Caroline Harwood, director, incentives at independent UK law firm Burges Salmon LLP, examines the impact a departure from the EU might have on employee benefits

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At the time of writing, it seems that voters are adrift on a sea of public uncertainty with the majority of businesses supporting the Remain campaign, while polls are fluctuating widely showing an increase in the numbers of voters supporting Brexit one day and a surge in Remain supporters the next.

With this background, and with the vote now just days away, what will Brexit mean for remuneration policies? Does the EU currently have any impact on how companies pay their executives and employees and if so, what would change if we vote out on 23 June 2016?

Transitioning out

The first point is that nothing will change immediately.  The UK must give two years’ notice of its exit so there will be a transitional period during which future relationships with the EU are negotiated. 

Where EU law has been incorporated into primary UK legislation, there will be no change.  However, where under the terms of the European Communities Act 1972 EU law takes the form of secondary legislation (such as the Transfer of Undertakings (Protection of Employment) Regulations or “TUPE”), these would fall away unless deliberately retained. 

Will executives be the cats that get the cream?

London is the largest financial centre in the UK and therefore was a centre of attention for the scrutiny of executive pay that followed the financial crash in 2008.  To address this, the EU regulators focussed on ensuring that there were no “rewards for failure' in the financial sector by the introduction of:

  • “malus” (adjustment of an award of variable remuneration before it has vested) and “clawback” (recovery of variable pay such as a bonus after payment) provisions if performance targets were not hit;
  • capping of bonuses for senior staff in financial institutions; and
  • deferring compensation with a link to longer-term performance.

The requirement for malus and clawback to apply to executive variable pay, such as bonuses and share plans, has been incorporated into the UK Corporate Governance Code, which applies to all UK listed companies so we are unlikely to see any reversal of these provisions.  However the Financial Conduct Authority sought to disapply the cap on bonuses and unsuccessfully challenged the provisions through the European Court of Justice (“ECJ”).  We may therefore see a change in these provisions going forwards if the UK votes to leave.

The other area of executive remuneration under consideration by the EU is disclosure of directors' remuneration.  Under the European Shareholder Rights Directive, we are expecting new EU rules requiring shareholders to be able to vote under new 'say on pay' provisions.  However UK law already contains similar provisions so change is unlikely.

Therefore, the direct impact of Brexit on directors' pay is likely to be relatively minor.

What about the workforce?

Much of the legislation that employees rely upon for protection, such as the right to equal pay, statutory redundancy pay, and the national minimum wage as well as protection against discrimination on the basis of sex, race, nationality etc., are either in UK primary legislation or from UK legislation, which pre-dated later EU directives relating to the same issues, and therefore unlikely to be affected by a Brexit.

However, as mentioned, other provisions that might affect remuneration such as TUPE, the majority of working time limits and rights to minimum paid holiday do derive solely from EU directives so in theory could fall away.  One of the key pieces of employment legislation at threat is the Agency Workers Regulations since these were EU driven: generally unhelpful to the UK as the heaviest user of agency workers in the EU. In practice it is unlikely that a government would want to take the brave step of wholesale change and it is more likely that we would see a gradual change if any.

Finally in terms of the impact on the wider workforce, there are a number of issues to be considered including:

  • International businesses could no longer rely on the exemptions available to EU members under the terms of the Prospectus Directive and so the extension of share plans to UK employees would become administratively more onerous with the risk of UK-based employees being excluded from some international share-based incentives.
  • The existence of the very popular Enterprise Management Incentives (EMI) is dependent upon the state aid provided under the Treaty on the Functioning of the EU.  This is because EMI plans provide tax relief (treated as “aid” for these purposes) to small and medium sized enterprises.  Any change to EMI proposed by the UK Government must be first approved by the EC and current approval expires in April 2018.  Brexit would mean greater flexibility for the way such plans are structured by UK governments going forwards.
  • EU directives and ECJ decisions have shaped much of the UK pensions law. Brexit could therefore result in greater flexibility going forwards, although it is unlikely that there would be significant change in the short term.

So while there might be an erosion over time of certain protections, many of these are now enshrined in UK law and good corporate governance while, at the same time, increased flexibility in structuring certain benefits and incentives mean that Brexit would not be entirely bad news for workplace pay and benefits.

Finally, the impact on certain sectors such as the financial sector and those which depend on trade within EU could mean that Brexit would result in a movement of jobs from the UK.  Paris has already said that it is lined up to pick up that business as well as being determined to celebrate a home nation success in the 2016 Euros.

Caroline Harwood is director, incentives at independent UK law firm Burges Salmon LLP