citizens would no longer have special privileges in immigrating to the UK. May has proposed a skills-based system for admitting immigrants after Brexit, but some business leaders and the National Health Service fear this system will leave them short-staffed in roles that would not qualify as high-skill under May’s scheme but for which native talent is in short supply.
- The UK government has pledged to uphold employment laws based on EU regulations after Brexit, but some of these laws may be partly amended to be more flexible for employers or to reduce their liabilities. Unions, however, fear that these protections may be weakened substantially.
- If there is no deal by the March 29 deadline, the UK will face a “messy” exit from the EU — likely causing severe economic disruptions. In the event of a no-deal Brexit, the UK would revert to trading with Europe under World Trade Organization guidelines, reintroducing customs and border controls. A no-deal Brexit can be expected to hurt the pound and cause instability in the British financial sector, which could spread to continental Europe and the rest of the world.
- In a no-deal scenario, the government has promised that EU citizens’ immigration status would not change before 2021, but it remains unclear what employers will have to do to ensure that their European employees are able to continue living and working in the UK. Many businesses have put contingency plans into action to protect against the consequences of a no-deal Brexit, but most HR managers in the UK are underprepared for this scenario. In any case, Brexit is expected to result in a labor supply shock and make it more challenging for UK employers to fill job vacancies.
On June 23, 2016, citizens of the UK narrowly voted to withdraw their country from the European Union. The “Brexit” referendum sent a shockwave through the British, European, and global economies, and prompted concern and uncertainty at many organizations in the UK and abroad.
Conservative Prime Minister Theresa May, who came to power shortly after the referendum in 2016, has worked to cut a deal with Brussels that preserves the UK’s strong trade ties with the EU, but has also stressed that no deal is better than a bad deal as far as her government is concerned. UK and EU negotiators deadlocked over several key points where London and Brussels are at cross-purposes, and uncertainty over whether and how these obstacles will be overcome has been a major source of anxiety for UK businesses over the past two years.
Chief among these issues are immigration and the free movement of people between the UK and the rest of the EU. May has stressed the need for the UK to “take back control” of its borders, even if it meant losing access to the EU’s single market. Free movement of people is one of the “four freedoms” underpinning that single market; the UK wants to preserve free movement of goods, services, and capital, while regaining the right to restrict immigration from the EU. For its part, Brussels has resisted creating new forms of special treatment for the UK that would make Brexit easier, partly to discourage other EU countries from pursuing exits of their own. Another, related area of disagreement is the border between the Republic of Ireland and Northern Ireland, which forms the UK’s only land border with another EU country. Many businesses on the island of Ireland have supply chains that cross that border every day and employees living on both sides of it; creating a hard border with customs and immigration controls would be costly and complicated for these organizations.
The deadline for reaching an agreement is March 29, 2019. If no agreement is reached, the UK will “crash out” of the EU and trade with the bloc under World Trade Organization guidelines. May announced on November 25 that her Brexit negotiators and their counterparts in Brussels had reached a draft agreement that would solve some of these challenges. The deal is not yet done, however; the UK Parliament is scheduled to vote on it on December 12, and many MPs have already come out opposing it, whether because they believe it is too hard or not hard enough, or because they believe the country should hold another referendum on the question before proceeding with Brexit.
The Terms of the Current Deal
The agreement Prime Minister Theresa May has drafted with EU negotiators does not contain permanent solutions to all of the points of contention mentioned above; in some instances, it simply buys more time for additional negotiations. It would, however, avert a “cliff edge” scenario where the UK’s status changes abruptly and dramatically at the end of March, resulting in a shock to the UK economy.
The documents approved by EU leaders include a legally binding, 585-page document detailing the terms of the agreement, along with a much shorter “Political Declaration” outlining ambitions for future talks over matters not yet settled. If this deal is implemented as written, very little will change on the formal exit date. It will instead mark the start of a 21-month transition period during which borders will remain open, the UK will remain bound by EU laws governing trade, and the European Court of Justice will continue to have jurisdiction over the application of those laws. The UK and EU can also agree to extend the transition period until 2022.
For HR leaders, the most important detail of the deal is how it handles immigration. EU citizens will retain the right to live and work in the UK until the end of the transition period in December 2020, while any EU citizens who move to the UK before that date will have the right to remain in the country and obtain permanent residency after five years, though the UK can require that these Europeans apply for a new residence document. The same set of rules will also apply to UK citizens living in other EU countries. The non-binding Political Declaration adds that the UK and EU will work toward arrangements for temporary entry for business travelers, visa-free travel for short-term visits, and coordinated efforts to curb illegal immigration. The UK government is already testing its settled status scheme for providing permanent residence to EU citizens already living in the country, and says the process has worked smoothly so far.
