Cross-Border Catch-Up: Employer Considerations for International Secondments

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Shirin Aboujawde: Welcome to the Cross-Border Catch-Up, the podcast for global employers who want to stay in the know about cutting-edge employment issues worldwide. I’m Shirin Aboujawde, and I’m here with my colleague, Maya Barba, and we are cross-border attorneys here at Ogletree. Today, we’re talking about an important global mobility topic, international secondments. Thanks for joining us today, Maya.

Maya Barba: Thanks for having me.

Shirin Aboujawde: So, let’s get into it. For those who might not be familiar, what exactly is an international secondment?

Maya Barba: That’s a great place to start. A secondment, in simplest terms, is a temporary work assignment. The employee remains employed by their original company, which we’ll call the home company, and then is temporarily assigned to work for another entity, which we’ll call the host company in a different jurisdiction or country. Secondments can take place in the same country, but for the purposes of this podcast, we’re going to focus on international secondments where the employee is assigned to a role in a different country. Also, secondments are most common between different entities within the same company, but they can take place between two fully unrelated companies. Generally speaking, it’s a great way to transfer talent and expertise while maintaining employment continuity.

Shirin Aboujawde: That makes a lot of sense. But I imagine structuring a secondment isn’t as simple as just sending an employee abroad. So, what are the key legal and compliance risks a company should consider?

Maya Barba: Absolutely. Secondments are complex, and do require a considerable amount of planning. Before we dive in, let me touch on a few key issues that parties considering secondments should keep in mind. Specifically, secondments in all global mobility assignments require consideration of immigration rules, the employment law in both the home and host country, income tax and social security obligations, and corporate taxation. And it’s also worth noting that these key points arise regardless of the destination country.

Shirin Aboujawde: Wow, these are really important areas that companies need to be mindful of. Why don’t we dig a bit deeper into each of these five legal risks? How should companies approach immigration concerns when they’re structuring a secondment?

Maya Barba: So, immigration is one of the most time-sensitive aspects to consider. Before the secondment even begins and even in contemplating the arrangement, it’s important to ensure that the employee has or will be able to obtain work authorization in the host country. This typically involves securing visas or work permits, and this can take a considerable amount of time. Companies should also consider the implications for the employee’s family as they might require dependent visas or special work authorization, as well. Immigration noncompliance can result in fines, penalties, or even deportation, and it’s also important to monitor any changes in immigration laws that might impact the employee’s ability to work.

Shirin Aboujawde: Yeah. That’s such a great point. I think that there’s an urban myth that some people have that if you go to Europe, you can work there for 90 days because that’s how long you can stay in Europe without a visa. And you can go there as a tourist, but you can’t actually work there. And a lot of these countries are like that where you need a permit from day one in order to work there. So, that’s a great point. But what about employment laws? What should companies keep in mind when it comes to that aspect of secondment?

Maya Barba: Employment law in a lot of countries and in most countries is territorial, which means the employment laws of the country where the work is being performed will apply automatically regardless of the terms of the secondment agreement. So, that means as soon as the employee starts working in the host country, they’re generally protected and subject to the host country’s employment laws on things like work hours, overtime, vacation, and even severance entitlement. So, in considering secondments, even if the agreement states that the employee is still subject to the home country’s law, this isn’t always a sure thing. With choice of law clauses, they can be tricky to enforce if the employee decides to seek the protection of the host country’s labor laws. And in some countries, you can’t contract out of certain fundamental rights such as maternity leave or discrimination laws. That said, even with those flags, it’s recommended to structure the secondment to continue the home company employment relationship during and after the secondment. This is especially true when we think about U.S. employees because at-will employment doesn’t generally exist outside of the U.S., and employees typically have greater rights and protections under the labor laws of other countries. So, just general awareness of these differences can be really helpful in structuring the secondment and making the transition as streamlined as possible while preserving the various employment protections.

Shirin Aboujawde: That’s a great point, Maya, and I think it’s really important for employers to do a deep dive into the jurisdiction that they’re seconding employees to you because to your point, some of these rights and protections apply on day one, don’t they?

Maya Barba: Yep. Absolutely. Absolutely. And that’s not something that employers are typically aware of. They think if they say U.S. law applies, or home country law applies, then it will. But that’s not always the case. In fact, that’s rarely the case.

