Post-Brexit employment law: evolution, not revolution?

In the aftermath of the Brexit referendum, the UK Government made a broad commitment not to reduce workers' rights – even though many supporters of Brexit often cited aspects of EU-derived employment law as prime examples of "unnecessary EU red tape". So far, we have not seen much change, but the Government is now consulting on post-Brexit employment law reforms relating to statutory holiday and business transfers. In this briefing we take a look at what those changes mean for employers, and whether any other improvements could be made to the UK's post-Brexit employment law framework.

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How did we get here?

Many UK employment laws derive from EU law, including regulations covering holiday and working time, agency workers, equal treatment of part-time workers and fixed-term employees, and employer obligations on the transfer of a business or outsourcing (TUPE). The original intention was that under the Retained EU Law (Revocation and Reform) Bill) these laws would disappear at the end of 2023 in a bonfire of EU "red tape" unless the Government decided to preserve them (with or without amendment). Now this Bill will only apply to specified laws, and the employment laws currently in the list are very limited (relating to workers from the EU and tanker driver hours).

The Government has announced that it is proposing to make changes in relation to holiday and TUPE but does not plan to make any changes to other EU-derived employment laws. We explore what the holiday and TUPE changes will mean for employers, and further improvements we would suggest in these areas.

Proposed changes to holiday entitlement

Under the Working Time Regulations 1998 (WTR), all workers are entitled to a total of 5.6 weeks' holiday per year (which is 28 days for a worker who works 5 days a week). This is made up of 4 weeks' holiday derived from the EU Working Time Directive, and an additional 1.6 weeks' holiday introduced by the UK Government in 2007 (effectively "gold plating" the EU law).

The WTR distinguishes between these two separate entitlements. Notably the 4 weeks' EU derived holiday must be used in the holiday year in which it is due (with some exceptions where the employee is unable to take it due to illness or family leave). In contrast, the 1.6 weeks' UK entitlement can be carried over into the following year. Also, the case law on including overtime and other regular payments in holiday pay applies only to the 4 weeks' EU holiday and not to the additional 1.6 weeks' UK holiday (which can be paid at basic rate only).

The Government is proposing to amalgamate the 4 weeks' EU holiday and the 1.6 weeks' UK holiday into a single 5.6-week entitlement. Although the carry over rules would remain the same as they are now, the Government is consulting on whether to amend the WTR to provide that the full 5.6 weeks' holiday entitlement can be paid at basic rate, with no need to include overtime or any other regular payments (as is currently required under EU case law for the 4 weeks of statutory holiday). Many employers have changed their systems to include overtime in holiday pay (whether for 4 weeks' holiday or the full 5.6 weeks' entitlement). If so, it may be challenging from an employee relations perspective to change the payments as this would leave employees worse off. It seems likely that most employers will continue with their current practices in relation to holiday pay.

Particular challenges have arisen for some employers around calculating holiday entitlement for irregular workers (e.g. casual workers) and dealing with holiday for employees on long term sickness. The Government is proposing changes to address the first of these issues (see "Making it easier to calculate holiday" below).

Making it easier to calculate holiday: irregular hours workers

Where an individual's working hours differ from week to week, as they may for a casual worker, it is difficult for the employer to assess what 5.6 weeks' holiday would be. The WTR do not provide any mechanism for calculating holiday for workers with irregular hours. In practice most employers would carry out an averaging exercise, but this is administratively burdensome and is little help at the beginning of the holiday year when the employer will not know how many hours might be worked over the rest of the year. Fortunately, the Government is already separately consulting on calculation of holiday for irregular hours workers, and it is to be hoped that the WTR will be amended to cater for this in a straightforward way. Also, as part of the recently published consultation on post-Brexit changes, the Government is proposing to permit employers to pay "rolled-up holiday pay", which is currently unlawful under EU case law. If employers could pay "rolled-up holiday pay" then they would not need to calculate holiday entitlement for irregular hours workers, but instead would pay an additional 12.07% pay, to reflect holiday pay. This will be helpful for employers, as rolled up holiday pay is easier to administer than other mechanisms for ensuring that casual workers benefit from statutory holidays.

Other changes the Government could consider: holiday and long term sickness

As noted above, another aspect of holiday which has caused difficulty for employers relates to long term sickness. This issue is not covered by either of the current holiday consultations, and the Government has not given any indication that it is considering this. However, if it were looking to make further changes to the detail of the UK's post-Brexit employment law framework, it would in our view be worth exploring. The issue is as follows:

Employees who are on long-term sick leave are entitled to take holiday during their sick leave, if they wish, but the employer cannot require them to take holiday. If they choose not to take holiday during sick leave, then they can carry over their untaken holiday to future years (see above) and take this when they return (or be paid for it if employment is terminated). It would be helpful for employers if they were able to require employees to take holiday at particular points during long term sickness absence (for example at the end of the holiday year), to avoid accruing an uncertain future liability.

