Transcending borders: Employee mobility issues for multinational employers

What you need to know

Where an organisation wishes to engage or move personnel overseas, the most common structures include:

• Using an employer of record (EoR)
• Having the employee work remotely under the home country employment contract
• Engaging personnel under an alternative working arrangement, e.g. as a contractor
• Seconding personnel to a local entity and
• Putting an employee on a leave of absence or the home country employment ceasing to operate and employing them with the local entity.

Each of these options involves different legal and cost considerations.

The availability of EoR arrangements varies significantly by jurisdiction, often turning on the local rules governing the supply of labour, agency licensing and worker classification.

What you need to do

Where an organisation is looking to engage or move personnel overseas, it needs to:

• Map the intended engagement structure against the laws of both the home and proposed overseas jurisdictions, including tax, employment, immigration, social security, superannuation, and work health and safety laws, to determine costs and limitations before onboarding or relocating talent; and
• If using an EoR, confirm the structure is legal in the relevant jurisdiction and seek specific advice about for example, protecting intellectual property and confidential information, and enforcing post-employment restrictions.

Multinational employers want to work in a world without borders but are often faced with challenging HR hurdles when they are setting up an overseas presence or moving talent around the world; local employment laws, immigration, income tax, superannuation and social security issues (to name a few). This article focuses on the most common structures that can be adopted to engage or move staff to an overseas jurisdiction.

1. Using an employer of record (EoR)

The booming EoR market has been fuelled by the recent demand for more agile global working arrangements. Organisations have been increasingly using EoRs where they want to retain key talent who are relocating overseas, or they are onboarding talent in a new market.

An EoR is a third-party entity that acts as the legal employer of an organisation's staff in a foreign jurisdiction.

A primary driver for using an EoR is that the organisation does not have to set up a subsidiary or branch, and so can avoid the associated administration costs and processes. Using an EoR structure is particularly appealing where individuals may only be needed in the jurisdiction on a short-term basis, such as for a bespoke project, and/or there may only be a small number of individuals involved or where speed is of the essence.

Key risks in using an EoR

Using an EoR may present some key risks for an organisation:

• Intellectual property: In most jurisdictions, intellectual property created by an employee during their employment belongs to the employer. Using an EoR structure means that the EoR is the employer. Where intellectual property is important, robust back-to-back arrangements must be put in place in the employment contract between the EoR and the individual, and in the commercial contract between the EoR and the end client, so that intellectual property rights clearly flow from the worker to the end client.
• Post-employment restrictions: Non-competition and non-solicitation restrictions to protect the end client's position are also tricky as a result of the employment relationship sitting with the EoR. Particular consideration needs to be given when describing the business interests the restraints are intended to protect and how the restrictions will be enforced. For example, the business of the EoR is not often what needs protecting and simply extending the ambit of the post-termination restraint to reference the end client is unlikely to be sufficient. Additionally, in Germany, post-employment non-competition covenants are only enforceable if the employer agrees to pay compensation (Karenzentschädigung) of at least 50% of the employee’s last remuneration for the duration of the restriction.
• Confidential information: Similarly care needs to be taken to protect confidential information the worker may develop or have access to. Often this information will belong to the end client not the EoR so it is sensible to draft a separate confidentiality agreement between the end client and the individual and not merely rely on the EoR's standard language.
• Choice of law and forum issues for employees of US employers: For US-based employers, many US courts will be reluctant to apply foreign law to claims brought by a US-worker, even if those claims arose overseas. This is especially likely if the employee returns to the United States to commence legal action. Similarly, US courts may not be inclined to honour forum selection clauses that require a US worker now domiciled in the US to sue in a foreign country.
• Labour leasing / temporary agency work risk in Germany and in Spain : With the temporary agency work legislation, there is a significant risk that an EoR arrangement may be re-characterised as unlawful temporary agency work (Arbeitnehmerüberlassung) or an unlawful assignment of employees (cesión illegal de trabajadores) where the end client in practice directs and controls the worker’s activities. This can result in the employment relationship being deemed to exist directly between the worker and the end client by operation of law, significant administrative fines, and joint and several liability for social security contributions. The key question is always who in fact exercises ‘employer-like’ direction over the individual – irrespective of how the arrangement is labelled contractually.

Where is it lawful to use an EoR?

