30 October 2023

Stumbling blocks in cross-border employment

  • Articles
  • Legal
  • Employment / Immigration

Jurisdiction, applicable law, residence permit or social security system? Our article gives you an overview of various problem areas in cross-border employment relationships.

Mobility on the labour market has increased steadily in recent years. This development has been further encouraged by the Covid 19 pandemic and the associated temporary home-working requirement (see our magazine article: Home office during the pandemic: recommendation or duty? Challenges?), which has led to the general introduction of teleworking by many employers. Moreover, due to digitalization, there are now many work activities that no longer require the physical presence of the employee (think of e.g. "digital nomads"). However, there are many risks for employers. The following magazine article looks at the main stumbling blocks from the perspective of employers based in Switzerland.

Where can an employer be sued? What law applies to the employment relationship?

Under the Swiss Code of Civil Procedure, an employer in Switzerland can normally be sued by its employees at the employer's registered office or at the employee's place of work in Switzerland. However, in the case of international employment relationships, the jurisdiction rules of the Swiss Federal Law on International Private Law (IPRG) and any international treaties, in particular the Lugano Convention, must be taken into account.

Both the IPRG and the Lugano Convention provide for the jurisdiction of either the defendant's domicile or the employee's habitual place of work, which will usually be in different countries. Where exactly the "habitual place of work" is for employees who work in different places can often be a matter of dispute. In any case, it is the actual employment relationship that is relevant, not a theoretical agreement on the place of work in the employment contract. Although this article deals exclusively with Swiss law, it is clear that other countries have similar rules.

This creates risks for employers: a company based in Switzerland with employees abroad runs the risk of being sued in a foreign court because the foreign court considers itself competent if the employee works in its jurisdiction. The Swiss company will then be forced to litigate abroad, with all the costs that this entails.

If a dispute is brought before a foreign court, that court will also decide which law to apply to the dispute according to its own rules. This can lead to the foreign court applying its own country's labour law to the dispute, even if a choice-of-law clause in the employment contract refers to Swiss law. In particular, other EU countries often have legal systems that are more employee-friendly than Swiss labour law, for example with much stricter rules on dismissal. If employers are not aware of this, it can have unpleasant (and costly) consequences.

It is therefore advisable, for example, to specify in regulations in which countries and to what extent a work activity may be carried out, in order to better clarify and assess the risks involved.

Does the employee need a permit under the immigration laws of the country of employment?

One aspect that is often forgotten in today's flexible working world is whether an employee is allowed to work in a particular country at all - for example, where he or she is staying on holiday during a “workation”. This has to be assessed according to the laws of the country of employment.

From a Swiss law perspective, the following applies: A distinction must be made between the right to stay and the right to work in Switzerland. Just because someone has the right to stay in Switzerland – as a tourist, for example – that does not mean that they have the right to work. For more information, see our article on the Schengen Business Visa.

When assessing whether a foreign employee requires a work permit, the nationality of the employee is of central importance. For EU/EFTA nationals, the rules based on the Agreement on the Free Movement of Persons are relatively straightforward. You can find more information on this in our magazine article: Moving to Switzerland – Immigration law.

If an employee from an EU/EFTA member state is only working in Switzerland for a limited period of time or is sent to Switzerland by his or her foreign employer, there is the possibility of correct processing by means of a registration procedure. However, this only applies to stays of up to 90 days per year.

Third-country nationals, on the other hand, must obtain a work permit from the cantonal labour market authority at the employer's working place before taking up employment related to the Swiss labour market. Their admission is also regulated by the Federal Act on Foreign Nationals and Integration (AIG). As a result of the popular initiative against mass immigration passed in 2014, the AIG gives priority to Swiss or EU/EFTA nationals, which is why the admission hurdles for a third-country national are higher than for an EU/EFTA national.