The agreement also contains “backstop” provisions that will be triggered if a permanent trade deal has not been agreed to by the end of the transition period. These backstops, designed primarily as a solution to the Irish border problem, will keep the UK in a “single customs territory” with the EU, effectively preserving its membership in the EU’s customs union. Northern Ireland would continue to follow most of the rules of the European single market, eliminating the need for border controls. (Irish and UK citizens already enjoy largely unrestricted travel between the two countries under a long-standing agreement, though this arrangement is not written in law.)
Financial firms in the City of London will lose the EU “passporting” arrangements that allow banks in any EU country to transact business throughout the Union with minimal additional authorization. May’s negotiating team had sought a special arrangement for the British financial sector, but unless a new trade deal stipulates otherwise, after the transition period ends, UK-based financial firms will then be governed by “equivalence,” which offers more limited access than passporting and can be withdrawn with 30 days’ notice.
What It Means for HR
If this deal is implemented, the good news for HR leaders in the UK is that nothing will change for the first 21 months after Brexit, giving them ample time to plan for the changes ahead and communicate these plans to their staff. After December 2020, their current European expatriate employees will be allowed to remain in the country, as will any new employees hired before the end of the transition period. Organizations with employees on both sides of the Irish border will not have to contend with a hard border.
On the downside, the deal leaves employers with a measure of uncertainty. Employers may find it difficult to hire European talent during the transition period as prospective candidates may not trust that they will actually be allowed to remain in the UK. The Irish border solution may not be as seamless as hoped, questions pertaining to business travel remain unresolved, and the situation could change in a future trade deal. In the finance sector, the eventual loss of passporting rights will likely encourage the ongoing relocation of talent from London to other European financial hubs as banks seek to ensure the seamless continuation of their European operations.
Deal or No Deal, What Happens Next?
The current deal remains subject to a vote in the UK Parliament, where it appears to face an uphill battle. If Parliament votes the deal down, May will have 21 days to decide how the government will proceed.
What would happen after then is unclear: The prime minister could try to renegotiate the deal, but EU leaders have indicated that they have little appetite for further concessions to the UK. She may also resign or face a leadership challenge within her party. MPs could form a cross-party coalition for a “softer” Brexit in which the UK remains in the single market, at least for the time being. Another possibility is a second referendum, which several opposition parties have said they want to see: The 2016 referendum won by a narrow margin and public attitudes toward Brexit have changed as its consequences have become clearer, though the country remains deeply divided on whether the UK should or should not leave the EU. Another referendum, however, would require an act of Parliament and would take months to prepare.
Though the government has downplayed the possibility, it is not unlikely that May will fail to produce an agreement that satisfies both UK lawmakers and EU leaders, as many of these parties’ demands are mutually exclusive. In the event that no deal is agreed to by the March deadline, the UK will “crash out” of the EU, ceasing overnight to have any special relationship with the bloc and reverting to World Trade Organization guidelines governing their trade ties.
The Potential Consequences of a No-Deal Brexit
Experts have warned that the economic consequences of a no-deal Brexit would be devastating. Shipments of goods from Europe, including food, medicine, and industrial components, would be held up at UK ports. Cross-Channel supply chains would be disrupted. Travelers and UK border guards would have to suddenly contend with new immigration rules, creating chaos at airports and further disrupting business. The UK banking sector would be thrown into disarray, and a currency crisis would be likely. An economic analysis published by the government in late November forecast that real wages would decline by as much as 10 percent on average throughout the country in a no-deal scenario (even with the deal, wages have been projected to decline slightly as the UK economy contracts).
Many British-based companies and multinationals that operate in the UK have activated contingency plans in anticipation of a no-deal Brexit. A survey by the Confederation of British Industry, published in October, found that around 40 percent of UK employers were ready to trigger such plans, which could involve cutting jobs. In June, the German-based manufacturers BMW and Airbus were among the first major companies to warn the UK government that they might need to shut down their UK operations entirely, costing the country tens of thousands of jobs, in the event of a no-deal Brexit or if Whitehall did not provide clarity on what the deal would entail. These companies and others, including pharmaceutical companies and food manufacturers, have also begun stockpiling materials in the UK in anticipation of supply chain disruptions. Nissan UK delayed pay talks with its employees until 2019, citing uncertainty about the post-Brexit situation.