It is important to check whether it is lawful to engage workers through an EoR in the relevant jurisdiction. The position varies significantly from jurisdiction to jurisdiction and often turns on local rules. A snapshot of the position in some key jurisdictions is set out below:

2. Working remotely under the home country contract of employment

Rather than engaging an EoR, an overseas employer may want to continue employing an individual on their existing employment contract whilst they work in a different jurisdiction. Where an employee comes to work in a new jurisdiction under a home employment contract:

• there will be legal compliance issues for the employer, such as insurances including workers' compensation, immigration, work health and safety duties, and social security checks;
• the arrangement may give rise to tax and licensing issues for both the employee and the employer depending on the duration of the remote work;
• the employer might be exposed to legal claims in the remote jurisdiction, if the employee is living and working there;
• the overseas employer will need to engage a local payrolling organisation to ensure compliance and appropriate tax deductions are made;
• consideration should also be given to the risk of broader corporate tax issues such as permanent establishment risk which are often more material than the employment related issues; and
• the employer should check that they can still provide the entitlements under the home country employment contract in a different jurisdiction, such as various benefits offerings including superannuation and share/option schemes. If not, a variation to the home employment contract may be required for the duration of the overseas remote working.

More specifically:

• within the EU/EEA, an A1 certificate (confirming the applicable social security legislation) must be obtained before the worker commences activities in the host country. Failure to obtain an A1 certificate can result in fines and double social security contributions being levied;
• in Germany, tax authorities may apply an ‘economic employer’ test where the end client effectively bears the cost of and benefits from the worker’s services. This means that income tax withholding obligations may arise in the host country regardless of the formal employment relationship – potentially even before the 183-day threshold under the applicable double tax treaty (Doppelbesteuerungsabkommen) is reached;
• in France and Spain, in the absence of a bilateral social security agreement with the employee’s home country, the overseas employer may be required to comply with social security law and pay all mandatory social security contributions on the employee’s behalf, even where salary continues to be paid into a home-country bank account. Failure to affiliate the employee to the French social security system (or to the Caisse des Français de l’Étranger where applicable) or the Spanish social security system can expose the employer to late payment penalties, administrative and criminal fines, and damages in the event of a dispute; and
• where applicable, the Rome Convention provides that although the law which relates to employment contracts may be agreed by the employer and employee, this cannot deprive the employee of the protection afforded by the mandatory rules of the country where services are usually performed, which will apply by default. It is therefore essential to analyse whether the terms of the home country employment contract comply with the minimum standards of the jurisdiction where remote services are being provided.

3. Engaging personnel under an alternative working arrangement, e.g. as a contractor

Mobile talent may not want to work in a traditional employment relationship. This means that an employer may need to consider an alternative working relationship. These options may have tax and cost implications for an organisation. Further, the tests for employment have undergone significant changes, at least in Australia and the UK, and organisations need to carefully ascertain the true nature of the relationship between the individual and organisation, both in their own jurisdictions, and in jurisdictions into which they may want to move personnel.

Incorrectly classifying personnel as contractors can involve significant and costly risks for organisations including underpayment claims. In Germany, for example, the risk of ‘deemed employment’ (Scheinselbstständigkeit) arises where a contractor is not genuinely self-employed (e.g. lacks entrepreneurial independence, is integrated into the client’s organisation, or is economically dependent on a single client).

In many jurisdictions, there are two categories of people who work: employees and independent contractors. Employees work under a contract of employment and have the most protection in terms of statutory employment rights. Independent contractors generally work for themselves, are classified by not being employees and don't have any employment rights.

In the UK there is an additional category called "worker". Workers include anyone who is an employee but goes beyond that to include people who are not employees but who work under some other form of contract and agree to perform their work or services personally.  Non-employee workers only enjoy certain protections, for example, they are entitled to receive holiday pay but are not protected against unfair dismissal. Recent UK decisions concerning individuals working in the gig economy impact on all sectors which engage self-employed individuals, such as consultants and contractors.

Where mobile talent are engaged under such arrangements, organisations should ensure that such individuals are categorised correctly.

In Australia, there are employees, regulated workers (employee-like workers doing digital platform work or regulated road transport contractors) and independent contractors. There are now multiple tests for determining a person's status:

• a statutory test under s15AA of the Fair Work Act 2009, for the purposes of the Fair Work Act only, which involves an assessment of the relationship that looks beyond the contract and considers the real substance, practical reality, and true nature of the working relationship (a similar test also applies in the UK);
• a common law test which primarily considers the legal rights and obligations within the written employment contract and if the contract is not complete, considers a broader multifactorial test; and
• separate tests again under tax, superannuation and workers compensation legislation.

Furthermore in Spain, there is a legal presumption that working relationships are employment relationships. It is therefore essential to be able to demonstrate that self-employed individuals operate outside the organisation’s management and control and enjoy genuine autonomy. Key indicators include: using their own work tools, not having a corporate email address, bearing the costs of their professional activity, having freedom to set their own working hours, not being subject to exclusivity arrangements, and similar factors.

