COVID‑19 has fundamentally changed the way in which we work now and for the long term. For many this means working from home, but for others, this opens up a whole range of possibilities as to where they live and work and for some, the prospect of working abroad has obvious temptations.
We have seen in the news recently that some businesses have introduced new policies allowing employees to work from abroad for up to a maximum number of days per year. This is not as straightforward as it might immediately seem (particularly post-Brexit) and can lead to a variety of legal issues that employers must take into account before allowing employees to work from home abroad, including tax, social security, employment rights and immigration.
Employees may gain local employment law rights if they work abroad
The general position (pre-Brexit) was that under the European Convention known as ‘Rome 1’ special provisions applied to employment contracts which meant the parties were free to choose the applicable law in the contract. In a UK employment contract this is often stated to be the laws of England and Wales. Post-Brexit, the EU Exit Regulations (Known as The Law Applicable to Contractual Obligations and Non-Contractual Obligations (Amendments etc) (EU Exit) Regulations 2019) approved in Parliament in 2019 state that the UK will continue to apply Rome 1 to determine the governing law. Given the desire of the UK Government to preserve legal certainty post-Brexit, this position is likely to continue to apply for some time.
Where a choice of law has not been specified in the contract, the applicable law is usually that of the country “in which, or from which, the employee habitually carries out work” (Article 8(2), or where there is no habitual place of work, the law of the country where the business through which the employee was engaged is situated (Article 8(3). However, Articles 8(2) and (3) will be dis-applied where it appears from the circumstances that the contract is more closely connected with a different country.
Regardless of the applicable law, an employee who works abroad, even for a short time can obtain protection under the local employment rights of their host country (known as mandatory laws) in relation to holiday, minimum pay and on termination. Any protection acquired will depend on the host country in question, but it’s worth noting that there are many countries, particularly in Europe, where individuals are afforded greater protection against dismissal than they are entitled to in the UK and it is possible for employees to seek to rely on those enhanced rights if they are conducting their work abroad and their employment is terminated.
For example, in the Netherlands, in some circumstances it is not possible for an employer to terminate an employee’s contract of employment, unless they have the permission of the Employment Insurance Agency (known as the UWE) or the Courts (depending on the reason for the proposed dismissal). Notice of termination given without permission is void. In the case of termination for business/economic reasons, the UWE will be responsible for reviewing whether the employer has valid reasons for termination (such as a restructure or closure) and making sure those grounds can be substantiated with sufficient evidence, such as recent company accounts. The employee can lodge an objection to the notice of termination but it can take the UWE several weeks to decide whether or not to grant permission.
In another example, in Italy, if an employee (male or female) has been married for less than one year, their employment cannot be terminated unless it is for misconduct, business closure or expiry of a fixed term contract. In other countries, it is not possible to terminate the employment of someone who is on sick leave. So an employee put at risk of dismissal can immediately go off sick thereby preventing their employer from being able to terminate their employment. If you have an employee working abroad, they may claim these enhanced protections to prevent any attempts to terminate their employment.
To complicate matters further, the fact that a host country’s law is the applicable law of an employment contract does not necessarily mean that claims under that contract will be brought in the host country’s courts (previously governed by the ‘Brussels Regulations’). Pre-Brexit, the general rule in relation to employment disputes was that the ‘weaker party’ (i.e. the employee) is entitled to receive extra protection and therefore can sue in the courts of the member state where the employee is domiciled, or in another member state where the employee works. However, the Brussels Regulations now cease to apply post-Brexit and, except for some specific circumstances or where the Hague Convention applies, it will be for the local laws of each member state to decide if they will give effect to a clause giving jurisdiction to a UK court.
Tax and social security rules will vary
There are significant tax implications in working abroad and these will depend on where the employee is based and where they are resident for tax purposes. In general, a UK employer is responsible for operating PAYE, deducting and withholding amounts in respect of income tax and national insurance contributions, and paying such amounts to HMRC in relation to its UK tax resident employees. In situations where the employee works abroad (even temporarily) the UK employer should continue to calculate and deduct PAYE tax but if the employee spends most of their time abroad over a period of 12 months or more, the basis of this liability may change. The employee may be able to obtain UK tax relief on their earnings and HMRC may provide the employer with a special PAYE code.
Pre-Brexit, the UK had in place bi-lateral agreements with most major countries in the world, including all EU member states that prevented double taxation. Post-Brexit, these arrangements will continue to apply and broadly speaking, ensure that individuals are able to claim relief from being taxed twice on their earnings.
If there is a double taxation treaty between the UK and the host country, this can assign the right to tax the individual to a single country, which would potentially override the liability to tax in the host country where certain conditions are met.
Tax residency status is complex and determined by a number of factors, which may differ in each country, but usually include the employee’s personal circumstances and whether the number of days present in the host country over a 12 month period exceeds 183 days (although the tests for tax residency can differ between treaties and between countries). This is regardless of whether that time was spent working or visiting family.
