- Law Firm
- International Employments
- Legal Management
- Tax Services
5.1 The Choice of Law Clause
Recommendation: Apply German Labour Law
The drafting of a secondment contract primarily raises the question of the legal scope to which the questions of design and conflict resolution should be subjected. As a rule, domestic law on the one hand and the law of the foreign country in which the work is carried out on the other hand are suitable for this purpose. It is advisable in principle to apply the domestic German employment contract statute.
The advantage of the German employment contract statute is not only the associated legal clarity, but also the calculability of the risks. This is because German labour law is generally known to both contracting parties. If the assignment contract is subject to a foreign employment statute, unpleasant surprises cannot be ruled out.
However, a foreign employment contract statute cannot be excluded in its entirety. The boundary of a choice of law clause is formed by so-called public law. As a rule, public law concerns the broad field of regulatory law in the host state. In any case, this includes public holiday law, tax law, social security law as well as the right of residence and work permit.
Clarify questions of doubt in advance
A further limitation of the choice of law clause is that the German employment contract statute is not recognised by all states. For this reason, it is always advisable in individual cases to contact an embassy, a consulate or a lawyer domiciled in the country in which the work is carried out in order to find out about the questions of doubt associated with a choice of law clause.
5.2 Reintegration clause
As already mentioned, a reintegration clause is particularly important in the event of termination or cancellation of the original employment contract. In these cases, the employment relationship with the sending employer is governed exclusively by the assignment contract. The secondment contract, in turn, usually ends at the end of the stay abroad. At this point at the latest, the question arises on what basis and under what conditions the expatriate is reintegrated into the sending enterprise. This question must not only be answered in the abstract, but also against the concrete background of the expatriate's experience abroad. The foreign employee regularly enjoys greater freedom in the host country, which he will not find in the domestic company. His experience on the foreign market is of economic interest to the sending company.
Reintegration is a sensitive issue
At the beginning of a stay abroad, however, it is not foreseeable which complications will arise on the foreign market. It is also not foreseeable how the company will present itself to the employee in the domestic market after the end of the stay abroad. Therefore, it is naturally extremely difficult for the sending company, even after careful consideration of all advantages and disadvantages, to make statements about the employee's use after his return to the head office at the beginning of the assignment abroad. On the other hand, the employee would like to be rewarded for the sacrifices he has made by taking a corresponding career step within the parent company. These decisions can certainly only be made on a case-by-case basis, taking into account all aspects relevant to the decision. For this reason, three conceivable reintegration clauses are presented below, each of which contains a different scope of regulation.
1. return to the conditions of the previous position
"We will offer you a position equivalent to your previous position with us in terms of function and remuneration - taking into account the general development of the salaries of our employees since you took up your position in ... - with us or one of our subsidiaries if your contract of employment with ... has expired. has expired without it having ended prematurely for reasons for which you are responsible or without the pension case having occurred.
2. a return clause, taking into account the experience of the
"Upon completion of your assignment abroad in ... we will offer you a position that corresponds to your experience and performance in Germany and abroad in terms of area of responsibility, income and requirements. In any case, we will offer you a position equivalent to your previous position with us in terms of function and remuneration, unless there is a possibility of transferring a higher-level position. You declare your willingness to temporarily perform an activity of lesser value." 3. Return clause.
3. return clause with position promise
"After completion of your assignment abroad we will offer you the position ... in our company. Your future task will be to further develop the market in ... to further develop and supervise it from the parent company. The remuneration will be determined in accordance with your area of responsibility and the associated requirements, taking into account the customary practices of our company".
5.3 Authority to issue directives/subordination/reporting channel
The secondment contract should clearly and unambiguously state to which parent company employee the expatriate is to be subordinated, whose instructions he has to follow and to whom he reports regularly. This provision not only has a clarifying function, but is also of legal significance in the case of a stay abroad with a foreign company, which is defined by a separate employment relationship.
"The employee is subordinate to the (management) in disciplinary terms, but receives his or her technical instructions from ... He/she shall report directly to the (Management Board) at regular intervals of three months".