Additionally in France, engaging an individual as an independent contractor may carry a significant risk of re-qualification as an employment contract where the reality of the relationship reveals a state of legal subordination, for example where the organisation exercises detailed instruction, direction and control over how the work is performed, imposes fixed working hours, or otherwise treats the individual as it would an employee. The French administration has been particularly active in investigating and challenging such arrangements, and a successful re-qualification claim can expose the organisation to administrative and criminal fines, back-payment of social security contributions and damages, as well as offences relating to undeclared work (travail dissimulé).

4. Seconding personnel to a local entity

Multinational employers often use a secondment arrangement between the home and host employer to move talent around the globe. It is important to first identify the current employing entity in the home country and confirm which entity will be the employee's legal employer during the secondment, as this will affect the laws (such as in relation to taxation and superannuation) which apply and who bears liability on termination of employment.

Sometimes, employees will have dual contracts in their home country and the secondment country. However, more frequently, a secondee will remain employed by their home employer. Although they will be subject to that country's labour laws, the statutory employment law of the country they are seconded to may also apply, which needs to be considered. This is true regardless of the law the parties choose to apply to the secondment agreement. For example, in the UK, employees will receive statutory rights such as in relation to holiday entitlement, and possibly also unfair dismissal protections if termination takes place in the UK.

In the EU, the Posted Workers Directive (as amended by Directive 2018/957/EU) requires that seconded employees receive at least the host country’s mandatory minimum terms and conditions (including minimum wage, working time limits, minimum leave and health & safety protections) from day one. In Germany, this is implemented through the Posted Workers Act (AEntG) and the Minimum Wage Act (MiLoG). After 12 months (extendable to 18), nearly all mandatory host country employment conditions apply. Notification and documentation obligations also arise.

Where an employee remains on their home country contract of employment in Australia, there must be a sufficient connection to Australia for the Fair Work Act to apply. Importantly, an employee may be an 'Australian based Employee' for the purposes of the Fair Work Act, where the employment contract was executed in Australia notwithstanding that the employee has never worked in Australia.

In Spain, while the subcontracting of services is permitted, secondments to other companies may be considered an illegal assignment of workers. Accordingly, the posting of a foreign employee to Spain should be structured within the framework of a services agreement between the employing home entity and the local host entity and not merely an agreement to second an employee to the host foreign entity.

Secondment documentation should also clearly set out:

• apportionment of any damage or loss that may be caused by the secondee during the secondment;
• whether the secondee will be entitled to return to the same role and duties they had before the secondment (and if not, the terms for termination of employment in both jurisdictions); and
• for dual contract secondment arrangements, when their secondment contract will end (e.g. when they leave the country they are seconded to) and the basis of the secondment contract (e.g. whether fixed or maximum term restrictions under the Fair Work Act also apply).

5. Putting the employee on a leave of absence/the home country employment ceasing to operate and employing them with the local entity

A final structure that might be considered to move talent around is either to put the employee on a leave of absence in their home country (where the home country employment needs to stay in place for some reason), or alternatively agreeing that the home country employment contract ceases to operate for a period of time, and employ them (often with continuity of service from the home country start date) in the new country.

This approach usually ensures that obligations cease to apply in the home country. However, risk and confusion can arise if:

• the employment in the new country comes to an end and there are no clear terms as to whether the employee is entitled to return to the same role and duties they had before the leave of absence (and if not, the terms for termination of employment in the home country); and
• where the employment in the new country is extended, but the leave of absence is forgotten and not similarly extended, making the terms for termination of the original employment unclear.

In Germany, this structure is typically characterised as a ‘dormant employment relationship’ (ruhendes Arbeitsverhältnis). Employers should ensure that the dormancy agreement clearly addresses: (i) the right to return and the terms of re-activation, (ii) the impact on unfair dismissal protection waiting periods, and (iii) the effect on vesting periods for occupational pension entitlements.

How to engage personnel overseas: A complex decision

As with most business decisions, the decision as to how to engage personnel overseas is a multifactorial one. Organisations should ensure that the structure chosen reflects the reality of the relationship with the individual and they should monitor and recalibrate the ongoing relationship, for example, where it moves from a short-term to long-term arrangement.

Other authors: Cristina Grande, Counsel; Lukas Muller, Counsel; Sara Mauger, Avocat à la Cour; Sarah-Jane Gemmell, Expertise Counsel; Julie Mills, Global Practice Management Counsel – Employment; Caitlin Green, Graduate