The social security implications of a no-deal Brexit

As the spectre of a no-deal Brexit looms, this note explains the social security implications for employers and employees, and the actions businesses should take now.

Why is social security a fundamental issue in Brexit?

The promotion of social welfare is a fundamental aim of the European Union, enshrined in Article 3 of the Treaty of Lisbon. It states that the Union will work to achieve “a highly competitive social market economy… and social progress”, “social justice and protection”, and “economic, social and territorial cohesion”.

A harmonised social security agreement structure is a cornerstone of this intention, and EU Regulations govern the treatment for individuals who live and work across borders, something that is increasingly common in the modern workforce. From a UK cross-border perspective, Brexit slices right through these objectives.

What are the current rules, and how do they apply today?

The EU social security rules (Regulation 883/2004/EC) set out the framework for the treatment of workers within the EU and EEA.

The basic overarching principle is that an individual is only subject to social security in one member state (Article 11).

Ordinarily that member state is the location in which the individual is working, but there are exceptions to this, where an individual is either:

a) employed in one member state, but assigned to work in another (Articles 12, 16); or
b) working across two or more member states (Article 13).

In addition to these scenarios, there may be other working arrangements where exceptions apply (e.g. more than one employment, self-employment, etc.), but the principle set out in Article 11, that an individual is only subject to social security in one member state, is always adhered to.

Under the Regulation, an individual (or their employer) should obtain an A1 certificate of continuing liability, to evidence the location in which social security is payable.1

What happens if there is a deal?

The likelihood of a smooth transition has fluctuated over recent weeks, but assuming some sort of deal is struck there is higher chance of securing a transition period and ultimately prolonging the status quo.

A deal with the EU is likely to include provisions which allow the UK to continue to operate within the framework of the EU social security regulation.

What happens if the UK leaves the EU without a deal?

The European Union (Withdrawal) Act (2018) states that all directly applicable EU law in place immediately before "exit day", forms part of domestic law on and after that point. The EU social security regulations (Regulation 883/2004/EC) fall within that category.

For the rules to be enforceable for individuals other than those being seconded to the UK, they require reciprocation by the rest of the EU and EEA. Given the uncertainty surrounding the Withdrawal Agreement, it is not surprising that only Spain and Belgium have mirrored this approach.

There have been some indications that the UK and EU member state governments would not seek to change the social security landscape drastically (not least because the regulations in place are generally equitable and practical to administer). However there is no guarantee that the status quo will continue, especially if there is a breakdown in relationship between the UK and the EU.

So what might it look like?

Scenario 1 – Existing bilateral social security agreements (that predate the UK’s membership of the EU)

The UK has a set of existing social security agreements, which pre-date their entry in to the then European Community in 1973. These agreements generally set out conditions to determine the location in which social security is payable.

Many of these agreements are over 50 years old, and their provisions reflect a different time. The UK-France Social Security Agreement for example (ratified in 1970) allows an individual to remain in his home social security scheme for up to six months (compared to five years plus under current EU regulations), after which the ‘pay where you work’ principle applies. The agreement applies to UK or French nationals only, and does not have provisions for individuals who work in multiple jurisdictions.

Other agreements include similarly limiting provisions and there are numerous jurisdictions within the EU27 that did not exist before the UK joined the Union in 1973.
HMRC’s view (that is also echoed by the social security authorities in other member states) is that it would not be appropriate (or indeed possible in many cases) to rely on these agreements without significant changes (which have not been publically discussed in Brexit negotiations to date).

Scenario 2 – New bilateral social security agreements

The Operation Yellowhammer leak (Government documents showing preparation for a no-deal scenario) confirmed that “No bilateral deals have been concluded with individual member states, with the exception of the reciprocal agreement on social security co-ordination with the Republic of Ireland”.
The UK/Ireland social security agreement was drafted in February 2019, and transposes the social security rules set out in the EU Regulations.  This bodes well as a blueprint for agreements with other jurisdictions, but no other jurisdictions have indicated that they will follow suit.

Scenario 3 – Default to domestic rules

Where there is no agreement in place the domestic rules of each jurisdiction would apply. This can give rise to the worst-case scenario, where social security is payable on the same income in two jurisdictions.  UK domestic rules determine ongoing liability for 52 weeks for outbound individuals based on their prior National Insurance position, employment status, and ties to the UK.

Clearly this outcome is least favourable for both employers and employees. While the UK employer social security is applied at a flat rate of 13.8%, in countries like France there can be a marginal rate in excess of 40%. Alongside the economic impact, an individual could end up making payments to one or multiple other social security schemes, deriving no benefits (e.g. accrual of pension entitlement), where the ability to remain within the scope of the ‘home’ social security scheme is not available.

What should businesses do now?

Employers should consider taking the following steps to prepare for a possible no-deal scenario:

  1. Review the current cross-border employee population – consider volumes, key locations, the level of seniority and remuneration – this will allow you to understand and quantify the risk.
  2. Ensure the business understands their social security and benefits policy for business travellers and assignees, and what the implications might be (benefits such as pension protection, or healthcare entitlement may be affected) – having this readily available will allow you to respond quickly in the face of any announcements.
  3. Prepare employee communications or reference materials for employees, so they are aware of how they may be affected.
  4. Budget for additional costs in the event dual liabilities arise, either as a result of additional social security liabilities or compensating employees for additional costs they suffer.
  5. Prepare for additional reporting requirements in EU member states.

1 Generally the A1 should be obtained by an employer, via an application submitted to the social security authorities of the jurisdiction in which the individual holds their strongest social and economic ties.