International secondments: legal and practical issues for companies managing overseas workers

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1 International secondments: legal and practical issues for companies managing overseas workers April 2012 Increasing labour mobility and growing numbers of multinational companies operating across borders make it is essential for employment lawyers to understand the international aspects of employment law. This article looks at the territorial scope of UK employment law which is relevant to international secondments generally. It then focuses on labour law in the UAE and the legal and practical issues which arise in relation to overseas workers with a connection to Great Britain. Introduction In the current economic climate, many companies are obliged to restructure and reorganise headcount. UK companies may require advice on relocating staff, terminating international secondments or making expatriate workers redundant. Often the local law does not provide comparable employment law protection, particularly outside the European Union (EU). Or, the individual is reluctant to engage in foreign law proceedings where he is unfamiliar with the law and faces language and other cultural barriers. These factors create a powerful incentive for a UK national working overseas to explore what remedies he may have in the UK in the event of a redundancy or other termination of employment. The UAE is a good example of an overseas jurisdiction where these factors come into play and is an increasingly popular destination for secondments. Many employees working in the United Arab Emirates (UAE), in particular in the Dubai International Financial Centre (DIFC) are expatriate employees 1. Statistics from 2010 suggest that some 88% of the population of the UAE is comprised of expatriates. Many UAE or DIFC-based expatriate employees will be on secondment from their overseas employer. Across all sectors, but in particular the financial services sector, many of these individuals will be on secondment from UK-based employers. Others are employed on local terms but previously worked for the employer in Great Britain. Alternatively, they may have been recruited in the UK, or have reporting lines or other connections with the overseas business in Great Britain. Unfair dismissal International commuters Individuals who live in Britain and commute to work abroad are more likely to have unfair dismissal rights in Britain following the recent Supreme Court decision in Ravat v Halliburton Manufacturing Services Ltd, particularly where the contract is governed by English law and assurances have been given to the employee that he will retain employment law protection. The Employment Rights Act 1996 ( ERA ) which contains the protection against unfair dismissal is silent as to its territorial scope. The general rule is that the place of employment is decisive. But this is not an absolute rule. There is scope for employees working abroad to have unfair dismissal rights: in Lawson v Serco the House of Lords (now the Supreme Court) cited (a) a peripatetic employee based in Britain and (b) an expatriate employee posted abroad by a British based employer to work for the British business, in a British enclave abroad, or with some other equally strong connection with Britain and British employment law. However, it is not for the courts to lay down a series of fixed rules where Parliament has decided not to do so, according to the Supreme Court in Ravat. Rather the task is to give effect to what Parliament may reasonably be taken to have intended by identifying, and applying, the relevant principles. The Lawson v Serco categories should not be rigidly adhered to; they are simply examples of how the general principles apply. 1. The DIFC is a legal island in the emirate of Dubai with its own civil and commercial laws, based on common law, focused on financial services.

