UK Votes to Leave the European Union: What Does This Mean for U.S. Companies With European Subsidiaries?

The people of the United Kingdom have spoken on the issue of whether the United Kingdom should leave or remain in the European Union (EU), and by a narrow margin have decided to leave. In fact, by region, the voters of Scotland and Northern Ireland and a large majority in the country’s economic powerhouse, London, (and most major employers and financial organizations), clearly wished to remain in the EU but have been outvoted in the referendum by parts of England which have not prospered in recent years, and which perhaps never recovered from the 2008 recession. Of the total vote, 51.9 percent voted to leave the EU and 48.1 percent voted to remain. Turnout was high at 72 percent of 45 million registered voters in a population of 65 million people.

What Next?

This is the question on everyone’s lips and to which there is no clear answer, triggering uncertainty and turmoil on the financial markets. This morning the British pound has fallen 16 cents against the U.S. dollar and the index of the top 100 major companies of the London Stock Exchange was down 8.5 percent on opening.

There is a mechanism for exiting the EU under Article 50 of the Treaty of the European Union. It begins with a notification by the member state that it wishes to leave. This is not automatic, and the timing of this is the immediate concern of the UK government. Prime Minister David Cameron has announced that he will step down after a short period in which he hopes to calm the markets and Parliament. Cameron has said that, it is for the new Prime Minister to begin the negotiation to withdraw from the EU once this replacement has been selected by the Conservative Party to lead the government by October of 2016. Once notification has been given of withdrawal, the European Treaties will cease to apply to the UK two years later.

The Consequences for U.S. Companies

What does all this mean for U.S. companies with employees in the UK? As we previously discussed, although there are areas where changes might be made, wholesale reform of UK employment law, even where those laws derived originally from EU directives, is not expected. There would be huge resistance from trade unions and opposition parties if workers’ rights were now seen to be significantly reduced. Likewise, the comments by some “Brexiteers” that they did not wish to be tied up in “red tape” by the upcoming European General Data Protection Regulation ignore the reality, felt all too keenly by U.S. companies after the demise of the Safe Harbor Framework, that some mechanism for transfer of EU citizens’ data has to be found if trade with the EU—which is so reliant now on data transfer—is to continue. Perhaps the UK may be able to find its own mechanism for transatlantic data transfers between the UK and U.S. more quickly than the stalled EU-US Privacy Shield? There will also clearly be changes required in immigration law for citizens of other EU  countries working in the UK.

However to pretend that the only significant challenges for U.S. employers with UK interests  would be  possible minor changes to employment or data privacy laws would be ostrich-like in its outlook. The much bigger issue must be what will this mean for the UK economy, the economy in the rest of the European Union, and the future of the European Union itself, where rumblings have already begun of demands for similar polls to be held. The UK is currently the second largest financial contributor to the EU and its withdrawal from the Union will have very significant consequences for the future of Europe as a whole in many ways both known and, as yet, unknown. Ogletree Deakins’ London office will continue to keep you informed as the consequences of this major political event become clearer.