Recorded on 13th August 2020. (UnaTerra regularly hosts webinars on a range of international expansion topics – to sign up for the next one, visit our Webinar page.)
Converting a contractor in France? Hiring a whole team in the UK? Our free webinar offered an understanding of what to look for when employing people in Europe.
Thanks for joining our employment law in Europe overview today. My name is Andrew Laing and I’m a business manager with UnaTerra.
If you’re not familiar with UnaTerra, let me give you a quick introduction on who we are and what we do. We help our clients expand internationally, whether that be US outbound, US inbound or not involving the US at all. We take care of the back-office services that companies tend to struggle with when they’re expanding abroad, helping them understand and work through what they don’t know. That includes HR, payroll compliance, financial reporting, and much more. Any questions you have on UnaTerra, feel free to get in touch with me.
Today, we’re going to give an overview of some of the topics that in our experience have been important to our clients. Helping them understand European employment law, payroll in Europe, and establishing themselves in Europe. If you have any questions, we’ll have a Q&A at the end.
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It consists of twenty-seven member states and it’s the second largest economy in the world, behind the US. It accounts for an estimated 22% of the global economy.
Throughout Europe, different countries have different specializations. For example, biotech, telecommunications, and IT in Spain and aerospace specializations in France. The EU also supports its members with education, making sure member states are performing well in that area. This creates a highly skilled workforce.
It is easy for employees to travel, easy to hire, and easy to set up a base of operations in Europe. Once established it is then possible to expand outward from there and we’ll go over that in a little more detail later. Essentially, it’s very easy for people to move about and for trade to happen between member states.
A lot of Europe is still developing, for example the Baltic States, this is an opportunity for foreign firms to jump in. To provide products and services that, either may not be available or may not be up to the level of what they can provide.
That was an overview of why companies tend to go into Europe, there’s a lot of different reasons, but those are the main ones that we wanted to hit.
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This is split into two categories; must haves and nice to haves. If you want to be competitive in Europe or have a well-defined strategy for expanding into different parts of Europe, or even using it as a base for launching into other parts of the world.
These are the ‘must haves’:
Whether that be registering your domestic company as an employer, which is a possibility in some European countries. Or, whether you use an international Professional Employer Organization(PEO) or Employer of Record(EOR) service. These have their own payroll registration that they hire your employees under. UnaTerra tends to focus on a fully compliant solution, which is establishing an entity in the country and that comes with making payroll registrations.
This is paying attention to local regulations, EU regulations, language, and collective bargaining agreements to name but a few.
Tax registrations and the way tax is levied is different from country to country. It’s really important to have experts who can help you remain compliant.
It’s different from country to country, even municipality to municipality sometimes, but statutory benefits are required to be provided by employers. Again, it’s helpful to have someone who knows the law and can keep you compliant.
The ‘nice to haves’:
These are things that can differentiate your company from other employers. I’ll go over those a little later. They are nice things to have that employees typically negotiate contracts on, so employers should be aware of them.
This can have its advantages. It mitigates your permanent establishment(PE) risk, which is the risk that the government is not getting a piece of your business. Also, you could be exposed to penalties or liabilities, arising from employing people through a non-compliant option.
This is very popular in the US, but you have to be careful in Europe because there are statutory minimums. Even though the EU is one economic zone, each country has different minimums that need to be observed and need to be given to employees and adhered to.
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Things employers should know
The HR landscape in Europe is very complicated and it’s very different from the US. A lot of the work we do is for US companies expanding into Europe. European employment law and the payroll landscape is not only very different between the US and Europe, but what is often lost, is that there are huge differences from one European country to the next. We’re trying to highlight some of the differences, and I think a lot of people appreciate that there are differences. We can’t cover them all but aim to highlight and inform about what are the factors and what are the considerations. My intention is to explain the broad concept of why employing people in Europe is so different from the US and other parts of the world.
This is a high-level overview, we’re not covering everything, but hopefully it will inform and help people understand some of the differences. Let’s look at the broad concept of employing and payrolling people in Europe versus the US.
This is the key difference, and it is a fundamental one. At will employment is common in the US and contract employment is common in Europe and most of the rest of the world. In the US you can employ at will, but you can also terminate employment more or less at will. In terms of offer letters and the documentation that sits behind an employment arrangement it is very simple. In Europe employment contracts are critical documents, they can run to 20 or 30 pages, they can have legal input. They’re very complex and it’s critical to understand the importance of fully compliant employment contracts for all employees. They are as different between European countries as they are between the US. The concept of contract employment is very important.
