Global employers: can an employer choose which country’s laws apply to its employment contracts?

If an employer has operations in more than one country, with employees who are not always based in the same place, how far can it decide for itself which jurisdiction will apply to its employment contracts? Chris Cook looks at the lessons to be learnt from a series of fines against airlines.

Ryanair recently lost an appeal against a hefty fine of more than €8 million for breaching French labour laws through avoidance of social security contracts. The budget airline had given its French staff Irish contracts, which meant that lower social charges were paid.

Ryanair’s French staff had paid their social taxes and pension contributions in Ireland but not in France. There was a considerable difference in the amount of social charges payable; in Ireland there was a charge of just 10%, whereas in France a much higher 45% charge applied.

There have been other cases where airlines have been subjected to fines for similar breaches of labour laws. In 2010, the French courts fined easyJet more than €1 million for avoiding French taxes and opting instead for UK law to govern staff employment contracts. Another example is CityJet, which was also fined for paying its French staff under Irish contracts.

The examples above show how employers frequently attempt to use jurisdictions that will be most beneficial for them for financial reasons, but are increasingly getting caught out by authorities. In the light of the above, it is important to understand why UK employers can have their non-UK staff employment contracts scrutinised. While the above cases apply primarily to tax issues, there are also implications from an employment perspective.

Which country’s law applies to an employment contract?

EU law allows parties to a contract to choose which country’s law their contract is subject to (Regulation 593/2008/EC). However, there are mandatory rules of the country in which the employee is working which apply automatically and cannot be ignored.

This means that even if an employer sets out in an employment contract that the law of a certain country applies, if the contract contains terms that are contrary to the law of the country in which the employee is based, it is the local mandatory law that prevails.

Employers need to take this into account when drafting employment contracts and should take advice on how the contracts are affected by mandatory laws of the particular country in which employees are working. If the employment contract does not set out an express choice of law, then the applicable law will usually be:

• that of the country where the employee habitually works (ie where the employee carries out the greater part of their obligations for their employer), or
• where there is no habitual place of work, the country where the employer’s business is situated; or
• if there are circumstances which show that the contract is more closely connected with another country, the law of that other country.

When looking at whether the contract is more “closely connected with another country”, the European Court of Justice (ECJ) 2014 case of Schleker v Boedeker demonstrated that working for a long, uninterrupted period in one country does not mean that the law of that country is necessarily the applicable governing law.

Factors such as the currency of payment, where taxes are paid, where the employee lives and which benefits apply are all relevant factors in determining this issue.

The ECJ has also said that where there is a conflict of one country’s law against another, the legal system more favourable to the employee should apply, as they are the weaker party.

Reality behind the contract

The stark message to employers, particularly following the decision in the Ryanair appeal, is that when it comes to tax and employment liability, the actual reality of what is behind the employment contract will be looked at. This will be done by looking at the role that the employee is actually performing, where the employee is actually working, and whether they are in law a contractor, a worker or an employee.

Courts are also increasingly willing to look at what jurisdiction employees are stated to be employed in, balanced against the reality of the circumstances, and have powers to impose onerous sanctions on employers where they are satisfied that the situation represents unlawful tax avoidance.