JPMorgan Chase has said it may have to relocate 4,000 UK employees to other countries if there is no deal. The London Stock Exchange projects that a no-deal Brexit will lead to 232,000 job losses in the City by 2024. Shortly after May’s plan was announced in late November, London-based investment banks and platforms trading in European government debt began accelerating plans to move business to the continent, in order to mitigate the risk that a no-deal Brexit will make it impossible for them to conduct these trades from the UK. The financial sector is particularly concerned at the prospect of losing passporting rights overnight.
Even in the best-case scenario, with an orderly Brexit deal, London is likely to lose some financial sector jobs as firms hedge against the risk that UK banks will eventually lose those rights. Other European financial hubs, such as Frankfurt, Paris, and Dublin, have made overtures to international banks to convince them to relocate their European operations there after Brexit. Goldman Sachs began preparing to move some of its London bankers to Frankfurt, where it has leased eight floors in a new tower block, in March. In August, Barclays announced that it was shifting ownership of its French, German, and Spanish branches from its UK company to Barclays Bank Ireland.
A survey published by the British Chambers of Commerce in October found that around one in five UK firms expected to cut recruiting and reduce investment in their business in the event of no deal. Another survey of over 24,000 UK HR managers by the Federation of International Employers found that only 28 percent of companies felt prepared for a no-deal Brexit, while 22 percent said they were unprepared (only 6 percent considered themselves “highly prepared”).
In the event of a no-deal Brexit, the status of EU citizens in the UK would probably not change immediately, but would be uncertain in the long term.
The UK government has sought to reassure EU citizens in the UK that their status would not change before 2021 no matter what, as long as they took up residence in the UK prior to the March 29 exit date. Still, the government has sent mixed signals about what a no-deal Brexit would require of EU citizens residing in the UK and their employers, while the white papers it has issued outlining its plans for this scenario do not contain a formal policy plan for upholding these rights. European expatriates in the UK, fearing the eventual loss of their status, might voluntarily emigrate in large numbers.
A no-deal Brexit would also have consequences for UK businesses with employees in the EU. According to Fieldfisher attorneys James Medhurst and Gillian McKearney, the free movement of people between the UK and the EU would not necessarily end overnight in the no-deal scenario, but might continue until the UK works out a new immigration system and new arrangements with the bloc or with individual EU member states. Short-term business travel should also continue with minimal disruption, as the UK and EU countries would likely move quickly to establish visa-free travel agreements. However, UK businesses with employees in EU countries would have to contend with the loss of conveniences such as the European Health Insurance Card and the right of UK citizens to contribute to UK national insurance rather than to local social security schemes.
What It Means for HR
Given the uncertain consequences of a no-deal Brexit, employers need to be prepared for a variety of different economic scenarios and have contingency plans in place for workforce planning, recruiting, and internal mobility. A sudden change in immigration rules will shrink the available supply of labor and may disrupt business travel between the UK and other European countries, at least in the immediate aftermath of March 29. Organizations that have historically relied on European immigrants to fill labor shortages will need to reorient their recruiting strategies toward local labor markets, particularly for low-skilled roles. Employers will have a freer hand in hiring highly skilled talent from abroad (see below) but may have a harder time attracting these candidates.
A no-deal Brexit may lead to confusion and even panic among EU citizens in the UK. Employers should also have communication plans ready to assure these employees in the lead-up to the exit date and afterward that their status is not changing and that their jobs are secure. In addition, employers will need to communicate the broader impact of a no-deal Brexit to their workforce and bolster employees’ confidence that the organization is prepared to face this sudden change in the business environment.
Immigration and the UK Labor Market After Brexit
If the Current Deal Is Approved
If Prime Minister Theresa May’s Brexit deal survives Parliament and is implemented, Brexit is still expected to have immediate and long-term effects on the UK labor market as the country tightens its borders with the EU and transitions into a more restrictive immigration policy.
Tightening controls on immigration was a central principle of the Leave campaign, and Brexit will have a major impact on its policies regarding the hiring of international workers.
In September, the government’s Migration Advisory Committee (MAC) proposed a post-Brexit system that would no longer give preference to immigrants from EU or European Economic Area citizens, but would expand capacity for hiring highly skilled foreign talent through the Tier 2 skilled-worker visa program, which would now apply the same criteria to EU and EEA citizens as it does to those from other countries. The Tier 2 (General) visa is available only to skilled workers, has a minimum salary requirement of £30,000 for experienced workers and £20,800 for “new entrants” (recent graduates and workers under 26), and ties guest workers to a single employer. When demand for these visas exceeds availability—as it has every month this year—they are awarded according to a points-based system, with the first visas going toward roles where the UK suffers a national skills shortage, then based on salary from highest to lowest. The MAC’s recommendations included eliminating the cap on Tier 2 visas, expanding eligibility to medium-skilled roles, and abolishing the resident market test. The salary requirement would remain in place, however, in order to insure that the program put upward rather than downward pressure on UK wages.