Not all countries have collective bargaining agreements, but as a concept it’s helpful to understand. The idea is that as well as headline employment law in a country, such as France or Spain, there are also collective bargaining agreements. These provide special, additional, employment terms and conditions for employees. Maybe in a certain sector, or maybe in a certain role, or maybe in a certain role in a certain sector. Each employment needs to be assessed for which collective bargaining agreement applies. This is usually conducted by an employment lawyer in the relevant country. So collective bargaining agreements are a critical difference.
Notice periods in Europe tend to be a lot longer than our US clients are used to. The average notice periods for professional workers would usually be three months, for executive levels it could be as much as six months. It’s seldom less than a month. During a probationary period, the early months of employment, the notice period can be shorter. A typical arrangement might include a six-month probationary period, in that time an employee can be terminated at two weeks or a month notice. Once they pass their probationary period, then they switch to the full notice period, which is reflected in the employment contract.
These requirements are important to understand. In some countries you can have an English language employment contract, but in many countries, they have to be in the local language. You can have a dual language contract, so it can be in English and for example, German. But it’s important to understand that the German language parts of the contract are the legally binding part and the English language parts are generally, just for information. There are some quirks, for example, French employment law requires everything to be conveyed in French. Occasionally something that’s conveyed in English, perhaps informally by email can be invalidated simply on the basis that it’s been conveyed in English. So, it’s important to capture and understand the language requirements.
European countries also have very specific payslip requirements. France comes up again and again, as an example, a French payslip is very complex. One thing a French payslip has to capture is the employees leave allowance at the beginning of the month, the movement in their leave during the month, and then their balance carried forward. It can cost a company in financial terms if that is not observed. So, each country has its own specific requirements around payslips.
It’s traditional and normal in Europe for employees in all European countries to be paid monthly in arrears. I do have discussions with clients who are interested in paying bi-monthly, which is usually the case in the US and Canada. But it’s absolutely not normal in Europe, and it certainly wouldn’t be expected.
Many countries have quirky rules around holiday pay and strange patterns of salary payments. For example, in Italy, typically an annual salary is carved into 14 amounts. So, two months of the year they’re paid double. Essentially there are 14 pay periods in Italy. That can be dealt with and reduced down to 12, as long as it’s addressed properly in the employment contract. People need to be aware that these sorts of products exist.
A comment on bonus pay, because this comes up quite frequently in discussions with clients. In Europe, broadly speaking bonuses and other payments that are commissions which go through payroll, are simply taxed as an extension of the salary. In the US bonuses are taxed in a different way. In the UK and the rest of Europe, if employees are paid a bonus then tax and social security apply. It’s as if it was simply a higher salary month.
I flagged some of them and most European countries have their own quirks. Some of them are very quirky, Italy I’ve already flagged a couple of times, Spain, and France as well. It’s really important to get the right advice up front, the employment contract piece is important. It’s also important to understand the quirks of payroll, because as I flagged on the French example, if you don’t follow or don’t anticipate, the strange things which come up. Then it may end up being more expensive for you as an employer.
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This is such a critical area. The employment contract is the legal document which governs the employment relationship between the employer and the employee. It’s legally binding and steeped in employment law and employment legislation.
There is no such thing as a European employment contract. Each country has its own employment law, which captures country-specific employment law and certain aspects of EU law. An employment contract for a given country needs to capture and observe all of that. It’s really important to understand. Many times, I’ve spoken to companies who say ‘Hey, we need to run a payroll in Germany. We’re very excited. We just hired a guy in Germany, but we wanted to do it super quickly, so we just gave him a US offer letter.’ Understanding that the US offer letter is not compliant is one thing. Understanding the implications of taking on an employee without an employment contract in place, is another. Clearly from a legal perspective, you as an employer don’t have any protection. Really there’s no legal contract in place.
Don’t expect European employees to resign their current posts until you’ve been able to give them a fully compliant contract and have it signed off and in place.
These need to be reflected in the employment contract. It’s important to understand that if a country has a regime of collective bargaining agreements, an assessment needs to be made in advance. This needs to be incorporated into the agreement.
To add complexity to collective bargaining agreements some countries have different classifications of employees. An example is in Italy, where there are four categories. The ones we usually come across are the top two. There are executive level employees, who are dirigenti, and middle manager level employees, who are quadro. The classification of employee needs to be determined and the employment contract then needs to reflect it in the verbiage and all the information.
It is important to note that local language always prevails.
What do European employees typically try to negotiate on? Of course, they negotiate on salary. They negotiate on stock options. They often try to negotiate on their PTO level, because they will often as a senior employee enjoy, or will be used to enjoying a higher than statutory level of holiday allowance. Some will try to negotiate on pension contributions. I was just on a call with a client talking about that a moment ago. There are various areas, in some countries they will try to negotiate a car allowance. I have to say, broadly speaking, car allowances are a thing of the past. If anybody experiences a prospective hire who is after a car allowance, it’s quite easy to avoid that through negotiation.
So that’s a high-level view of some interesting aspects of employment and employment contracts in Europe. Generally, this would be very different to the offer letters that our clients are used to issuing in the US and in other parts of the world.
Hiring is great, but we all have to understand, and in fact we support our clients quite frequently with the unfortunate situation where employees have to be terminated.
Employment at will is termination at will as well. Typically, in the US, I don’t believe there is a statutory notice period at all. I know most employers usually offer a couple of weeks to allow a handover and for goodwill. Whereas with European contract-based employment, the notice period is governed by the details of the contract. Classically it’s three months for a reasonably senior employee. So, you either have to stick with an employee throughout the notice period, or as is often the case, put them on notice and then allow them to take their notice period as gardening leave. Which I know is a European concept.
It’s important, critically important to understand that if you want to terminate an employee in any European country, there is always a process that has to be followed. Some countries are more complex than others, but there is always a process that has to be followed. Not following that process is probably, in my experience the most common reason why employees go to litigation, on the basis of contravening employment law.
This is usually because the process hasn’t been conducted properly. I was involved with one recently where we advised the client on a French termination. We provided the paperwork for the termination of the French employee, and our client used the same paperwork to manage the termination of a German employee. The paperwork wasn’t compliant with German legal requirements and the employee went into litigation, and we’re now managing that on behalf of the client. It’s a false economy to not take legal advice and follow due process on termination of employees in Europe.
These are a common aspect of litigation. An outgoing employee can be asked to sign a compromise agreement, which essentially will waive the employee’s rights to go into litigation or to make a claim against the company. In return, the company usually will make a payment to the outgoing employee, as compensation for agreeing not to make any claims.
Generally, six-month notice periods are only for senior employees.
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Now a run through of all the popular countries where we provide our clients with a lot of support, highlighting a few interesting factors about those countries.
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Employment law is well balanced between the employer and the employee. In the US, it’s very stacked in favour of the employer because of the employment at will arrangement. In the UK, there’s quite a nice balance between employer and employee. When you move further down the spectrum to countries like France and Spain, it’s stacked quite heavily in favour of the employee.
They are pretty straightforward in the UK, particularly if they have less than two years of service. The process is even simpler if they have less than two years of service.
It’s helpful to explain what the total cost of employing somebody in the UK is. As in, what’s the employer loading for social security, pension contributions and other things. In the UK, the employer loading is about 20% of the gross salary. If you pay them a hundred, then the cost to you as an employer will be in the region of 120.
This comes up so frequently. Any employee can be hired fairly immediately in most countries. When it comes to a first hire, in a country where you don’t have any infrastructure, where you haven’t made any registrations, it’s quite helpful to understand how long it takes. That is, from pushing the button to actually being able to onboard that employee. In the UK, it’s almost instantaneous. You can employ somebody today and we can take care of tax registrations and other things tomorrow. That’s absolutely fine and it is compliant with how things are done in the UK.
There aren’t many country quirks for the UK, but as they are on their way, or have technically exited the EU, there’s still a lot of uncertainty. Particularly around mobility of those who previously enjoyed full mobility into the UK, based on its membership of the EU.
This is intended as guide for prospective companies wishing to do business in the UK. There seems to be a strong correlation between how easy or difficult it is to do business in a country with how easy or difficult it is to employ. The UK is simple in terms of doing business, it’s simple to expand into and a simple place to employ people.
2020 World Bank Ease of Doing Business Ranking: 8th
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France is often rolled out as typically very complex and an awful place to hire people.
It is complex and it does favour the employee, but with the appropriate advice and with good support then employment can be managed. We’re very well versed and experienced in supporting our clients with employment in France. There are those who say, ‘we should never hire in France.’ That’s not the case at all. There are some fantastic talents and skills in France. I think it’s more important to tap into that talent, than it is to be too overly sceptical about the dangers posed by employment.
These are complex.
It is relatively high, 140%, or even 145%. The burden of social security in France is mainly with the employer.
From pushing the button to being able to onboard the first employee is longer than the UK. It takes about four to six weeks. Be aware that if you want to hire somebody in a hurry, it’s a good idea to start the process as early as you can, because registrations and other things need to be put into place.
Things that we’ve already referenced HR, collective bargaining agreements, and language requirements. Also, French employees are typically quite litigious if things don’t work out, so that’s something to look out for.
It is a reasonably complex place to do business and accordingly a fairly complex place to employ people as well.