2 The starting point is that the employment relationship must have a stronger connection with Great Britain than with the foreign country where the employee works (Ravat, SC, para 27). Therefore, where the employee has his home in Britain but works abroad, eg as an international commuter rotating periods of work abroad with periods of rest at home, the employee automatically has a connection with Britain. These arrangements are not uncommon in the Middle East, with many oil and gas companies bringing in employees on shift rotations or asking them to spend periods of time in the country supervising local contractors. However, it still remains an open question as to what exactly amounts to a sufficient or sufficiently substantial connection with Great Britain. Factors which are relevant to the question of whether the employment relationship has a stronger connection with Great Britain than with the foreign country where the employee works, include: is the employee a British national? was he recruited in Britain by a British company? what is the governing law of the contract? where is the employee domiciled and where is his home? where is he paid and taxed? where is the HR administration for the employee based? is he a member of any British benefit schemes? (Being a member of a global scheme is, of course, less relevant.) has the employee been told that British employment law will apply even when he is posted abroad? Expatriates living and working overseas An expatriate who is both living and working outside Britain will need an especially strong connection with Britain and British employment law to enjoy protection against unfair dismissal. This high hurdle would, in many cases, apply to most expatriates working in the Middle East; most relocate because of the distance between the UAE and Great Britain. It is generally difficult for an expatriate living abroad to make out a strong enough connection with Britain. Dependants of Ministry of Defence service personnel stationed abroad were exceptionally held to come within the category of expatriate employees with a sufficiently strong connection with Great Britain to bring claims of unfair dismissal and sex discrimination in an English tribunal (Wallis v Ministry of Defence, CA). Further, teachers working in European schools, but employed by a UK government body under contracts expressly governed by English law were another example where the employer had such an overwhelmingly clear connection with Britain and with British employment law, that it was right to conclude that Parliament must have intended that the employees should enjoy protection from unfair dismissal (Duncombe v Secretary of State for Children, Schools and Families, SC). English governing law clause It is relevant whether the contract is governed by English law. Section 204(1) of ERA 1996 states that: For the purposes of this Act it is immaterial whether the law which (apart from this Act) governs any person s employment is the law of the United Kingdom, or of a part of the United Kingdom, or not. Mandatory rights, such as protection against unfair dismissal, are conferred on an employee working in Great Britain irrespective of the choice of law. However, the governing law of the contract is pertinent to the question of whether an employee based overseas has UK employment rights. Within the EU, where English law is the governing law of the contract (even if there is no other connection with England), or English law provides the mandatory rules applicable to the employment because England is the country most closely connected with it, in certain circumstances an employee working abroad may bring claims derived from EU law in the UK (Bleuse v MBT Transport Limited, EAT). It is not clear whether an employee working outside the EU would have protection against unfair dismissal in the UK simply on the basis of being employed under a contract governed by English law. As far as the authors are aware, this point has not yet been tested in the courts. Lady Hale did highlight the issue in her Supreme Court judgment in Duncombe; she queried whether it would be enough simply to provide that the contract is governed by English law: Would a person employed to work in China, for example, be able to claim the benefit of all the domestic law which emanates from the European Union? Unfortunately for us, it was not necessary for her to answer that question as Duncombe concerned work within the European Union (para 31 and 32, Duncombe, SC). Where there are factors additional to the governing law clause which suggest a significant connection between the employment relationship and Great Britain, the possibility of an expatriate employee having unfair dismissal protection cannot be ruled out. Discrimination claims The Equality Act 2010 is silent as to its territorial scope. In the Act s explanatory notes, the government explains: As far as territorial application is concerned, in relation to Part 5 (work) and following the precedent of the Employment Rights Act 1996, the Act leaves it to tribunals to determine 2 international secondments April 2012

3 whether the law applies, depending for example on the connection between the employment relationship and Great Britain. It therefore remains to be seen how tribunals will decide whether they have jurisdiction in such cases; there is genuine uncertainty as to who might benefit from the protection of the anti-discrimination legislation. It seems that the Lawson test could apply according to recent, albeit, non-binding case law: a UK-qualified solicitor and equity partner of a UK law firm, expelled from the partnership while working in Tanzania, could bring a pregnancy discrimination claim in the UK (Bates Van Winkelhof v Clyde & Co, ET). Further, protection against discrimination may extend beyond the Lawson categories where employees are working abroad under a contract of employment governed by English law. Employment law rights in the UAE and DIFC Labour law in the UAE and DIFC Employment law in the UAE (outside of the DIFC) is governed by Federal Law No. 8 of 1980 on the Regulation of Labour Relations (the Labour Law ). The Labour Law also applies in all of the free zones of the UAE, except the DIFC. Some of the free zones have additional employment regulations which apply to employees within the relevant free zone. These supplement rather than amend the Labour Law. The DIFC employment law legislation is contained in the DIFC Employment Law (DIFC Law No. 4 of 2005). Form of contract Employment contracts in the UAE must be in Arabic and be lodged with the Ministry of Labour. There is a standard form contract produced by the Ministry of Labour which, in practice, forms the basis of the employment relationship between employee and employer. In the event of an employment dispute, the Ministry of Labour will generally only refer to this contract. However, the form only contains the basic terms of employment such as the start date of employment, salary and duration (if it is a fixed term contract). Therefore, it is not uncommon for the employer and employee to enter into a separate contract which includes additional terms, particularly enhanced rights for the employee or additional benefits which are not provided for in the Labour Law (such as additional types of leave, pension payments etc). The side agreement may be governed by UAE law, but may not be enforceable in the UAE before the Ministry of Labour or the local courts (in particular, if it conflicts with the standard form contract filed with the Ministry of Labour or the Labour Law). The parties may also choose to have the side agreement governed by the law of another jurisdiction (subject to the laws of that country). For example, the side agreement may be a secondment agreement with the employee to confirm the period of continuous employment and that the benefits which the employee was entitled to in his home jurisdiction will continue during the secondment. There is no requirement to file employment contracts with the DIFC free zone authority. The DIFC Employment Law contains an obligation to provide an employee with a statement of employment particulars, where there is no written contract, which includes a summary of the rights provided under the Employment Law. However, the Employment Law expressly provides that it is open to the employee and employer to agree enhanced terms under a separate employment contract. Termination rights In the UAE, permanent, indefinite contracts may be terminated: by mutual consent; by giving 30 days notice in writing where there is a valid reason (there is little guidance on what is meant by a valid reason but it is clear that the termination must not have been for an arbitrary reason see below); or immediately without notice in cases which effectively amount to gross misconduct. Under the DIFC Employment Law, there is a sliding scale of notice required to terminate a permanent indefinite contract from one to three months. Fixed term contracts are commonly used in the Middle East. Under UAE law, the rights to terminate a fixed term contract differ to permanent contracts, based on the expectation that a fixed term will be honoured. In short, if either party wishes to terminate a fixed term contract before its expiry, it is required to buy out the other from the remainder of the term, capped at a maximum compensation amount of three months salary where the employer is terminating the agreement. Unfair dismissal/arbitrary reasons Under the UAE Labour Law, there is protection against arbitrary termination of employment, defined as termination for reasons other than those which are relevant to the work. However, the employee s compensation is limited to a maximum of three months salary (including allowances). In reality, it is within the discretion of the court to determine the exact amount of compensation with regard to the nature of the work, the amount of loss the employee has suffered and his period of service, which may result in a lower award. The UAE Labour Law does not have any specific provisions for redundancy of employees. Unlike British employment law, there are no provisions which specify the circumstances in which an employee may be made redundant, or which set out the specific treatment of a redundant employee in terms of any settlement pay or notice provisions. The general provisions on termination (as described above) apply, regardless of the reason for the end of the employment relationship. Recent case law suggests that the genuine redundancy of an employee in the UAE should not give rise to an arbitrary termination and, therefore, not require the payment of three months salary. international secondments April