May has embraced these recommendations, promising a system “built around the talents and skills a person has to offer” in which less-skilled workers from certain countries would no longer be able to “jump the queue” ahead of people with more valuable and needed skills. Existing exemptions from the Tier 2 visa cap will remain in place for doctors and nurses, addressing concerns about skills shortages in the National Health Service, which depends heavily on immigration to meet its needs. The likely upshot of the proposed system is that UK employers will have an easier time than they currently do hiring highly skilled individuals from other countries, but a harder time filling low-skill roles.
Employers and business associations have expressed concern that May’s proposed system would not address shortages in these lower-skill jobs; European immigrants currently make up a large segment of the UK workforce in industries like construction and hospitality, as well as support staff in the health care system who are not eligible for Tier 2 visas. Brexit proponents contend that these roles can be filled with UK citizens instead, but employers say they have difficulty finding local workers to do these jobs, particularly in the tightest labor market in over 40 years. Some businesses anticipate that these roles will take longer to fill and that many may not be filled at all, hindering growth.
To meet seasonal demand for low-skilled labor in the agricultural sector, which now depends heavily on migrant workers from EU countries, the government had suggested expanding the Youth Mobility Scheme and/or creating a new work-permit scheme. The latest plan, according to Cabinet documents leaked to the press at the end of November, would see the UK issue low-skilled migrants with 11-month visas “with restricted entitlements and rights” and allow EU migrants between the ages of 18 and 30 to live and work in the UK for two-year stints. These proposals have drawn criticism, however, that they will require the government to micromanage the labor market, that sponsorship of unskilled guest workers will be a burden on British businesses, and that guest workers may be more vulnerable to exploitation.
Attracting Foreign Talent
There is also the question of whether European workers will still be attracted to the UK labor market, and if so, would want to take part in more-limited visa schemes. After all, policy changes are not the only way Brexit will affect immigration; it is also changing the way Europeans think about living and working in the UK. Already, EU citizens have been leaving the UK or declining to move there, whether in anticipation of new immigration restrictions to come or in response to an environment in which they no longer feel welcome. The number of EU nationals working in the UK fell in the third quarter of 2018 by 132,000 to a total of 2.25 million: the fastest drop since the Office for National Statistics began collecting records of this figure in 1997. Polish citizens, who have emigrated to the UK in large numbers and make up its largest European immigrant community, expressed very low interest in moving abroad for work in a recent survey, and only a third of those who do want to emigrate named the UK as their preferred destination. Net migration from EU countries fell to a six-year low of 74,000 in the year to June 2018, according to the latest figures from the ONS. At the same time, however, the UK has been issuing more Tier 2 visas to non-EU immigrants this year, indicating that employers are looking beyond Europe to fill talent gaps.
The UK Labor Market
Dwindling numbers of European immigrant workers are contributing to a labor supply shock for UK employers, exacerbated by low unemployment and skills shortages in the domestic labor pool. In theLabour Market Outlook for Autumn 2018 from the CIPD and The Adecco Group, 44 per cent of employers said it had become “more difficult” to fill vacancies over the past year, while 34 per cent said retention pressures had increased in that time and 70 percent said at least some of their vacancies were proving hard to fill. Demographic changes are also shrinking the workforce, to the point that one member of the Bank of England’s monetary policy committee fears the country could experience zero workforce growth as soon as 2020 due to its aging population.
Other research from the Recruitment and Employment Confederation found that UK employers’ confidence in the economic outlook reached a low for the year in October. In that survey, 46 percent of employers who intended to hire permanent staff expressed concern over the availability of candidates for those roles, and a similar number of those planning to hire temporary help were worried about finding agency workers with the right skills. Many employers are counting on temporary hiring to help them fill skills gaps in the coming year, particularly in technology roles, but even these short-term role will likely be harder to fill in a tight and extremely competitive labor market. Our own research at Gartner finds that UK employees, observing these labor market conditions, are increasingly optimistic about their ability to find a new or better job; in our Global Talent Monitor report for the third quarter of 2018, 23 per cent of UK employees indicated a low intent to stay in their current role.