2020 World Bank Ease of Doing Business Ranking: 32nd
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Germany, France, the UK are markets where we do an awful lot of work. In Germany, I would say employment law is moderately in favour of the employee, but again fairly balanced.
These are moderately complex. The German employee isn’t quite as litigious as the French or Spanish.
This is typically about 130%, or a 30% uplift on gross salary.
This is about four weeks, but it can be accelerated. We can get employees onboarded quicker than that with a couple of work arounds.
The social security system is quite a unique part of German employment and payroll, in that German employees have their own social security account. This they port from one employer to the next. The burden of social security is actually about 40%, but it’s split between employee and employer. As an employer, you would burden would be 20% of that, the employee themselves cover the other 20% and that’s the normal arrangement in Germany.
It is fair to say that it falls between the UK and France in terms of general employment complexity.
2020 World Bank Ease of Doing Business Ranking: 22nd
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We’ve added Ireland because it’s a popular choice. As the UK now exits from the EU, Ireland is again on the radar of tech companies as a great place to employ. They’re English speaking and there’s good communication routes into the US and also Europe. Being a member state of the EU, it retains all the advantages of EU membership, which the UK is gradually shedding.
It is similar to the UK, in that it is quite well balanced.
This is also quite straight forward.
This isn’t too bad, only a 20% uplift on gross salary.
It’s very similar to the UK system and we can get an employee onboarded virtually immediately.
There are none from an HR and payroll perspective.
I don’t think the difficulty ranking does it justice, I think it’s more straightforward than that.
2020 World Bank Ease of Doing Business Ranking: 24th
That is an accelerated run through of the employment law landscape in Europe. Hopefully this flags to everybody why European employment law is portrayed and often typified as very complex and very difficult to deal with. It’s not, if you get the right advice and if you get the right guidance. If you don’t do that, then it can be fraught with risk and liability. But if it’s well managed, it’s a great place to do business. We support a huge number of our clients with their European activities.
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What do you mean exactly by country quirks?
These are things that are unique to those countries, things that may be of particular interest. For example, the unique social security structure in Germany, or the complex HR law in France. Things that are unique to each country and not really a broad umbrella that applies to the EU as a whole.
I suppose another word for quirk would be oddity. So, a country quirk, or a country specific quirk is what is particularly unusual or particularly odd about that country or about its employment law.
Is there a risk to paying contractors and not having a local legal entity?
The main risk is permanent establishment risk. There are a few criteria that feed into to what PE risk is, these can really damage your brand and open your company up to liabilities. The way we recommend mitigating that is by establishing a legal entity, but certainly there are other options that exist. It’s dependent on your circumstances, how large your team is and what kind of work they’re doing.
Whether a legal entity is technically required, does depend on circumstances. How many employees do you have? What activity are they engaging in? Then we can determine whether there is a risk, a tax risk generally. And it is about tax and not really about HR or employment law. Employment without a legal entity is fine for certain types of activity. There are gray areas where one could argue that there should be a legal entity and on the other hand, you could argue there shouldn’t. That gray area is really the piece that usually requires a bit of support. That’s something we advise a lot of our clients on, what is the risk of employing this person or these people in this country with, or without a legal entity. Usually we get to find a compromise or an agreement with our client based on their attitude towards, frankly, risk and cost. Those usually are the factors that play a part in concluding the situation.
Which countries are currently popular spots for US companies to hire in Europe?
Despite Brexit, the UK remains a really popular place, particularly for US companies to hire as a first footfall in Europe. Brexit does have an impact for some types of business and it doesn’t have any impact at all for other types of business. As long as a company understands where it falls on that spectrum, then the UK can continue to be the location of choice for first footfalls into Europe. The UK is still popular, Germany and France have always been popular and they continue to be popular. Germany is a big economy, France is a big economy, they both have very skilled workforces, they’re more central than the UK to Europe. There are great commercial opportunities in those countries across the board.
Spain is also very popular. The general level of engineering skills, particularly in Spain and Portugal are very high. We have an increasing number of clients coming to us and asking us for help with establishing engineering centres in Portugal and Spain.
I think those are the main ones and then there are what I would consider, perhaps to be secondary countries. These countries are Italy, the Netherlands, the Nordics as a whole, and also Ireland. There is still lots of interest in these places.
I’m based on the West coast of the US but we’ve got pretty much all time zones covered since we’re a UK company as well. I am always happy to take an hour-long phone call just to discuss what specific circumstances you have, what your need is, what your timeline is like and how we can help you meet that. If you do have any questions, feel free to reach out to me Andrew.Laing@unaterra-global.com.