5.4 The salary system/properties
In the area of posting abroad, the area of possible salary components and material advantages is extremely complex. There are already various attempts at a complete and numerical recording of conceivable remuneration positions, but in my opinion these are no longer manageable. In the definition of a salary and material advantage policy, two different approaches have to be distinguished from each other.
1) One is defined for all employees - regardless of the country in which they are posted.
- generally applicable remuneration policy;
2. a remuneration policy shall be developed on the basis of the remuneration policy in force in the State in which the work is carried out
tax law, taking into account the associated tax advantages.
While the politics under 1. is rather of importance with large enterprises, in order to achieve a uniform representation for all enterprise coworkers, the second way offers itself straight with middle and smaller enterprises, which can use tax organization possibilities in this way economically meaningfully. The approaches connected with the two alternatives lead in practice to completely different procedures with the organization. In the following, accentuated focal points of a remuneration policy with their essential contents are presented. This presentation does not claim to be complete either.
When defining salary components in the classical sense, the following regulatory complexes must necessarily be taken into account:
1. the incentive function,
2. the compensation of disadvantages,
4. international comparison,
5. material advantages,
6. definition of some salary components.
Incentive function through mobility premium
In many cases, an employee with a certain professional qualification is particularly suitable for a position abroad. Experience has shown that an attractive salary is the best way to motivate qualified employees. The amount at which the incentive threshold is exceeded varies from case to case. The incentive can be created by a mobility bonus, which is usually granted to every employee who is willing to spend time abroad. The amount of this remuneration component is a question of company policy.
Compensation for disadvantages as a "consolation pavement
Disadvantage compensation is necessary for host countries which are less attractive due to climatic, political, cultural and economic developments. These disadvantages are also referred to as hardship. In this area in particular, there is a multitude of conceivable and applied design options. What these systems have in common is a country-specific approach. To facilitate orientation, a brief overview is presented here. In the case of a short-term stay within the framework of a business trip of up to three months or up to a stay abroad of up to 183 days, a justifiable compensation for disadvantages can be achieved by means of the tax-recognised rates for additional expenses for meals and overnight accommodation for business trips of one or more days. It makes sense to use the indices of the BfAI (Bundesstelle für Außenhandelsinformationen in Köln) or Lufthansa for stays abroad that go beyond this point in time. However, against the background of the strong Europeanisation, the following system also appears to set clear accents:
Staggered compensation for disadvantages
Starting from the Federal Republic of Germany as the sending country, the European countries have a predominantly recognised high level of quality of life. The rest of the world outside Europe could be divided into industrial countries and developing countries. To this extent, the compensation for disadvantages would have to be structured in three stages, with the EU states representing the lowest stage, the industrialised countries the second stage and the developing countries the top stage. A new idea in connection with disadvantage compensation is that an expatriate adapts to the changed circumstances in the course of his stay abroad, so that the amount of disadvantage compensation can be reduced with increasing length of stay in the host country.
Performance-related remuneration components
Even working in a foreign country can be rewarded from a performance-related point of view. A number of target agreements are available for this area, which can be job-related, area-related, employee-related, turnover-related or economic-related. While the performance-related share of a salary at the beginning of a stay abroad will be rather small, because experience has shown that there is only little room for manoeuvre, it is expected that it will increase over time. The so-called commissions or royalties represent an incentive for the additional work assignments associated with this. Their dynamisation usually more than compensates for the disadvantage of a pay-dependent compensation for disadvantages.
An international comparison of personnel costs in the increasingly narrow markets for expatriates shows that there are considerable differences in salary levels depending on the country from which the employee is seconded. In a forward-looking definition of salary and material benefits, this aspect cannot be ignored.
The material advantage policy, in turn, can be divided into 5 larger blocks:
1. necessary reimbursement of expenses,
2. hardship compensation,
3. status questions,
5. insurance package.
What is included in the reimbursement of expenses?
Under 1. belong in each case the costs, which result from the application of a visa, the residence and the work permit, furthermore possibly necessary health test, for example in a tropical institute. Furthermore, the costs for a certain weight of luggage are covered as well as the flight costs in the host country and for return flights from the host country, which in this case are also business trips. Household liquidation / furniture storage / removal companies are further financial burdens.
