Which country’s laws apply to an employment contract?

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When employers have operations across the globe, how much leeway do they have to decide which country’s jurisdictions apply to their employment contracts?  Employers do not have unlimited rights as we explain.

We examine below for employees:

  • What evidence is used to make a determination on jurisdiction;
  • Position if the employment contract sets out a jurisdiction – can this be ignored?
  • Position if the employment contract is silent on jurisdiction.

Looking at the evidence on jurisdictions

The best way to assess the answer to a question relating to jurisdictions and which country’s laws apply to an employment contract is to review relevant court cases. Some of the best examples can be found in cases involving airlines and local labour laws.

One of the best examples involves the budget airline Ryanair, who lost an €8 million appeal for avoiding French labour law by providing their French employees with Irish employment contracts. This meant that employees paid 10% for social charges payable, when in reality the French rate of 45% applied.

EasyJet was also fined more than €1 million by French courts for using UK employment contracts to avoid French taxes. In another case, CityJet was also penalized for using Irish employment contracts to pay their French employees.

Implications are broader than tax

As well as tax, there are also other implications.  For example, the UK courts, including the Employment Tribunal, will not deal with cases if they do not have the jurisdiction.

Contractual position

According to EU law, parties that are entering into a contract may choose the country whose law applies to that contract (Regulation 593/2008/EC). But other mandatory laws may also apply and regardless of what country’s laws an employer chooses for their employment contracts.

If the employment contract terms are contradictory to the employee’s host country, then local laws prevail in setting the standard.  There can be debate about who is the host country.  Here the provisions of double tax treaties may assist.  Not all treaties are identical.

  • The position has to be looked at on a case by case basis.

Position if the employment contract is silent

If the employment contract does not specify which country’s laws are applicable, then one of the following typically applies:

  • the law of the country where the employee routinely works
  • if there is no country where the employee routinely works, then the law of the country where the employer’s headquarters are located applies
  • if extenuating circumstances connect the contract more closely with another country, then that country’s law applies

It has also been demonstrated by the European Court of Justice that long, uninterrupted periods of work in a country does not necessarily establish jurisdiction in the country in which the work was performed.

Determining jurisdiction under an employment contract

In practice, many factors are considered.  The factors include:

  • the permanent residence of the employee;
  • the country where taxes are paid; and
  • the currency of the payment and the benefits of the various countries.

Directors

Similar rules apply for directors.

Secondments and transfers abroad

The secondment and transfer of employees abroad gives rise to problems.  One problem area surrounds the availability of benefits such as death in service or permanent disability insurance.  Sometimes the policies only cover employees of a certain territory – say for example the UK.  If an employee or director is transferred or seconded to another office – say for example China, will the benefit of the policy still apply?

The answer depends in part upon the governing jurisdiction in many cases.  The terms of the policy are also in issue.

Tie breaker position

According to the European Court of Justice, whenever there is a conflict between one country’s law and another, then the laws that are most favorable for the employee should be applied, since they are the weaker party.

Alex Kleanthous  is a partner in the employment law with plenty of experience in resolving issues relating to jurisdiction under employment agreements especially where there has been a transfer or secondment abroad.