One of the key goals of human resource (HR) professionals when seconding staff is to avoid any unnecessary disturbances to the expat and his family. In light of this, in most cases, a strategy is developed to allow for a smooth transition to the new environment. The efforts undertaken in this respect are numerous, and include relocation services, tax equalization schemes, and career guidance for spouses, to name just a few.
An item that often is forgotten in this respect is social security. For employees, social security can be very important. In many jurisdictions, social security offers a safety net in case of emergencies such as disability, sickness, unemployment, but also in cases of retirement. Employees do not want to see disruption in any of these aspects.
However, social security systems differ by country. Therefore, when we talk about social security in one country, we may be talking about something completely different compared to social security in another country. In general, social security schemes offer benefits such as health insurance, unemployment benefits, disability pension, and old-age pension benefits. However, the actual items covered, the amount of benefits, and the conditions to qualify for said benefits, differ from country to country.
In addition, the cost of social security can differ significantly. Differences relate not only to the percentage of contributions, but also to the question of whether social security contributions max out at some point in time. Some countries may, for example, require high percentages in contributions, but these costs rapidly max out. Others may have smaller percentages that need to be contributed, but when there is no cap on the maximum income, the total amount due can be very high—especially with high-income earners. Therefore, when it comes to employer contributions for high-income earners, the cost can be tremendous in some countries.
Employers and employees can have conflicting interests concerning social security. An employee may be primarily interested in continued coverage under the social security system in which he or she is familiar (the home-country scheme), while the chief interest of an employer may be the scheme that has the lowest employer cost. In practice, however, we see that most employers prefer continued home-country coverage to achieve the least disruption to the assignee. Most assignment policies explicitly stipulate that every reasonable effort is made to ensure this.
The international aspects of social security are governed by so-called “totalization agreements.” These are mostly bilateral agreements—agreements between two states in which they address how to deal with international aspects of social security. Within Europe, the European Union (EU) directive on social security (EU directive 1408/71) currently offers information concerning the social security aspects of international transfers. This directive will be replaced at some point in the future. In this article, we discuss the most important characteristics of the current EU directive, and also will discuss the key distinguishing factors of its successor.
EU Directive 1408/71
The EU directive on social security is applicable to EU citizens who are, or have been, subject to the legislation of one or more member states. Even though they are not citizens of EU member states, citizens of Iceland, Norway, Liechtenstein, and Switzerland should be treated equally for the purposes of the EU directive.
On May 14, 2003, EU members reached an agreement that directive 1408/71 also is applicable to third-country nationals. This expansion of the scope of the directive not only is accepted by Denmark, but also by Iceland, Norway, Liechtenstein, and Switzerland. Therefore, the U.S. citizen who lives in, say, Germany, also now is covered by the EU directive.
The Rules
Under EU directive 1408/71, the first and most important rule is that one is covered by the social security system of the country where employment activities are performed. This implies that, for example, when a resident of Italy works full-time in France, he or she will be covered by the French social security regime. Where the employer is established does not matter. However, to this general rule some exceptions apply. The most important exceptions are secondment and work in several countries.
Secondment
When an employee is seconded to a foreign country, it is possible to remain covered by the home-country social security system for a maximum period of one year. In such a case, an employee needs to apply for a so-called E-101 form with the social security authorities in his or her home country. This form then can be used to evidence home-country coverage to host-country authorities.
In case it turns out that the assignment needs to be extended, the employee can apply for an extension. When this extension is allowed, a form E-102 is issued. With this form, it is possible to extend the home-country coverage by one year, up to a maximum of two years. Form E-102 needs to be applied for with the social security authorities of the host location.
The one-year secondment with possibility of extension is not used very often in practice. This is because most international transfers last longer than one or two years. In practice, in most cases, the individual and his employer use the mutual agreement procedure of article 17 of the directive. Under this procedure, it is possible to remain covered by the home-country social security system for a maximum period of five years in case of an international secondment. Further extension is granted only in a very limited number of cases.
