Employment, Pension and share incentive analysis

Now that the implementation period has ended, are there any particular areas of employment legislation which may be affected?

A significant portion of UK employment law is derived from and grounded in EU law. Pursuant to the European Union (Withdrawal) Act 2018 (2018 Act) in combination with the European Union (Withdrawal Agreement) Act (the WA Act) (together the Withdrawal Agreement), all EU employment legislation and therefore workers' rights which had effect on 31 December 2020 is adopted into UK law and so workers’ rights which existed prior to the end of the implementation period will continue to have effect in domestic law as retained EU law.

The main concern with regard to employment law was that there should be a level playing field with regard to labour and social standards. This would mean a reciprocal commitment from both parties not to reduce the level of protection for workers or fail to enforce employment rights in a manner that has an effect on trade. Part 2, Title XI Chapter 6 EU Trade and Cooperation Agreement (TCA) which has been implemented into UK law by the European Union (Future Relationship) Act 2020 sets out that the parties agree that they will not weaken or reduce, in a manner affecting trade or investment between the parties, its labour and social levels of protection below the levels in place at the end of the implementation period. This is in line with similar “non-regression” clauses in other free trade agreements.

One outstanding point covered the level of protection for worker’s rights going forward. In the TCA both parties will retain the reasonable discretion to make their own decisions on how they regulate rights going forward. This means that retained EU law will not have a special place on the UK’s statute books. Originally the WA Act included clauses protecting EU derived workers' rights. However, these provisions were removed from the final form of the WA Act. In the Queen's speech in December 2019, the Government announced its intention to introduce an Employment Bill including provisions protecting workers' rights. This Bill has yet to be implemented.

It is yet to be seen what changes will be made to workers’ rights going forward. Any changes are likely to be to legislation that the government considers imposes additional red tape on employers, such as those relating to working time (getting rid of the 48 hour limit on weekly working time and simplifying the calculation of holiday pay) or allowing agreed changes to terms and conditions of employment following a transfer under the Transfer of Undertaking Regulations. However this will have to be balanced against the difficulties of removing workers’ rights.

The UK Government has also introduced new immigration provisions following the end of free movement of EU nationals in the UK (see below).

What impact does the end of the implementation period have on the immigration of people within the EU?

The biggest impact on UK immigration is that the freedom of movement of EU citizens to the UK and UK citizens to the EU ended at 11pm on 31 December 2020. The impact on immigration of people is as follows:

• EU citizens in the UK - All EU nationals who had the right to enter the UK before the end of the implementation period can apply under the EU settlement scheme for settled status (where they have been resident in the UK for five years) or pre-settled status (where they have been resident for less than five years). Those who have pre-settled status can apply for this to be converted to settled status when they have been resident for five years. This allows those individuals to continue living and working in the UK after December 2020. From 1 January 2021, a new immigration system controls how EU nationals who do not have settled or pre-settled status and their family members visit, live and work in the UK. This is a new single immigration system, which is based on the worker's skills and not the country they come from so that EU citizens arriving from 2021 are subject to the same UK immigration controls as non-EU citizens. Any employer wishing to employ EU citizens will need to have a sponsor licence and pay the Immigration Skills Charge (£1,000 per worker per year). Where the worker is entering under the skilled worker route then, from January 2021 the job will need to be at a required skill level of RQF3 or above (equivalent to A level); this has been reduced from degree level under the current system. There will be an applicable English language requirement, as well as a relevant salary threshold (higher of £25,600 or typical rate for the job). Points may be 'traded' on specific characteristics if the salary threshold is not met (but must still be over £20,480). The rules are slightly different if the applicant is entering by way of an intra-company transfer.
  
  Concerns exist, particularly over whether employers will be able to have access to the requisite number of low-skilled workers, as pursuant to the current points based system, employers cannot sponsor low skilled workers.
• UK Citizens in the EU – UK nationals living and working in the EU will enjoy reciprocal rights in other states as outlined above for EU citizens in the UK. UK citizens living in one of the EU's other 27 countries may need to have applied for residence status to confirm they were already resident in the EU before 31 December 2020. They will, like EU citizens in the UK, have until 30 June 2021 to do this. From 1 January 2021, UK citizens will need to seek relevant local country guidance on visiting, living, working and studying in any particular EU27 country.

• The TCA does not affect these new immigration rules. However, provisions are made in relation to social security coordination which will ensure that individuals who move between the UK and the EU in the future will have their social security position in respect of certain important benefits protected.

What impact will the end of the implementation period have on the standing of CJEU rulings on employment matters?

All past judgments of the CJEU are given effect in UK law at the point of exit under the terms of the Withdrawal Agreement. Past decisions of the UK courts which have followed rulings of the CJEU, such as those relating to holiday pay and collective redundancy consultation, will remain binding on UK courts. The Supreme Court when sitting as a court of appeal will not be bound by any retained EU case law, but must apply the same test in determining whether to depart from case law as they would do in departing from existing Supreme Court decisions.

