In the second of Kingsley Napley’s series of articles on Brexit, employment law and global mobility, Juliet Carp looks at why the identity of the employer is so important; at practical things that need to be done to get this right; and at the potential impact of new criminal laws on advisers who help their clients get it wrong.
When an employment contract is prepared, or a new recruit is put on the payroll, decisions must be made about the employer’s identity. In a normal domestic hire context, little thought is usually given to this – and so those who rarely deal with cross-border issues could be forgiven for failing to take on board the potential financial consequences of getting it wrong.
Why the identity of the employer matters
If an employee will take up an international assignment, or work in more than one jurisdiction, the employer’s identity is critical. For example, this could have an impact on:
- the availability of immigration clearance;
- whether a “permanent establishment” is created for corporation tax purposes (and which jurisdiction will get the tax);
- how payroll taxes must be administered tax rates and reliefs available;
- whether sales taxes must be paid on intra-group fees for services;
- employer social security contribution rates;
- whether the individual can participate in a pension plan or share plan; or
- ownership of intellectual property (and the tax consequences of reassigning it).
The difficulty, of course, for HR specialists and employment lawyers is that these are not typical “HR” issues.
Take social security, for example, a typical UK employer will deduct and pay over UK National Insurance contributions through the payroll. If a UK employee is to go to France to carry out a particular project, will French employer contributions be due during the assignment or will the employee stay in the UK social security system? The identity of the employer during that period (along with other factors such as the intended period to be worked overseas) could make a huge difference to the employer’s costs, and employee’s entitlements.
The financial, and practical, advantages and disadvantages of a particular employment structure can vary considerably. “Home” and “host” countries; proposed assignment length and role; and the employee’s personal circumstances, could all make a difference.
So how do we choose the employer?
Well, it’s not really a question of “choice”. As HR, employment lawyers and tax advisers know employment status is a question of fact. Technically, different specialisms and different jurisdictions will have their own perspective on how facts should be assessed. But the frequency with which they agree is telling. The weight given to different factors may vary but the same things are discussed the World over, for example:
- what does the email sign off or business card say?
- who pays the employee and how are payroll arrangements managed?
- who provides benefits such as pension or health cover?
- who does he report to and who reports to him?
- is there an organisation chart?
- which company benefits from his work?
- are employment costs recharged between group companies?
- who can dismiss him?
The list goes on, but the key point here is that employment documents produced by the employer are not conclusive. They can help, but they are unlikely to be the deciding factor.
So, can we do anything about the employer’s identity?
Yes, but timing matters. Facts will reflect the arrangements the employer has chosen to make for the assignment. Once the employee has signed his new contract and started work, scope for changing things in a way that suits the employer will be much more limited. And, of course, some facts are what they are, and it won’t be possible to change them at any time.
As is often the case, early advice can make a difference. As a minimum, immigration, tax and employment laws should normally be considered and other important issues will usually be flushed out in the course of that advice. Normally, it is best to check for “blocks” first (eg a host country rule that people working there must be employed by a locally registered employer) and then focus on immigration and tax. A combination of internal and external advisers may be needed. In either case, it is worth checking that those specialists have global mobility experience.
What about the paperwork?
The key thing to remember is that the documents needed for cross-border working arrangements will depend on the identity of the employer. Usually it doesn’t make commercial sense to start preparing employment documents until the identity of the employer is clear. To keep things moving it usually helps to have some checklists to help gather information on things like benefits: once the employer’s identity is clear it should then be possible to move more quickly to producing the documents that will be needed.
And what if we get it wrong?
The consequences can be pretty awful for both employer and employee, and not all of those consequences will be financial. For example, in addition to a hefty additional tax bill it may not be possible for the employee to continue to do the work he is employed to do in the place the business wants him to do it.
Advisers are often tempted to repeat awful warnings and then stand back from their clients’ decisions on employer status. That has never been good enough. Those who need more encouragement to check the reality of the arrangements they document should bear in mind that additional UK criminal laws covering advisers who facilitate tax evasion are expected to come into force later this year.
What can global mobility advisers do to help?
- Take time to understand the context properly before recommendations are made or documents are prepared.
- Make sure your engagement terms are clear, that appropriate insurance is in place for the work that you do, and that you don’t “overreach” your expertise. If in doubt, consider asking an appropriate specialist to check your work.
- Don’t document arrangements that don’t reflect reality or encourage others to do so.
What can HR and other global mobility project managers do to help?
- Ensure business needs, practical aspects of the role, personal circumstances etc are clearly communicated to advisers from the outset.
- Be aware of where expertise fits with that of other specialists and refer when appropriate.
- Make sure appropriate internal and external advisers are consulted sooner rather than later.
- Manage advisers to contain costs (we’ll take a closer look at some ways of doing that in a later article).
- Ensure that advice is given or confirmed in writing and shared appropriately between internal and external team members.
As with all things global mobility, getting it right all the time is hard. But a lot of unnecessary work, cost and risk could be avoided if we focused harder on getting the employer’s identity from the outset.