Similar or comparable rules are likely to apply regularly in other countries. Before employees of Swiss companies are sent abroad, it must be checked whether the employees in question are allowed to carry out the intended activity abroad at all, or what must be done to ensure that this is the case.

In which country must social security contributions be paid?

Employers are used to pay social security contributions in their own country. However, when employees work in different countries or when there is a difference between the country of residence of the employee and the country of residence of the employer, there is a risk that social security contributions will have to be paid in several countries or in a country other than the country of residence of the employer. The specific rules of the countries involved must be checked in each case. Under Swiss law, the employer is responsible for the correct handling of social security contributions.

It should be noted in advance that there is always a risk in these situations that (1) employers who allow their employees to be working remotely will have to pay social security contributions in a foreign country whose systems they are not familiar with, which can involve considerable administrative work, and (2) they may even have to make double payments (in Switzerland and abroad).

There is an agreement with the EU/EFTA countries which provides for different rules for Swiss and EU/EFTA nationals to ensure that even in the case of cross-border employment, only one social security system applies in terms of both contributions and benefits. The most important – but not the only – rule is the following: If an employee works simultaneously in his or her State of residence and in another Contracting State, the social security system of the State of residence applies, provided that the employee performs at least 25% of his or her work in that State. If this percentage is lower, the social security system of the employer's country of residence applies. See also our article on the Form A1 - important for cross-border activities.

Switzerland and certain EU and EFTA member states have also signed an agreement to facilitate teleworking from a social security point of view. The agreement, which entered into force on 1 July 2023, stipulates that people who work in the country where their employer has its registered office can spend up to 49.9% of their working time in their country of residence without being subject to the social security system of the employer's country of residence. This 49.9% limit is calculated over a 12-month period. The rule only applies to situations involving two states and their nationals that have signed the agreement. The current list of countries that have signed this additional agreement can be found here.

In order to limit social security risks, it is advisable for employers to make specific arrangements regarding the countries in which their employees may work and the extent to which this is permitted.

Employee or "contractor"?

In order to avoid the risks associated with cross-border employment, some companies try to employ new staff as contractors rather than employees. However, at least under Swiss law, it is not up to the parties to define whether someone is an employee or a contractor, but is always assessed by the courts and/or the competent authorities, taking into account the circumstances of the individual case. Therefore, the risks cannot be avoided by designating someone as a contractor in the contract.

The main difference between an employment contract and a contractor agreement is that the contractor has much more flexibility in organizing the work, usually works only on a project basis and is not integrated into the employer's work organization. In addition, unlike the employer, the client does not have the right to give instructions to the contractor.

If an enterprise wishes to engage a contractor, it must first be checked whether the contractual relationship can actually be established in such a way that a contractor agreement exists. If a legal relationship is subsequently reclassified by a court or the (social security) authorities, there is a risk of financial claims for up to 5 years back. In addition, there will be interest payments and possible penalties, so it is worth getting the contractual relationship right from the start.

As mentioned above in relation to jurisdiction and applicable law, a court will also assess whether an employment or contractor relationship exists on the basis of the national law of the country in which the proceedings take place. Depending on where a "contractor" is to operate, it will be necessary to consider whether this is feasible under local law or what the risks are.

Are there tax risks?

This article deals with labour law aspects and does not go into detail on tax issues. However, it should not be forgotten that tax issues can also play an important role in cross-border activities (e.g. permanent establishment issues; personal tax liability of the employee; obligation to pay withholding taxes, etc.). Depending on the country of activity, this risk can also be minimized by providing concrete guidelines on which activities employees are allowed to carry out in which countries and to what extent.

Our recommendation

Cross-border employment relationships involve various legal stumbling blocks and can lead to financial consequences and other undesirable consequences for the employer if they are not observed. In order to avoid such risks, the employer is well advised to clarify the legal consequences before entering into the employment relationship.

Our experts from the employment law team and our tax team for related tax issues will be happy to assist you with questions regarding employment relationships abroad.