Sophie Maes, Partner, Claeys & Engels, for Ius Laboris

Companies doing business in Europe often send employees over to temporarily work at their local subsidiary or affiliated company. These employees keep the employment agreement with their Home Country employer during the secondment and remain employees of the Company. At first glance, only the place of work is temporarily changed. However, many other legal issues may come into play and need proper preparation and well-drafted paperwork. This "top ten" provides tips each in-house counsel should consider when preparing a secondment to Europe.

(1) Check if the employee needs authorisation to work ("work permit").

European Community law provides for the right of free movement for European nationals to work in another Member State without requiring permission to work (some exceptions may, however, still apply). Non-European nationals need authorisation to work in Europe. Work permits are still a national matter, meaning that a separate work permit is needed for each country where the employee will work. Some countries may provide for exemptions for short-term assignments/business travel. Special rules may also apply for intra-group secondments. In many countries the work permit will only be granted if the employee earns a minimum annual gross salary. The timing to obtain a work permit varies from a few weeks to three to four months depending on the country concerned.

(2) Check if the employee needs a separate visa and/or residence permit.

As a rule, non-European nationals need a Schengen visa to enter and stay in the Schengen Area. The Schengen Area includes the following countries: Austria, Belgium, Denmark, Finland, France, Germany, Iceland, Italy, Greece, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Estonia, Czech Republic, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia and Switzerland. However, US nationals are exempt from a Schengen visa. As a result, they may freely enter and stay in the Schengen Area based on their US passport for a maximum of 90 days in any 6-month period. After 90 days, the employee will need a residence permit. In some countries no separate residence permit is needed as this is deemed to be included in the “work visa” (“one single document”). In other countries a separate residence permit must be applied for. US employees holding a residence permit of a Schengen State are free to stay in other Schengen States for a maximum of 90 days in any 6-month period.

(3) Determine which law will govern the employment agreement during the secondment.

In the case of an employee that remains in service of a US Company, for example, the parties will typically opt for the employment law of a US State, as this is the natural law governing the employment relationship. However, in-house counsel should be aware that the employee might, depending on the circumstances of the case, be able to invoke some mandatory laws (such as dismissal protection) of the Host Country according to international private law (Rome Convention and Rome-I Regulation) which apply to secondments to Europe. According to these rules, the law chosen by the parties may not deprive the employee from the mandatory rules of the country where the employee habitually works. There is no definition as from when an employee is considered habitually working in the Host Country. All depends on the circumstances of each case and Courts usually make a global assessment. Hence, the importance of maintaining as many links as possible with the Home Country (pension scheme, benefit schemes, currency and place of payment, repatriation clause, place of control, reporting, etc.) and having the parties sign a well-drafted assignment letter to reduce the risk of the Host Country being considered as the place of habitual work.

(4) Be aware of any “minimum” local employment laws that apply despite the law governing the employment agreement.

Even if the Host Country is not considered the place of habitual work, some “minimum hardcore of local working conditions” may nevertheless apply from the first day of the secondment. This is a result of the local implementation of the Posted Workers Directive providing for the protection of the minimum working conditions in force in the Host Country despite the law governing the employment agreement. The following are usually considered part of this core: minimum pay rates, maximum working hours and minimum rest periods, minimum paid annual leave, maternity protection, non-discrimination, health and safety and conditions of hiring-out employees.

(5) Check that hiring-out of employees is allowed and if so under what conditions.

In some European countries, the hiring-out of employees is strictly regulated. This may be a matter of concern in secondment situations as the employee remains in service of his Home Country employer while he may receive instructions from the affiliate or subsidiary in the Host Country. In some countries (e.g. Belgium, Luxembourg, France) such situation is already regarded as a prohibited hiring-out of employees.

Non-compliance with the rules on prohibited hiring-out of employees may in some countries entail criminal penalties and/or civil penalties such as the joint liability between the Home Country Company and the Host Company for all employment conditions or the deemed existence of a permanent local employment agreement between the employee and the Host Company. Sometimes the execution of a service agreement between the Home Country employer and the Host Company is recommended to reduce the risk of prohibited hiring-out of employees.

(6) Calculate applicable social security contributions.

The US executed Totalization Agreements with the following European countries: Italy, Germany, Switzerland, Belgium, Norway, United Kingdom, Sweden, Spain, France, Portugal, the Netherlands, Austria, Finland, Ireland, Luxemburg, Greece, Denmark, Czech Republic and Poland. If the conditions of the Totalization Agreement are complied with, the employee may - up to a certain maximum period - continue being insured in the US and be exempt from social security contributions in the Host Country. The US Company needs to apply for a Certificate of Coverage to that end. Also, it should be checked for each country how long the employee can remain covered under US social security and exempt from local social security contributions.

If the conditions of the Totalization Agreement are not complied with, the employee may be subject to social security contributions in the Host Country. In some European countries social security contributions are very high compared to the US social security contributions. Also, there are very important differences in the social security rates from one country to another; see, for example, the 2010 amounts:

(7) Be aware of applicable income taxes.

First it should be checked if a Double Tax Treaty exists between the Home Country and the Host Country. If that is the case, then employees who are seconded for more than 183 days will most likely be taxable on their remuneration in the Host Country, at least on their Host Country sourced salary. However, it is of utmost importance to verify in each situation the Double Tax Treaty concerned as the wording and conditions may differ from Treaty to Treaty.

There are also very important differences in the level of income taxes on salary between the different countries. To give a rough idea, we calculated the income tax due (2010 rates) by a resident, who is married (spouse has no professional income) and has two dependent children. The annual taxable income is 100,000 €: