What are the key issues for employers of internationally mobile employees? Gary Chandler and Rosie Godden answer your questions.
Social security coordination for internationally mobile employees was certainly tumultuous throughout 2020. This was not only due to the global pandemic but also because of the uncertainty surrounding the UK’s negotiations with the EU on their future trading arrangements. Fortunately, a last-minute deal was reached and within the Trade and Cooperation Agreement lies the new Protocol for social security coordination (hereafter “the Protocol”). This was certainly welcome news for many employers and expats; the European social security coordination rules have been replaced by a new agreement that, at first glance, looks largely similar to the familiar EC regulations. However, examining the details of the Protocol reveals a number of surprises that need to be managed.
Why is social security coordination important?
The new UK/EU trading arrangements have created plenty of new challenges for global mobility and tax functions. These range from the vast changes made to immigration rules to niche areas such as the lack of mutual recognition of professional qualifications. Social security has been an area of growing complexity globally for some time, and the Protocol on social security only adds to the difficulty. There are compelling reasons to take advantage of the opportunity these changes give to look at social security policy afresh:
- Social security is emotive – employees feel very strongly about maintaining affiliation to their home country social security system. This is especially true for countries with excellent benefits systems, such as France, and can be a deciding factor in someone’s choice to work abroad if it means no longer being able to contribute to their home system.
- Expensive fines and even blocking access to work in the host country could be a reality if employers get social security compliance wrong.
- Social security may be one of the highest costs an employer has to factor into an assignment overseas. In France or Belgium, for example, employer contributions can be around half the individual’s salary.
The EC regulations
Up to 31 December 2020, the EC social security regulations applied to the UK. These regulations ensured two things:
- An individual (and their employer) working cross-border anywhere within the EU, EEA and Switzerland would only be liable for social security contributions in a single Member State at any one time.
- An individual’s contributions in different Member States should be aggregated when assessing their entitlement to various state benefits.
Under the UK’s Withdrawal Agreement, any individuals already in a cross-border situation between the UK and the EU prior to 1 January 2021 are still covered under the EC regulations, and they can continue to apply the EC regulations as long as their ‘situation’ remains unchanged. Once there is an ‘interruption’ this group will have to rely on the Protocol to see where social security is payable.
For most employers, this means that in the short term their existing assignee and business traveller populations between the UK and EU can continue to rely on their A1 certificates as proof of exemption in their host countries. However, care is needed to identify when changes to an individual’s circumstances will constitute an ‘interruption’, especially as HMRC and most other authorities have yet to publish clear guidance on this subject.
The Protocol: what hasn’t changed?
Liability in a single state:
The fundamental principle that individuals and their employers should only pay social security contributions in a single state is maintained. This will normally be the state where the work is physically carried out, unless one of several exceptions applies.
Employer liabilities:
The Protocol requires that an employer in the UK shall be responsible for meeting the employer social security payment and withholding obligations in any Member State where one of their employees becomes liable to social security, and vice versa for employers established in a Member State with employees becoming liable to UK National Insurance contributions (NIC).
Postings:
Just like the EU coordination rules, individuals will remain mandatorily insured in their home country social security system for temporary postings of up to 24 months. All EU Member States have initially opted into this derogation. Certificates continue to be required to prove exemption from host social security. Given the increased visibility of inbound employees between the UK and EU due to the new immigration rules, it is more important than ever to ensure robust processes are in place to obtain these on a timely basis.
Multi-state workers:
The rules for multi-state workers (ie, individuals regularly working in both the UK and one or more EU Member States) remain almost identical in the new protocol. Liability will be determined by the individual’s personal circumstances, their working pattern and/or the location of their employer(s). These individuals should also be covered by certificates to prove exemption in the states where they are not liable. This is not time limited, so coverage can be extended as long as their multi-state working pattern continues.
Healthcare:
Although the popular European Health Insurance Card (EHIC) is coming to an end, existing cards are valid until expiry and will then be replaced by the Global Health Insurance Card (GHIC). For all intents, the GHIC appears to be an EHIC under a different name. Short-term postings, and even holidaymakers abroad, may use the GHIC to access emergency medical care in an EU Member State.
Gaps in the Protocol: what isn’t covered?
Exceptions:
A stark departure from the European coordination rules is the absence of an exceptions article. Under the EC regulations, this allows the authorities of the Member States to mutually agree to disapply the normal outcome in any particular case. In practice, this was most commonly used to obtain A1 certificates for postings beyond two years, with up to five years becoming the standard across most of the EU. But it was also used for many other situations.
For example, a scenario where an A1 certificate would be issued but is no longer possible under the Protocol is where an individual is nearing retirement age in the final year of an assignment, so would accrue very little benefit from paying social security in the host country for a short period of time. Under the new agreement, certificates for detached workers cannot be extended beyond 24 months. Businesses may need to factor in the cost and administration of host social security or consider alternative assignment structures to manage this, such as multi-state working as an alternative approach after the initial two-year assignment period.
The exceptions article was also often used to correct ‘honest mistakes’. The flexibility for authorities to agree to these situations has now been removed entirely.
Family benefits:
Family benefits are also excluded from the scope of the Protocol. For UK employees posted to an EU Member State from January 2021, and eligible for child benefit, claiming child benefit in the UK will now follow domestic UK legislation and will be available for a much shorter period compared to grandfathered individuals.
What about the EFTA States?
Let’s not forget about social security coordination between the UK and the EFTA States (Switzerland, Norway, Iceland and Liechtenstein). These nations are not included in the UK/EU Protocol (for now) and so the social security for moves between them and the UK must be assessed on a country-by-country basis.
Switzerland:
The underlying bilateral agreement between Switzerland and the UK has been in force since 1969 and, unusually, has continually been used whenever the European coordination rules couldn’t be (for example, in the case of ‘third country’ nationals). However, it also hasn’t been updated since the 1960s and today’s global workforce behaviours have evolved considerably.
Does this reciprocal agreement close the gap from the European coordination rules?
- Employees working abroad can be covered in their home social security system for an initial two years, with the possibility to extend further, subject to agreement by both UK and Swiss social security authorities.
- There is no multi-state worker provision as known from the EU coordination rules, so commuters and multi-state workers between the UK and Switzerland will likely default into the ‘pay where you work’ principle unless an exceptions application is approved. Social security will still be payable in one country only.
Norway:
The underlying bilateral agreement between the UK and Norway allows certificates of coverage for periods of up to three years for postings. The agreement also contains specific provisions for offshore workers between the two countries.
Iceland:
The bilateral agreement between the UK and Iceland provides coverage for postings up to one year and can be extended for an additional year. If individuals are posted beyond this period, they will have to pay social security in the host country.
Liechtenstein:
Currently there is no reciprocal social security agreement between the UK and Liechtenstein, so domestic legislation will govern where social security is payable. This could mean dual social security liabilities, and gaps in accruing benefits where an expat has fallen out of their mandatory home social security system.
Individuals posted from the UK to Liechtenstein, and their employer, may have to continue paying NIC for the first 52 weeks of their assignment as well as social security contributions in Liechtenstein.
Individuals posted from Liechtenstein to the UK may have to pay NIC from the start of their assignment if they are ‘ordinarily resident’ in the UK, otherwise their contributions will become payable after 52 weeks.
Multi-state activities between the UK, EU and EFTA:
Before Brexit, an individual working between the UK, an EU country and an EFTA country, could be covered under a sole A1 certificate. This is no longer possible with the Protocol. Now, it could mean obtaining a certificate under the Protocol for the UK to EU and a separate certificate under the bilateral agreement with the EFTA country. However, we have yet to see how each social security authority will approach the need for two concurrent certificates for the same period.
What does this mean for social security coordination in 2021?
The Protocol provides a certain degree of continuity for UK/EU cross-border work. A significant number of assignee and business traveller scenarios will have the same outcome as under the EC regulations. However, as we have seen, there are limits to the Protocol. In general, longer assignments are now at greater risk of triggering host social security requirements.
Although the UK is no longer part of the EU, employers must remain compliant with EU rules when posting employees abroad. Social security compliance is closely tied with immigration and the increasingly enforced Posted Workers Directive, so obtaining certificates under the Protocol will be just as, if not more, important as applying for A1 certificates for intra-EU moves.
Global mobility functions should act now to review how their assignment and business traveller policies and processes fit in with the Protocol, and seize the wider opportunity to rethink social security to get the most out of their mobility programme.
About the authors
Gary Chandler, Director, Global Social Security, PwC
Rosie Godden, Senior Associate, Global Social Security, PwC