Provisions under the EU (WA) Act 2020 gave the Government power to allow other courts such as employment tribunals to depart from retained EU case law. The Government has however decided that this power should be limited to the Court of Appeal and equivalent in Northern Ireland and Scotland. The Employment Tribunals and Employment Appeal Tribunal will continue to be bound by the decisions of the CJEU. Therefore such matters as holiday pay, etc, where there is a substantial amount of case law from the CJEU is unlikely to change significantly, unless there is a change in the EU legislation or a decision of the Court of Appeal or above. In addition, future decisions of the ECJ will not be binding on the UK. Having said that, if the UK courts are interpreting EU-derived legislation which is retained, they are likely to be influenced by the CJEU's rulings.

What are the possible effects of Brexit on pensions, and in particular pensions equality law?

Much of UK pensions law is derived from EU Directives or CJEU decisions, particularly in relation to equality and final salary scheme funding. It remains broadly unchanged following the end of the implementation period and the coming into force of the TCA. It is not expected to change significantly in the short term.

For example, Section 62 of the Pensions Act 1995, which included an equal treatment rule in occupational pension schemes, and the provisions of the Equality Act 2010, which govern how schemes treat surviving civil partners and same sex spouses, remain in effect following December 31, 2020. These areas of pensions law are well-established and it seems unlikely that there is the political desire to make any changes in the immediate future.

However, there may be some changes and divergence from EU law over time. Theoretically the UK government could repeal some legislative requirements. In addition, any future decisions by the CJEU will not be binding on the UK courts (although the courts may have regard to such decisions if the decisions are “relevant”). The UK Supreme Court and Court of Appeal can also depart from pre-January 1, 2021 CJEU decisions, where they consider it appropriate to do so.

Any scheme trustees or employers hoping that Brexit would be a solution to GMP equalisation will be disappointed; the UK courts have already decided that pensions must be equalised for the effects of GMPs and Brexit does not change this.

There are some practical steps trustees and employers should be considering to ensure their schemes can continue to run smoothly. These include:

• considering the impact of Brexit and the TCA on employer covenant, funding support and the scheme’s investment strategy;
• liaising with scheme administrators to ensure overseas members can still be paid;
• being ready to respond to member questions about Brexit; and
• considering mechanisms for ensuring the continued free flow of data between the UK and EU (and EEA).

For more information see our blog post or contact the Norton Rose Fulbright pensions team.

How might Brexit affect cross-border schemes?

The legislation governing cross-border schemes ceased to apply at the end of the implementation period. Cross-border schemes should comply with guidance from the Pensions Regulator (“TPR”) which it plans to update further “in early 2021”. In particular:

• UK-based schemes need to check whether EEA-based employers can continue to pay contributions. This will depend on the rules of the relevant EEA member state.
• UK-based employers using a scheme based in the EEA need to check it complies with UK rules and that the host EEA member state allows them to continue paying contributions. Employers should also consider the tax implications of paying contributions into the scheme and, if it is used for auto-enrolment, whether that can continue.

TPR estimates that there are only about 40 schemes which operate cross-border between the UK and another member state. Trustees of such schemes will now need to keep monitoring updates from TPR and from the relevant authority in their scheme’s host EEA member state. TPR also suggests that any employers who are considering setting up new “cross-border” arrangements should wait for the UK government to clarify its policy on this.

As regards state pensions, the DWP has confirmed that (as required by the TCA) anyone who moves to live in the EU will have their UK state pension increased each year in line with the rate paid in the UK. This is regardless of when that person left the UK. Previously only someone who had moved before January 1, 2021 was going to be entitled to these increases. The DWP has also confirmed that social security contributions made in EU countries will count towards qualification for a UK state pension.

What does the Brexit vote mean for employee share incentives?

The UK Government is unlikely to repeal EU measures which impact share plans e.g. age discrimination legislation. The UK will also be likely to retain rules limiting the amount and form of variable remuneration paid to senior employees in financial institutions though some of the detail might change. Brexit is unlikely to have a significant impact, particularly in light of the introduction of a more relaxed securities law regime under the EU Prospectus Regulation (2017/1129).

How might Brexit affect executive remuneration?

Remuneration committees will need to exercise careful judgement when approving annual bonuses and the levels at which a Long Term Incentive Plan will vest to ensure that any market volatility does not lead to outcomes that will be considered inappropriate by shareholders.

In addition, uncertainty/volatility can potentially make performance target setting more challenging. Remuneration committees will need to be very careful not to be seen to dilute future performance targets in a way that unduly benefits management and/or has the potential to provide windfall gains in the event that markets perform strongly. If companies do want to adjust performance targets for future awards then this is also something which will require shareholder approval if the proposed new targets are not within the scope of the existing directors' remuneration policy.