4 There are no statutory provisions on procedures to be used to ensure fair selection of the employees to be made redundant, although the position of Emirati nationals in the private sector is protected by the law. Under the DIFC Employment Law, there are also no specific provisions on redundancy and there is no concept of unfair dismissal or arbitrary termination. The lack of unfair dismissal provisions was confirmed in a DIFC Court of First Instance case in 2009 in which six separate actions were brought by former employees of Rasmala Investments Limited against the company for unfair dismissal. In the judgment, it was noted that there is no current provision in DIFC Law for unfair dismissal claims. Although the DIFC Employment Law envisaged that the Director of Employment Standards may propose regulations to the DIFC Authority to further the purpose of the DIFC Employment Law including as to the maximum compensation for discrimination or unfair dismissal, no such regulations have been passed into law. End of service gratuity Employees are, however, entitled to an end of service gratuity on termination of the employment relationship in all circumstances other than dismissal for actions which amount to gross misconduct under Article 120 of the UAE Labour Law. A recent ruling of the UAE Ministry of Justice has confirmed that it is not lawful for an employer to agree with its employees to avoid the end of service gratuity provided for under the UAE Labour Law. Under Article 132 of the Labour Law, upon termination, the employer must pay its employees a severance payment (or gratuity ) of 21 days salary for each of the first five years of service and 30 days salary for each additional year of service, provided that the employee has completed at least one year s continuous service. The maximum amount payable as a gratuity is two years salary, which is a considerable additional liability for employers. There are restrictions on the circumstances in which the full gratuity must be paid. The Labour Law requirement to pay an end of service gratuity is designed to provide an amount in lieu of a pension contribution for expatriate employees. It is possible to structure the gratuity in the form of a monthly payment if the employer operates a corporate pension scheme, at the option of the employee. If the employee leaves in circumstances which mean that he was not entitled to the end of service gratuity, later on, it is unlikely that the employer would be able to claim back the payments made under such a scheme. However, employers should factor in the cash flow issues of making a large lump sum payment on termination when structuring their employment arrangements. The DIFC Employment Law contains similar end of service gratuity provisions. Other entitlements on termination Other payments which may also be due on termination include, under the Labour Law: for a permanent employee, payment of salary in lieu of notice (if relevant); payment for accrued annual leave (unless the employee takes it before termination); and the cost of a travel ticket to repatriate an expatriate employee (unless the employee has found alternative employment). Conclusion Given the lack of specific legislation in the UAE on unfair dismissal and treatment during redundancy, it may well be in the interests of an employee to attempt to fit within British employment legislation from a compensation perspective. In particular, if a UAE or DIFC-based company has not followed a procedure similar to that which would be conducted in Great Britain on a redundancy programme (such as fair selection criteria), there is a risk that the employee may be able to claim for unfair dismissal, discrimination or detriment or dismissal on whistle blowing grounds under British employment law. A complex corporate structure cannot be used to evade liability. There is evidence of the courts showing an increased willingness to look beyond complicated corporate group structures to ensure that a person is not deprived of their employment rights simply because they are seconded to a different company within the group structure. The vehicles which a multinational corporation uses to conduct its business across international boundaries depend on a variety of factors which may deflect attention from the reality of the situation in which the employee finds himself (Ravat, SC, para 30). Further, the tribunal gave a broad interpretation to the provisions governing procedural jurisdiction which require the employer to reside or carry on its business in Britain to enable an individual seconded to a group company in London to pursue his unfair dismissal claim against his Hong Kong employer (Pervez v Maquarie Bank). Cases cited: Bates Van Winkelhof v Clyde & Co ET/ /11 Bleuse v MBT Transport Limited and Tiefenbacher [2008] IRLR 264 Duncombe v Secretary of State for Children, Schools and Families [2011] IRLR 840 Lawson v Serco [2006] IRLR 289 Pervez v Maquarie Bank [2011] IRLR 284 Ravat v Halliburton Manufacturing Services Ltd [2012] UKSC1 Wallis v Ministry of Defence [2010] IRLR international secondments April 2012