Shirin Aboujawde: So, moving on to income tax, what are the tax implications that companies should consider?

Maya Barba: When it comes to individual income tax, companies need to consider both the home and host country tax requirements. For example, the host country may require the employee to withhold and remit taxes on their earnings unless there’s a bilateral tax treaty that provides otherwise. This can get complicated and lead to dual taxation issues, which would require the employee to pay income tax in both countries. A common strategy to mitigate this, especially in secondment arrangements, is through tax equalization, which would ensure that the employee wouldn’t pay more tax than they would have if they’d stayed in their home country. But with this, it’s important to get tax advice from a tax professional early on so that all parties can understand the specific rules in the countries and plan for any potential tax credits or exemptions that may apply.

Shirin Aboujawde: Yeah. That’s a great point. It’s really important to do your homework and actually explore things like double taxation treaties where you might get credit in one jurisdiction for the taxes that you pay in another. So, obviously, staying ahead of tax rules is essential. What about social security? How do companies manage those contributions when employees are seconded abroad?

Maya Barba: So, social security is an interesting area in international secondments. So, employees may need to contribute to the social security system of the host country, unless there is what’s called a totalization agreement in place between the home and host countries. These agreements typically prevent double contributions and allow the employee to remain under the home country’s social security system for a period of time. That said, as like a prerequisite to obtain this exemption, the employee will need to get a certificate of coverage from the local social security authorities confirming that the contributions are being made in the home country, and this can just be a time-consuming process, so just worth considering prior to seconding the employee. If there is no totalization agreement, then the employee may have an obligation to contribute to both. So again, this is another area where early consultation is vital to avoid any compliance issues and to get ahead of them to the extent that they exist.

Shirin Aboujawde: Wow. It sounds like there are a lot of moving parts here. I’m sure that you definitely need to take a deep dive into the different jurisdictions and what they offer in terms of totalization agreements. I know if you’re seconded from one European country to another, there are certain rules, and if you’re seconded from the U.S. to a different jurisdiction, there are others. So, it’s just a great point for employers to be aware of. What about corporate tax though? How can a company structure secondments to avoid the unintended tax risks there?

Maya Barba: Great question. So, corporate taxation is another area that requires careful structuring, and with all of these arrangements, it is a country-by-country assessment. It’s very regionally specific. With respect to corporate taxation, if the secondment is not set up properly, it could result in the home company becoming liable for taxes in the host country through the concept of taxable presence, or what’s known as a permanent establishment. Countries use different standards to determine whether a taxable presence exists, and tax treaties typically also address whether the employer will become subject to taxation in the host country, and this can be based on residency of the seconded employee or the source of the income generated. One general good way to mitigate this risk is to structure the secondment so that the employee has little to no decision-making authority that would bind the home company to contracts or commitments in the host country. But again, corporate taxation is a pretty nuanced area, and it’s important to consult a tax professional to really get a full picture of that risk.

Shirin Aboujawde: Yeah. 100%. There are some jurisdictions that use deemed services definitions of permanent establishment where you don’t even need to be involved in negotiating or executing contracts to establish a permanent establishment there. So, it’s definitely something that needs to be on everyone’s radar. God, it’s just so much to consider here, but it really underscores the importance of careful planning and strategic structuring. So how do companies document these arrangements to protect themselves?

Maya Barba: So, there’s two essential agreements. Well, actually, let me rephrase. There’s actually three. There’s the underlying employment relationship between the home company and the employee. That’s typically an employment contract outside of the U.S., often offer letter in the U.S. But beyond that, with respect to international secondments, there’s the letter of assignment, and then there’s the intercompany secondment agreement. The letter of assignment is the agreement between the employee and the home company. This agreement typically sets the terms of the secondment, such as the duration, the scope sets out compensation, will include the governing law clause, and will talk about what happens when the assignment ends. The intercompany secondment agreement is between the home and the host companies, and the employee is not a party to it. This agreement will cover responsibilities between each company, such as cost allocation, tax responsibilities, the party’s roles in the employment relationship, and just general legal compliance requirements.

Shirin Aboujawde: Wow. Okay. So, let’s dig in. Let’s first start with the letter of assignment. What are the key points that companies need to address in this agreement?