It remained unclear for quite some time what was required to constitute a secondment. Case law needed to be developed to allow for a clear definition. The first important case in this respect was the so-called Manpower case. The facts in Manpower evolved around an employment agency that hired staff that had not previously worked in the sending country. The individuals then were sent to work in another EU country.
In this case, the court decided that when an employee has not worked previously in the country where the sending entity was established, and when he or she was hired solely to be seconded, the secondment still can qualify as a secondment under the EU directive. The court requires, however, that so-called “organic ties” remain between employee and employer. The employer needs to maintain authority over the employee. He must, for example, be capable of firing the individual. Also, the company must meet certain conditions. It also is required, for example, to perform activities in the sending country. The secondment cannot be established solely to assign staff to other EU member states.
Later, in the so-called Fitzwilliam case, the requirements were further clarified. In this case, the European court explained that, in order to qualify as a secondment, the following facts are important, too:
- the number of administrative employees working in the country where the company was established versus staff in other countries;
- the place where the majority of contracts with clients are signed;
- the employment law, applicable on the agreements with staff; and
- the turnover in a certain period in each of the countries involved.
Work in Multiple Countries
Specific rules apply in case individuals need to perform their employment in several countries. Under the main rule, the individual is covered by the social security system of the country where employment activities are performed. If the individual works in multiple countries, including his or her country of residence, he or she is, in principle, covered by the social security system of the country of residence.
If the individual does not perform activities in his country of residence, he or she is covered by the social security regime of the country where his or her employer is established. Finally, if he or she is employed by several employers, the home-country social security regime is applicable.
Several questions arise from this situation. The first item that is important to mention concerns individuals who live in one country but who are not covered by the social security regime of that country because he or she solely works outside his or her country of residence. Should such an individual accept only a small employment in his or her home country, his or her social security status will change.
As an example to clarify this point, imagine that Sergio lives in Italy near the French border. He is employed by a French company and works solely in France. In his time off, he wants to give something back to the community, and decides to accept a position with the local fire brigade. This is a low-paying position.
Because of this position, his social security status changes. He now works in two countries, including his country of residence and, therefore, is covered by the social security system of his country of residence. It can be questioned whether employers are truly aware of what is going on in the individual’s personal situation, and the effect this may have on the employer obligations.
The second item that is important to mention is that certain activities rendered in the country of residence may be ignored. However, the exact interpretation of this de minimus rule may differ from one country to another. In general, in order to be considered, activities must be of a substantial nature. Therefore, reading documents, having meetings, and speaking with visitors does not qualify.
When the employment has the below characteristics, the activities may not exceed the de minimus requirements:
- activities have a supporting nature and lack an independent character;
- the activities generally are performed from home;
- the activities are supporting to the main activities, performed in the other member state; and
- the duration of the activities is limited. In case the activities are less than two hours per week, they always are ignored.
Force of Law of European E-documents
Having an E-document is very important in practice. However, some states are more likely to issue E-documents than others. This is particularly true for the one-year secondments, in which the country of residence may issue a Form E-101. Several European member states issued such forms without having proper checks in place. Others were aware of that fact and started to ignore the documents issued.
An example occurred in the previously mentioned Fitzwilliam case. The European Court of Justice, however, was very clear in its verdict here. It forces the other member state to accept the E-101 issued, even though it had reasons to doubt the correctness of the form. The reason for this is that other procedures were agreed to between member states that need to be followed when one member state questions the other member states actions. The individual may not be stuck in the middle of a discussion.
New EU Directive
The current EU directive was concluded in 1971. In 2004, the successor of the current directive was published. However, this successor has not entered into law as the implementation of this new directive needs to be arranged via a separate directive that still is under negotiation. Based on information that is currently available, the most important change is going to be that secondments are restricted to a maximum period of two-years.
Nino Nelissen, GMS, is the director of Executive Mobility Group, Amsterdam, the Netherlands, and a member of the MOBILITY Global Editorial Advisory Committee. He can be reached at + 31 20571 1831 or e-mail nino.nelissen@executivemobility-group.com.