It is worth noting that there is one other post-Brexit change proposed to the WTR, around record keeping. This is to confirm that employers do not need to keep a record of daily working hours for all staff (as required by the Working Time Directive according to an ECJ case). However, there is no suggestion that there will be any change to the 48-hour limit on the working week under the WTR, or any of the other rules around working hours.

Proposed changes to business transfers/outsourcing

TUPE applies where a business is transferred (on an asset sale) and also on an outsourcing or insourcing of services (or change of service provider). Under TUPE, the employees working in the business or service which is transferred, or outsourced/insourced, automatically become employed by the buyer of the business, or the new supplier of the service, on their existing terms and conditions. Both the old and new employer have to provide information to their employees about the transfer and consult them about any measures they plan to take in connection with the transfer.

There are two areas in which TUPE transfers could be made easier in practice, relating to employee information and consultation and harmonising employment terms. The Government has announced that it will be making certain post Brexit changes in respect of employee information and consultation (see below) but there is no indication it intends to make any changes in respect of harmonising terms.

Proposed TUPE changes: informing and consulting employees

TUPE requires employers to inform and consult employees through trade union representatives or (where the employer does not recognise a trade union) through elected employee representatives. This is currently the case regardless of the number of employees involved. So if, for example, only five employees are transferring under TUPE, the employer still needs to arrange for employee representatives to be elected (if there is no trade union). The Government is proposing that employers will be able to consult employees directly where either the employer has fewer than 50 employees or where fewer than ten employees are affected by the TUPE transfer. These changes would be very helpful to employers, giving them more flexibility about how to consult employees in smaller businesses or transfers.

Other TUPE changes the Government could consider: changing employment terms

As noted above, another aspect of TUPE which has caused difficulty for employers relates to harmonising employment terms. This issue is not covered by the current TUPE consultation and the Government has not given any indication that it is considering this. However, if it were looking to make further changes to the detail of TUPE (as it is now free to do following Brexit), then harmonisation of terms would in our view be worth exploring. The issue is as follows:

Employers will frequently want to harmonise employees' terms post-acquisition, for various reasons including employee relations and simplifying administration. However, any change in terms by reason of the TUPE transfer will be void, even if the employee agrees to the change. An exception applies for certain changes (for economic, technical or organisational reasons) but only if the changes involve a change in employee headcount or roles, which harmonisation rarely does. If employers had greater scope to agree changes post TUPE transfer, including changing terms solely for harmonisation, then this would be highly beneficial for businesses involved in acquisitions and service provision changes.

Evolution, not revolution

It is unsurprising that there will not be any major changes to EU-derived employment law, not least for political reasons but also because this could impact the level playing field required to be maintained under the Trade and Co-operation Agreement (see sections 4 and 13 of this briefing). However, the smaller scale practical changes proposed would be to the benefit of employers.

Although in some areas divergence from the EU position can result in increased costs for some businesses (owing to the need to comply with 2 sets of differing rules), this is less of a concern in the employment sphere because there remains significant variation between national employment laws, including within the EU; as a result, employers typically need to seek local advice and cannot normally assume that a "one size fits all" approach will work across each country in which they employ staff.

That said, even within the constraints imposed by EU membership, the UK's employment law framework was already at the more liberal end of the spectrum, compared with those of most other EU Member States. This is a further reason why the scope for very significant "employer-friendly" reform in the wake of the UK's departure from the EU is limited.

What about the changes to post-termination non-competes?

The Government has also announced proposals to limit post-termination non-compete restrictions to 3 months in employment and worker contracts. This could be seen as a more radical change. However, two points should be borne in mind when comparing these proposals against the changes outlined above:

Firstly, views may differ on how far it is an "employer-friendly" measure; some employers may not welcome the change.
Secondly, EU employment law did not specifically regulate this area and the UK would have been free to pursue this reform as an EU member state, had it wished to do so.

For more discussion of these proposals, see Section 3 of our Employment Update for May 2023.

The bigger picture

Taken in isolation, incremental improvements – such as the changes to employment law outlined above – won't normally have a material impact on a business' "bottom line". However, they can help to bolster the UK's reputation as a business-friendly environment and, taken together with other, similar changes across different areas of law, they have the potential to give the UK an edge over other countries as an attractive place for businesses to invest. For this strategy to work, though, Government needs to identify opportunities for small improvements across a wide range of areas and then push through reform. This is typically somewhat unglamorous work, unlikely to garner much in the way of headlines – but in our view it is probably one of the more productive areas that the Government could explore as a way of delivering a meaningful "Brexit dividend" for business.

The Retained EU Law (Revocation and Reform) Bill may provide an opportunity to focus more on this area, as it will (if enacted) make it easier for the Government to change retained EU law. However, as the two examples above illustrate, wholesale removal of regulation is not usually what is required; it is more a question of making changes to technical detail to produce marginal gains, whose cumulative impact (it is hoped) will be to give the UK a decisive advantage.

Spotlight on better regulation

This article is part of a series on regulatory reform and better regulation across a range of different sectors, entitled 'Spotlight on Better Regulation'. You can also use our 'Regulatory reform' portal to check for the latest updates on changes to regulation across all areas on which we advise.

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