Now that the dust has settled on the June referendum on Britain’s membership in the EU, the effect the decision will have on Global Payroll in the UK is becoming clearer. One thing is certain: Any significant event such as Brexit will affect the market, and companies will begin to streamline by focusing on core capabilities and outsourcing non-key resources. Brexit will also undoubtedly impact other key factors we’ll explore in this blog. The first question is “when.”
Under Article 50 of the EU Treaty, it could take the UK two years or more to become totally autonomous. That means what is likely to be a massive event will happen in slow motion, giving companies time to adjust and plan. According to Helen Hargreaves, associate director of policy and research at the Chartered Institute of Payroll Professionals (CIPP), it’s “business as usual for payroll” until Brexit negotiations are finalized. Although some large international companies made reactive announcements and the market took a whack, it will undoubtedly take two plus years to disentangle the UK from Europe and realize the full impact.
However, the payroll profession is complex and continually subject to changing legislation. This will continue to be the case over the coming years and months, irrespective of the UK’s status within Europe. It won’t be an easy road, and payroll teams should prepare now, ensuring tight systems and procedures are in place, and payroll is legislatively compliant.
So what effects can UK organizations expect to see from Brexit?
1. Head offices will be impacted.
Expect to see shuffling in the head offices of big businesses, including the relocation of key offices as the UK becomes more open to emerging markets. This shift inevitably means more challenges for payroll departments. Non-EU businesses use the UK as a platform to penetrate EU markets. The UK is host to more business headquarters than Germany, the Netherlands, Switzerland, and France combined. Many of these head offices may move. The more businesses that remain in the UK, the steadier the pound will be. However, companies will need to ensure the payroll platforms they are planning to increase headcount on, either within the UK or the EU, are capable of handling the additional headcounts, future proofing their HCM and payroll solutions.
2. Service centers may also move.
Due to the potential VISA requirements of UK employees, UK companies could begin to hire key management roles within EU service centers, where traditionally they may have sat within the UK. Also, off-shoring to non-EU countries (reversing the current trend) may now look more attractive as the same VISA requirements could be in place, but the workforce costs are lower in India, China, and South America. However, there remain some advantages to having a UK-based service center.
Companies will be better placed to grow through global markets with strategies designed to achieve this. This will likely be accomplished through mergers, acquisitions, and reshaping their organizations. This in turn will lead to an increase in HCM and payroll platform review and upgrade, resulting in a greater need for skilled contractors.
3. Skill shortages must be addressed.
If EU workers are forced to leave the UK, skill shortages could impact overall payroll costs for businesses. This will encourage UK businesses to invest in skill development to increase the quality of the UK’s workforce. HR departments will have to consider development plans and investment in training to make up for the eventual deficit. However, current statements made by the government indicate the UK may also allow EU workers to stay to obtain favorable trade agreements.
The UK has already seen a trend towards contracting “on-demand” workers vs. hiring full-time employees. With Brexit, this trend is likely to continue. While good for contractors, full-time unemployment could rise, particularly amongst the younger generation.
4. Wage demands could increase.
Following Brexit, certain services may increase in price, affecting household income. This could drive a call for bigger wage increases to compensate for the rise in the cost of living.
5. Data management and security will need to be rethought.
One of the biggest challenges affecting payroll post Brexit will be data management. Many UK businesses have EU employees, and the challenge for payroll companies will be to reconcile EU legislation against UK legislation. Data security is held to standard by ISO 27001, but Brexit could potentially release the UK from the EU’s strict Data Protection directive.
Changes are sure to result in more complexity. The UK government could increase their Data Protection mandate, being the EU in all but name. Payroll will have to become more flexible and knowledgeable than ever about legislation.
6. Taxes likely won’t change.
Exiting the EU could free up the UK to potentially undercut the EU to restore a competitive edge. Reduced social regulation and taxation simplification to achieve this could be a reality as a direct result of leaving. But big changes are unlikely, as the UK never switched their currency to the Euro.
What can your organization and payroll team do now to prepare?
– Focus on core skills and outsource indirect costs
– Streamline headcount to be as efficient as possible
– Negotiate with payroll providers on cost
– Future proof payrolls (for large organizations moving into, as well as exiting, the UK)
– EU-based organizations should consider talent placement/availability based on travel restrictions, including payroll companies
– Upgrade HCM (talent management) leading to payroll upgrading
– Locally hire (non-UK) to bolster workforce without reliance on UK employees (global)
– Explore potential added complications of UK employees working in EU and vice versa (reciprocal tax agreements)