5 Practical tips when handling secondment At the outset of a secondment/posting overseas consider: What will happen to the underlying employment contract on a secondment/overseas assignment will it continue? Is the underlying contract governed by English law? Are assurances given about the applicability of English employment law? Should a new contract governed by local law be put in place? What are the applicable and mandatory laws in the home and host country? Do internal company policies set out the terms of assignment eg assistance with school fees, relocation costs? Does the policy specify what costs would be covered on termination of the overseas assignment? Is there a right to return to the home country to work? Corporate structure: is the employee being seconded to another group company? Will the Great Britain office retain a personnel file? Will a P45 be issued indicating termination of UK employment for tax purposes? Will the individual be on UK headcount? Which entity will pay the salary? Are the employment costs charged back to the host company internally even if the UK company administers payroll? Are any UK benefits being continued during the period of the secondment eg pension benefits, private healthcare? Could the individual be transferred into global or local schemes? On termination consider: What is the governing law of the employment contract and other relevant documents (eg incentive and bonus arrangements)? Consider the implications of a local law governing law clause. Do any mandatory employment laws apply? For example, will the Labour Law in UAE/DIFC apply to foreign nationals working in UAE/DIFC? The UAE Ministry of Labour may treat the employment as UAE employment if there is an employment contract filed with it. There is a territorial scope provision in the DIFC Employment Law. These are laws which will apply to the expatriate employee irrespective of their nationality, by virtue of their carrying out their work in the UAE/DIFC. The complex question of whether UK mandatory laws apply to employees posted overseas to non-eu countries is discussed above. What is the appropriate governing law of the severance agreement, or is it preferable to enter into separate agreements in relation to the separate jurisdictions? Local law advice will be required. Where claims may have arisen in various jurisdictions, ensure the settlement agreement achieves a valid waiver of all potential claims. Jurisdiction the relevant time for the purpose of determining jurisdiction is the time of any dismissal. Which courts have jurisdiction to hear the claim? Seek legal advice about jurisdiction and the risk of parallel proceedings. Where expatriate assignments outside the EU are contemplated, it will be helpful to include a choice of jurisdiction clause in the assignment documents. Optimally, what continuing reporting requirement will there be to Britain? Can this be minimised/dispensed with? What is the immigration position? Will the work visa expire on the termination of the overseas assignment? What will happen if the expatriate has relocated his family and children overseas eg can a work visa lawfully be continued to enable a redundant employee to see out the school year? Consider the potential personal tax consequences for Middle East-based employees who are in low/no tax jurisdictions of an early repatriation part-way through a tax year. international secondments April

6 Contacts United Arab Emirates Stuart Paterson Partner, Dubai stuart.paterson@herbertsmith.com United Kingdom Andrew Brown Partner, London andrew.brown@herbertsmith.com Justine Reeves Senior associate and PSL justine.reeves@herbertsmith.com Jemima Coleman Senior associate and PSL jemima.coleman@herbertsmith.com Craig Shepherd Partner, Dubai craig.shepherd@herbertsmith.com Peter Frost Partner, London peter.frost@herbertsmith.com Anna Henderson Professional support consultant, London anna.henderson@herbertsmith.com Tim Leaver Partner, London tim.leaver@herbertsmith.com Andrew Taggart Partner, London andrew.taggart@herbertsmith.com 6 international secondments April 2012

7 This article first appeared in the April 2012 issue of the Employment Law Journal. If you would like to receive more copies of this briefing, or would like to receive Herbert Smith briefings from other practice areas, or would like to be taken off the distribution lists for such briefings, please You can also contact us to say whether you would prefer to receive these publications in a printed or electronic form. The contents of this publication, current at the date of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication international secondments April

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