Maya Barba: Good question. So, the letter of assignment is really the foundation of this secondment from the employee and the home company’s perspective. Some of the key provisions to consider are employment status. With that, it’s important to make clear that the employee remains employed by the home company, even while working in the host country. Again, for U.S. employers, this is very important, as it’s the best approach to try to continue that at-will employment status. As I’ve mentioned earlier, choice-of-law clauses can be included and should, but they’re not always enforceable in other countries. That said, it’s a good tool to set expectations with the employee. Beyond the employment status provisions, other things to include are language addressing the duration of the assignment. So, the assignment letter should set the expected end date. We generally do not recommend exceeding five years, and likely, the secondment should be shorter than that to align with the outer limits of social security treaties.
It’s also a good practice generally to include a provision stating that the terms of the secondment will be reviewed annually to allow for changing circumstances. And it’s also pretty critical to address that the end of the assignment does not lead to termination of the employment relationship. With secondments it’s a very important practice to ensure that the employee returns to the home country before the employment relationship is ended, if that’s the direction that the employment relationship is going. Beyond that, there should be provisions addressing tax obligations, so if any tax assistance will be provided, as well as benefits and relocation considerations. Secondments are interesting in that it’s common to include a various amount of additional employee benefits, like relocation assistance with moving to the host country, airfare, education reimbursement for dependents. We’ve even seen provisions addressing costs for pet relocation. So, anything like that should be addressed in that letter of assignment.

Shirin Aboujawde: Wow, there are so many points to consider. What about the intra-company secondment agreement? What do companies need to include there?

Maya Barba: So, the first point to include there is language addressing payroll and compliance obligations. So, the agreement should specify which company will handle payroll and manage compliance with local labor laws and secure work permits and things like that. The next provision to include is something related to cost allocation. So, the parties should be very clear on the costs associated with the secondment and which company is going to bear which costs such as salary, benefits, relocation expenses, and the cost allocation provision should also consider transfer pricing and other tax rules. Again, this is a nuanced area, so definitely could do another deep dive on these provisions, but that’s what we’re thinking at a high level with respect to cost allocation.
The next point is that this agreement should also consider employment decisions, so address which company will have responsibility over which parts of the employee’s employment and decision-making authority with respect to that relationship.
It’s also critical to include language and consider data privacy, intellectual property, and confidentiality obligations in consideration of both the home and the host country’s law, as well as each of the party’s obligations. And finally, central to this agreement is just general compliance. This agreement should make sure that both companies comply with relevant laws, for example, anti-bribery regulations, labor laws and tax regulations in both the home and the host countries. So, it’s a complicated agreement that considers a whole host of these overlapping issues and is vital to setting this up in a way that protects and benefits both companies.

Shirin Aboujawde: Wow. Okay. So, for both agreements, it seems like clarity and compliance are the key elements to protecting both the interests of the company and the rights of the employees. Are there any best practices to consider when drafting these agreements?

Maya Barba: There’s a whole bunch, but I would say for our purposes, a few key best practices are to make an effort to expressly continue the home company employment relationship for the reasons we’ve discussed. The next best practice is to limit the duration of the assignment and definitely not exceed five years. Next, I’d say plan for tax equalization and payroll compliance from the start. Next is consider intellectual property and confidentiality obligations. And then finally, I’d just say consider permanent establishment from the get-go. I know these are vague and very complicated topics that I’m touching on, but these are all important issues to keep in mind from the very, very beginning.

Shirin Aboujawde: Those are great guidelines to follow. Before we wrap up, any final thoughts for companies considering international secondments?

Maya Barba: I think the biggest consideration is to plan ahead. Every secondment is different, and the laws of every jurisdiction are different, and compliance is key. By addressing these issues upfront, the company can avoid major complications down the road, and ensure that the secondment is beneficial and as streamlined as possible for all parties.

Shirin Aboujawde: Well, thank you, Maya, for sharing your insights today. They’ve been invaluable.

Maya Barba: My pleasure. Thanks so much for having me.

Shirin Aboujawde: And that’s a wrap on this episode of the Cross-Border Catch-Up. Follow us to stay in the know about cutting-edge employment issues worldwide.

Announcer: Thank you for joining us on the Ogletree Deakins podcast. You can subscribe to our podcasts on Apple Podcasts or through your favorite podcast service. Please consider rating and reviewing so that we may continue to provide the content that covers your needs. And remember, the information in this podcast is for informational purposes only and is not to be construed as legal advice.