Changes in EU social security legislation

The social security contribution rules for employees on secondment or who are working regularly in more than one EU country will change considerably from 1 May 2010 when a new set of regulations is introduced. These revised regulations, numbered EC Regulations 883/2004, replace the long-standing EEC Regulations 1408/71 drafted in the late 1960s and no longer appropriate to the seconded worker of today. The new regulations are intended to simplify matters and to close some of the loopholes which have evolved over the years. They take account of many European Court Judgments made over the last 40 years or so and also include recommendations and decisions made by the Committee on Social Security for Migrant Workers.

 

One of the main intentions of these revisions is that the whole process, from an employer making an application to confirm where contribution liabilities arise, to the authorities in different countries discussing the matter, deciding the position and issuing the decision, should be handled electronically. This is welcomed and should speed up the process considerably. When the system is fully electronic E101 certificates as we know them will disappear and be replaced by some form of attestation which will be recognised by all authorities in the same way as they currently recognise E101s.

 

 

Under the current rules a short-term assignment is anything up to 12 months and home country contribution coverage is mandatory as long as the employer is in the home country and the employee has a recent history of paying contributions in that country. There is a process using E102 certificates whereby home country coverage can be extended by a further 12 months. The E102 system is cumbersome and under the new arrangements will disappear. At the same time the definition of a short-term assignment will change from 12 to 24 months. Employers wishing to take advantage of cheaper contribution costs in a host country during a short-term assignment will need to ensure that the home country employment contract is broken.

 

A feature of the current arrangements is that an E101 certificate should not be issued where one employee on secondment is replacing another whose period abroad has come to an end. Application of this provision has been somewhat patchy throughout the EU but there is an intention to police this much more vigorously under the new arrangements.

 

Longer assignments are those that currently last between 12 months and five years and whilst the starting point is to say that contributions are payable where the duties are performed it has always been possible to continue with home country contribution liabilities where the employee is content for this to happen and there is a good reason for doing so.

 

What constitutes a good reason was set out in Recommendation 16 from the Committee on Social Security for Migrant Workers and includes being in the employee’s best interest, the employee having a skill not available locally and the employer having an objective in the host country and the particular employee was needed to achieve that objective. It will still be possible to continue with home country liabilities but only where the employee is happy to do so and it is in his best interests for that to happen. Application for home country coverage will continue to be considered by both the home and host country authorities but it seems that more detail will need to be provided showing why it is in the employee’s best interest.

 

There was a suggestion that agreements under this provision would be limited to three years but that appears to have been dropped and the five year rule will continue.

 

The current rules only allow contributions to be paid in a single EU member state at any given time and that rule will continue under the new provisions. To establish where contributions are payable it is necessary to identify the country in which an employee is habitually resident. That means looking at his personal ties – where does he own property, where is his immediate family, where are his investments and pension entitlements, where do the children go to school and so on? In simple terms, if an employee worked regularly in the country in which he was habitually resident then that is where the contribution liabilities arose.

 

This rule changes significantly with the revised regulations and an employee will only be able to pay contributions in his country of residence if he has significant activity there. Although not defined in the regulations, significant means at least 25% of the workdays are in the home country or at least 25% of the remuneration stems from the home country activity. This will make it much more difficult for National Insurance Contributions (NIC) to continue because under the current rules one day of work a month is sufficient for that to be possible.

 

One group of employees where difficulties are almost certain to be encountered will be those involved in international transport. Aircrew, for example, on international flights are unlikely to satisfy the 25% test but it is difficult to see with any certainty where they should pay contributions.

 

The position is a little bit more complex where there is more than one employer in different EU Member States or where an employer is registered outside the EU, but the detail is outside the scope of this brief article. A further change is that applications under this provision need to be made to the country in which an employee is resident even though the contribution liability may not arise in that country. It is up to the authorities in the home country to liaise with other interested countries to determine where the contribution liabilities arise.

 

 

At present, in some countries such as the UK, for example, it is quite common for employer contributions to be avoided on some or all of the earnings – this will primarily be where an employee is working in more than one country for different employers. There is a specific Article in the new provisions covering equality of treatment and this is intended to create an employer liability for any employer with a place of business or other presence anywhere in the EU. This will significantly increase contribution costs for many employers operating in countries where currently there is no collection mechanism where the employer is not present in a particular country or the domestic legislation specifically removes a liability. It will fall to the foreign employer to make whatever arrangements are necessary to meet the contribution liabilities. These extended provisions do not apply outside the EU and so there will be planning opportunities surrounding non-EU employers.

 

There is nothing specific in the new regulations covering the position where a valid E101 is held at 1 May 2010. The advice we have received to date is that such certificates will remain valid to their expiry. It has also been suggested that where there is no significant change in the arrangements a further period of home country liability will be allowed even though that would not be possible under the new rules. We await clarification on this issue.

 

Under the new provisions it will be possible for contribution debts to be pursued in other EU Member States. This will only apply, however, to debts accruing after the implementation date.

 

The changes are considerable and now is the time for employers to consider the position of their seconded employees. Are the correct certificates in place? Can existing certificates be extended? Do the employment arrangements need to be tweaked?