Before the mandatory home office phase during the pandemic, many employees had a difficult time imagining that they would one day be able to move their workplace to sunnier climes without even having to change jobs. The corona pandemic combined with digitalization and the shortage of skilled workers has created previously unimagined opportunities. However, this also means more work for HR managers to minimize legal and tax risks for employers.
1. Which labor law applies?
If employees temporarily work abroad, German labor law continues to apply and continues to govern their vacation and parental leave entitlements, their working hours and protection against dismissal. The length of time regarded as “temporary” is not clearly defined. In view of this, it is a sensible precaution to conclude a supplementary agreement to the employment contract containing a choice of law clause stating that German law will continue to apply. However, it pays to be careful: If the job lasts for several months, the habitual place of work may move abroad. Despite the choice of law clause, the Rome I Regulation stipulates that the legal provisions of the place of residence apply under some circumstances if these are more favorable for the employee than the German provisions. The minimum wage, overtime supplements, maximum working hours, maternity leave or vacation are several examples. When it comes to occupational health and safety, the local rules always apply due to the territorial principle. As a consequence, HR managers should have examined the specific regulations that apply to the employee working from abroad for each individual case.
2. Right of residence and work permit: Possible fines outside the EU
It is essential to check whether a residence and/or work permit is required at the intended place of work. Otherwise, the companies may face fines. EU citizens can work in another EU member state without special permission. Staying in Iceland, Liechtenstein and Norway is possible for up to three months without a permit as these countries are part of the European Economic Area, even if they are not EU members. If employees want to work for longer periods in these countries or in non-EU states, the corresponding right of residence has to be observed. For example, exceptions apply for Switzerland if employees work there for less than three months or no more than 90 days per calendar year. However, employers have to report the work via a reporting process at least one day before the work commences.
3. Social security pitfalls
Social security law also contains pitfalls given the lack of clear guidelines regarding remote work while abroad. As such, it is important to distinguish between remote work and personnel deployment, which takes place on the employer’s instructions and specifically not at the employee’s request. Instead, mobile work at the employee’s chosen location remains subject to the principle that the regulations of the state in which the employees work apply. To prevent employees from receiving later partial pensions from multiple countries together with administrative overhead for the employer, we recommend contacting the German Liaison Office for Health Insurance Abroad (Deutsche Verbindungsstelle Krankenversicherung – Ausland) and signing an exemption agreement pursuant to Art. 16 of EU Regulation No. 883/2004. In the case of third countries beyond the scope of the EU regulation, it is important to check whether bilateral agreements exist. Otherwise, there is a risk of social security contributions being levied twice. Conversely, employers may face prosecution if contributions are paid neither in Germany nor abroad.
4. Tax law risks
The following needs to be clarified in order to prevent employers or employees from also having to pay taxes abroad: Does the employee retain their place of residence in the Federal Republic of Germany as per Section 1 para. 1 of the Income Tax Act? Or is their usual residence located abroad because they spend 183 or more days abroad as per Section 9 s. 2 of the German Tax Code? Does a double taxation agreement exist with the respective country? Is a permanent establishment established abroad by renting office space, acting as an independent agent or relocating the center of management? Under some circumstances, tax reporting obligations may exist even if employees are not required to pay tax in the respective country.
5. No entitlement to remote work abroad
Regardless of where employees would like to work – they are not entitled to remote work and require their employer’s approval, according to a recent ruling by the Munich Labor Court.
6. Conclude supplementary agreement or company agreement
If companies intend to allow individual employees or even parts of their staff to work remotely while abroad, they should conclude a supplementary agreement to the employment contract, a company or collective agreement or implement a company policy. Alongside the choice of law clause described in section 1, an agreement needs to regulate the following: Who belongs to the group of beneficiaries? Who bears which costs for working materials and technical equipment? How are working hours documented and monitored? How are occupational safety and data protection safeguarded?
7. The works council has a say
When considering how to regulate remote work while abroad, the works council also has a right of co-determination pursuant to Section 87 para. 1 no. 14 of the Works Constitution Act (BetrVG).
While working with a view of the mountains or the sound of the sea in the background sounds tempting, both employers and employees may face considerable social security or tax law risks under certain circumstances. In the worst case, employers may even be liable to prosecution. To make sure that an idyllic working environment does not become a nightmare, HR managers should have carefully checked the legal and tax consequences in each individual case.