The Trade and Cooperation Agreement (TCA) signed by the UK and EU in December 2020 contains a number of provisions which may constrain the UK's scope to make changes to employment law. In practice, how significant could these constraints prove to be?
As part of the level playing field section (see textbox), the TCA contains provisions committing the UK and the EU to the maintenance of certain standards in relation to labour and social policy, including fundamental rights at work, fair working conditions and employment standards, and business restructuring. If one party believes that there are "significant divergences… impacting trade or investment between the Parties in a manner that changes the circumstances that have formed the basis for the conclusion of this agreement", it can seek to invoke the rebalancing mechanism with a view to adjusting the agreement in response to these changes.
The TCA contains a level playing field section with a rebalancing mechanism which is relatively unprecedented in trade agreements. This has been included because the UK's stated aim is to diverge from the EU, whereas most trade agreements tend to focus on areas of convergence. The rebalancing mechanism is intended to help manage this process of divergence by allowing the TCA to be adjusted in response to significant changes. It can be invoked in relation to areas of divergence covered by the provisions of the TCA on labour, social standards, environment and sustainable development.
The aggrieved party can seek a review of the whole agreement (but may only do so from 2025 onwards) or it can convene a panel of experts to consider the specific matter complained of. It can also take unilateral measures to remedy any alleged imbalance arising from a divergence in regulation. Such measures could, however, be challenged before a panel of arbitrators, where the party invoking them would need to show that (i) a significant imbalance had arisen; and (ii) its unilateral measures represented a proportionate response to that imbalance.
The key implication of this for future UK policy on employment matters is that the UK may well be somewhat constrained in how far it can diverge from EU regulation without risking the loss of benefits under the TCA (see text box below). There has been no indication from the Government as to what changes, if any, it may seek to make to employment law now that the Brexit transition period has ended. There were reports recently that the Government was planning a post-Brexit review of employment law, but the government has since said that this is not going ahead.
Although the TCA imposes some limits on the UK Government's scope to change employment law (particularly if it were minded to pursue a radical, deregulatory approach), it may be that in practice domestic political factors will prove to be a greater constraint – not least promises that have been made at various times since the EU referendum that Brexit will not lead to a significant dilution of employment rights or a "race to the bottom" in terms of regulation.
Whilst radical change seems unlikely, there is scope for more incremental changes to be made to employment law. These could occur through Government legislating to make minor changes – but they could also come through the courts, particularly now that the Court of Appeal has been given the power to diverge from retained EU case law (see this briefing).
We will provide an update on any further developments in the Government's plans for post-Brexit employment law.
In order to justify any rebalancing measures, the EU would have to establish that any alleged divergence was having a "material impact on trade and investment". A number of commentators have pointed out that in practice, this might be difficult to prove; for example, this paper from the UK Trade Policy Observatory highlights the difficulties experienced by the US in arguing that Guatemala had gained competitive advantage by failing to enforce its own labour laws (allegedly in breach of non-regression clauses in the relevant trade agreement). On the other hand, as noted above, the TCA allows a party to take rebalancing measures unilaterally. Although these could be challenged through arbitration, in the meantime, the rebalancing measures would be in place and could well be causing significant harm to businesses. The recent controversy over the European Commission's aborted attempt to rely on safeguard measures in the Northern Ireland Protocol over vaccine supplies highlights the temptation to invoke such powers – even though many might regard them as a "last resort".
For more information on the TCA generally, see our Business-friendly guide to the UK-EU Brexit trade deal.