In relation to their UK tax liability, if the individual moving abroad is still UK tax resident, they will be liable for UK income tax to be paid in respect of their worldwide earnings, as they arise, regardless of where the duties are performed, subject to the terms of any applicable double taxation treaty. If they are not UK tax resident under the UK tax residence tests including the 183 day test, they will only be liable to pay UK income tax on employment earnings if any duties were performed in the UK, unless there is a double tax treaty between the UK and the host country, assigning taxing rights to the host in respect of those earnings. If an employee spends a significant amount of time in the host country, they are likely to have tax liabilities and other possible reporting obligations in that host country, and may be considered tax resident there, depending on the applicable tax rules in that host country.
Each country has its own tax laws, and double tax treaties sometimes vary in respect of the tests and tiebreakers determining which country has taxing rights and so local tax advice will be required.
The question of who pays national insurance or social security contributions is a separate consideration and will depend primarily upon what agreements the UK has in place with the host country. This is also complex and rules differ between countries, depending on the agreements in place.
There is a risk of creating a ‘permanent establishment’
There are significant income and corporate tax implications if it is found that an employee working abroad has created a ‘permanent establishment’ for the employer in the host country. This isn’t an issue if the employer has already established a taxable corporate base in the host country, but if it hasn’t, it could cause real problems. This is a particular risk if the employee’s role is for example a sales role that includes concluding contracts on behalf of the employer, which are simply agreed by UK staff without amendment. A ‘permanent establishment’ essentially means that the profits attributable to that establishment would be subject to local corporation tax rules which in some countries are considerably higher than in the UK. It could also affect the way bi-lateral double taxation treaties would apply.
Immigration rules need to be thought about
An employee intending to work abroad temporarily needs to check if they require any special immigration permissions. Generally, if an employee returns to work from their country of nationality then there won’t be any immigration concerns as an individual can work on the basis of their nationality in their home country. As an organisation, you may however need to undertake a ‘Right to Work’ compliance check or make local filings regarding employees you have based in that location.
Individuals seeking to work from a country that they are not a national of will need to take immigration advice. It is a common misconception that you may enter a country as a ‘visitor’ and work remotely from a country without first obtaining a work visa. Most countries around the world determine the need for a visa by the activity that you will be doing, not the duration of a stay. Therefore even if you are permitted entry as a visitor for 1 month, it does not mean you are allowed to work remotely during that time. Each country has its own rules and so should be assessed on a case-by-case basis. Generally, a right of entry is going to depend on the intended length of stay, their nationality and the restrictions in the host country. Visitor-type visas sometimes permit some sort of business activities, however again, this will depend on jurisdiction and remote working is rarely permitted as a business visitor activity. The longer an employee stays and works abroad the less likely it can be categorised as a business visit. There are quite significant consequences for both individuals and businesses if they get this wrong.
Data protection and confidentiality – will the employee be processing personal data abroad?
If an employee’s role involves processing personal data, this could give rise to data protection issues. Data protection advice will need to be taken and consideration given to whether any personal data is being transferred to another country.
Insurance and benefits – check they continue to apply
Periods spent working in another country may impact on group insurance policies and on an employee’s ability to participate in benefits, such as private medical cover, life assurance, travel insurance, income protection and pension. It is important to check the wording of any group insurance policies to determine if any such conditions are stipulated.
Health and Safety – know your local laws and requirements
UK employers are under a duty to protect the health, safety and welfare of the employees, irrespective of where they are working, including when they are working from home. If you have employees who are working from home abroad, employers must ensure they are compliant with local health and safety laws. This involves carrying out risk assessments and considering any local health and safety requirements.
What should employers do?
It is likely that as employers and employees look at how they want to work long term, we will see an increase in flexible working requests. Employers should not be deterred from being flexible and seeking to accommodate employee requests to work from home, but it is important that proper steps are followed to minimise the risks. Some practical points to consider are:
- implement a ‘working from home abroad’ policy covering requests to work from abroad
- put in place a proper process for employees to follow when applying for such arrangements to be put in place
- consider using trial periods and granting requests initially, at least, on a short term basis to start with, to assess how the arrangement is working for both parties. Build in regular review periods and make sure arrangements are documented in writing.
- make it clear in any written agreement that the employee will remain liable for any additional taxes or social security that might arise because of their request to work abroad and ensure they take responsibility for obtaining personal tax advice
- ensure any written agreements record the governing law and jurisdiction as UK law in the UK courts. This won’t prevent mandatory protection arising but will be taken into account in all other respects, including which courts have jurisdiction to hear a dispute
- some countries have put in place COVID-19 concessions – understand what these are and when they are likely to come to an end
- document any secondments abroad
- consider taking advice on the tax and employment laws that may apply in the host country of any employee who has been, or will be working and living abroad for a period of over 6 months
- create a ‘temporary working abroad’ agreement setting out obligations of both employer and employee.
If you have any questions on the contents of this article, please contact Olivia Toulson on [email protected] or 01223 643145.