The hardship compensation includes the clothing cost allowance plus cleaning and the separation allowance. Status issues include housing, cars, house staff, telephone, mobile phone. Incentives include, for example, a home travel budget.
Frequently used remuneration components
5.5 The social security obligation
Clarify the social security obligation!
In the case of a posting abroad, the question arises as to whether contributions are still to be paid into the German social insurance system or into state insurance schemes of the country in which the work is carried out, or whether contributions are even to be paid into both the German and the foreign country, i.e. a double payment burden arises. These questions cannot be answered in general terms. The answers depend, on the one hand, on the form of the contract and, on the other hand, on mandatory legal regulations which may originate both from the German legal system and from the foreign legal system. So-called social security agreements have been concluded with some states which serve the purpose of avoiding a double levying of contributions. The EEC Regulation 1408/71 is of particular importance in this context. Outside the EU, there are other intergovernmental agreements that must be observed. Relevant information is provided by the social insurance institutions.
Since the ruling of the BAG of 26 July 1995, contracts which provide for the employee to be transferred at any time have been subject to a cost risk if they do not contain an explicit and unambiguous provision on the costs of relocation, if the seconded employee is recalled or transferred at the employer's request.
A previously typical and flat-rate rule was that the relocation costs were reimbursed by the employer. In the event of termination of the employment relationship, it was frequently clarified that the removal costs were not reimbursed, especially as the employer's duty of care expired at that time.
Based on this flat-rate regulation, the BAG has concluded, with the aid of the principle of good faith, that the removal costs must also be reimbursed. This is the case even if the job at the place of posting is no longer available and the employee concerned terminates his employment for this reason. A reimbursement obligation therefore only does not arise if it is expressly excluded by contract.
5.6 Taxation of income
Observe double taxation agreements!
When posting, the questions arise as to which state has the right to tax the income or whether income taxes are payable in both the host state and the sending state. These questions are answered by the so-called double taxation agreements (DTAs). They serve the purpose of avoiding double taxation of income. Different conditions must be observed in this respect.
In general, the state has the right to tax income from employment in which the employee is domiciled and in which he or she usually resides in order to carry out his or her activities.
The employer is legally obliged to withhold and pay income tax.
The starting point for the tax liability is the residence principle or the usual place of residence, §§ 1 EStG, 8, 9, AO. According to this, every resident or foreigner who lives in the Federal Republic of Germany and receives his income here is liable to tax. One speaks here also of the unrestricted income tax liability. A limited income tax liability exists in the FRG if the residence has been relocated abroad. Exceptions exist if the employee leaves his or her family in the FRG until the time of family reunification. Then there is an unlimited income tax liability. This tax liability also exists if the employee transfers the result of his activity outside the scope of the EStG to the domestic employer in an economic manner by making himself available to the employer and paying the income at the expense of the domestic employer. This is the so-called liquidation stock of § 49 paragraph 1 no. 4 EStG.
An exception to the FRG's right to tax the entire income arises in the case of a double taxation agreement. Then the right of taxation generally passes to the state of activity after 183 days, and the employee is subject to limited taxation in the FRG with his other income. Under certain circumstances, the right of taxation is transferred to the state in which the work is carried out after only a few days if the conditions for the so-called reservation of permanent establishments are fulfilled; see Article 15 of the OECD Model Convention, which as a rule has been incorporated into Article 15 of a respective DTA.
In the case of an unlimited tax liability in Germany, the employer must record the global income including the monetary benefits of the employee, withhold the taxes and pay them to the tax office. If there is only a limited tax liability, the DBA or the Foreign Activity Decree (ATE) and, in addition, the regulations of the country of activity must be taken into account. Monetary benefits are often tax-exempt here. This must always be checked on a case-by-case basis. This information must always be included in the payroll account. A certificate from the employee's tax office of domicile can be obtained in order to secure the question of domicile.
The tax questions are more extensive if no DTA has been agreed with the state in which the employee is working. It is advisable to consult an experienced specialist.
Here you will find our latest releases for magazine and technical literature.