What It Means for HR
The perfect storm of these trends will challenge UK employers to hone their talent attraction, retention, and development strategies. That means offering employee value propositions focused on what the workforce wants most: for UK workers, that means work-life balance, location, and stability. Employers will also need to invest in upskilling their current staff to improve productivity and close skills gaps. Even with the best efforts of employers, however, the UK may not be able to meet its total labor needs in the coming decade in the context of demographic aging and a much tighter immigration regime.
If the Current Deal Is Approved
While some changes should be expected post-Brexit, many, if not most EU employment laws and regulations will likely be maintained in some form, as the UK workforce has grown accustomed to the protections and benefits they provide.
While Prime Minister Theresa May belongs to the traditionally pro-business and anti-regulation Conservative Party, her government has positioned itself as a champion of the UK’s working class and sought to assuage fears that Brexit would erode the legal protections UK employees currently enjoy.
The European Union (Withdrawal) Act 2018, which passed Parliament in June after a lengthy legislative process, provides for the conversion of some 20,000 directly-applicable EU laws and regulations into UK law, while allowing Parliament to change or rescind any European regulations it does not want to keep after Brexit. When the “repeal bill” was first published in 2017, the government said EU-derived laws guaranteeing certain employee rights would be retained.
- the Agency Workers Regulations, which require employers to treat agency staff identically to regular employees in terms of pay and work conditions;
- the Working Time Regulations, which guarantee employees’ rights to paid leave and breaks during the workday;
- the Transfer of Undertakings (Protection of Employment) Regulations, better known as TUPE, which protect workers’ rights if the business they work for is sold;
- the Equality Act 2010, bringing UK anti-discrimination law in line with EU standards; and
- the General Data Protection Regulation governing EU citizens’ digital privacy rights.
Some of these regulations have become part of British workplace norms and as such are unlikely to be repealed. In some cases, UK employment law goes above and beyond the EU’s mandates, such as the regulation requiring employers to give employees 28 days’ paid vacation time a year (EU standards only require four). Anti-discrimination protections, restrictions on working time, and other British policies that map onto the EU’s agenda are also unlikely to be repealed outright, though some rules may be amended to give employers greater flexibility. Richard Thomas, an employment lawyer and partner at Capital Law, explains that the government might make some changes, such as amending holiday pay calculations and repealing the maximum workweek under the Working Time Regulations, tweaking some terms and conditions under TUPE, and capping compensation for discrimination claims under the Equality Act.
Unions and labor rights activists are not taking the government at its word that it will maintain the rights British employees enjoy under EU law. The Trades Union Congress has come out against May’s Brexit deal, saying it does not provide “a long-term, binding guarantee that rights in the UK will keep pace with those across Europe” and expressing concern that a future prime minister who opposes these EU-derived employment laws could renege on the current government’s promise not to rescind them. The TUC’s general position on Brexit is that “Britain’s final status deal with the EU must include a level playing field for workers’ rights to stop unfair competition and ensure good employers are not undercut by the bad.” The Independent Workers’ Union of Great Britain, which represents migrant and gig economy workers, is backing calls for a second referendum on Brexit, saying the loss of EU employment protections would be “a carnival for profiteering companies and a curse for UK workers.”
Ultimately, what may do the most to limit Brexit’s impact on employment law is that employees there have grown accustomed to extensive legal protections and guaranteed benefits, and may resist any effort to take them away. From a political perspective, UK voters are not likely to support a government rolling back regulations that they value greatly and that have made an impression on British work culture.
What It Means for HR
As of now, there are no clear indications that any employment laws will change after Brexit. If the current government does make changes, they will likely remove restrictions on employers rather than imposing new rules. Employers may want to think twice, however, before taking advantage of relaxed government mandates, even if doing so would save businesses money or increase their flexibility in the immediate term. In a tight labor market that is bound to become even tighter after Brexit, employers will be competing to attract and retain talent and may not want to take actions that would dilute their employee value proposition.
For example, our research at Gartner has found that work-life balance is a top priority for UK workers currently looking to change jobs. If the government eventually allows employers to reduce holiday pay or demand more overtime, organizations that do so may risk damaging their employer brands—as well as their consumer brands, by way of negative media reports. With talent in short supply, labor market considerations will still encourage businesses to offer competitive work-life balance benefits regardless of the regulatory climate.
(This explainer was originally published following the referendum vote in 2016 and was last updated on December 5, 2018.)
This post is for informational purposes only and does not constitute legal advice or an opinion on the legal matters discussed within. Employers should consult their general counsel whenever they have questions pertaining to laws, regulations, or potential liabilities.