“I know that I have to comply with UK employment laws (minimum wage, notice periods, unfair dismissal protection. etc.) if I’m hiring an employee who lives and works in the UK. But, what employment laws apply to people I hire who live and work outside the UK?”
It’s something we often get asked at SeedLegals, it’s relevant to many SeedLegals users and it’s an important question with a two-part answer, so we thought it worth doing the research and sharing in this blog post.
So, here we’ll explain
- How the law decides what employment law jurisdiction applies to an individual (through a “closest connection” test), and
- How the law decides which of the employment protections an individual is entitled to once their working relationship is deemed to be connected to the UK (through the “employee”, “worker”, and “self-employed” categories).
How UK law determines which employment law jurisdiction applies
Unfortunately for those looking for a quick answer to this question, the Employment Rights Act (the statute which contains many of the employment protections in our law) was silent on whether its provisions apply to individuals beyond our shores. So, that question was left up to the courts, trying to interpret what the legislators must have intended when drafting the statute.
The courts decided that for employees working abroad the task was to look at the underlying employment relationship and evaluate whether it had a closer connection to the UK, or whether it had a closer connection to the foreign country in which the employee was working. If a closer connection to the UK, then the Employment Rights Act would apply. If a closer connection to the foreign country, then local employment laws would apply instead.
When making this inspection the courts said that the general rule is that the place of work is decisive in deciding where the closer connection lies. e.g. if employed by the UK company but living and working in the Ukraine, then Ukrainian employment law would normally apply to the employee’s contract.
But, the courts have also said that this rule was only a general rule, and that exceptional factors can swing the balance the other way. What the judges have not done is provide an exhaustive list of what those exceptional factors are. Neither could we find a reported case where it has been successfully argued that UK employment law applied despite the individual living and working in a foreign country.
You should craft your employment relationship with these in mind to minimise the chance of an unpleasant surprise when your US employee alleges you have unfairly dismissed her under UK employment law, when you were under the impression you could fire US staff without cause under US employment laws.
The best we can do is summarise what factors have been deemed relevant in swinging the balance:
- Purpose of working abroad/company structure
The courts drew a distinction between being posted by a British employer for the purpose of a business carried on in the UK, and working for a business conducted abroad. The example given was between a foreign correspondent for the Financial Times working in the US but writing for the Financial Times UK, versus a Financial Times journalist moving from the UK to the US to work for Financial Times American Edition. The former has a closer connection to UK employment law than the latter.It is not necessary that the foreign business be conducted under a formal subsidiary. Provided the foreign business has a separate budget and some form of autonomy it will be considered as distinguishable from the main business in the UK and make it easier to conclude the worker did not have a closer connection to the UK to fall under UK employment laws.
- Employment contract governed by English law
It is relevant what the employment contract states the governing law to be. A common mistake made by UK employers is using the standard form employment contract that they have on file, forgetting that the contract makes multiple references to English law and being governed by English law. You cannot use the excuse “oh, we just do that because it is inconvenient to draft a new employment contract for the new jurisdiction”.
- Frequency of foreign employees travelling to the UK to work
If the foreign worker regularly travels back to the UK to work for you, if they are British or hold property in the UK that will increase their connection to the UK in the eyes of the courts. Conversely, if the worker has been working in the foreign jurisdiction for many years, holds property in this new country, or effectively has roots in the foreign country, the courts are more inclined to hold the worker has a closer connection with the foreign country.
- Recruited and initially working in the UK
It has been held that if the employee first worked for the company in the UK and was hired in the UK, then it is more likely they could be seen as having a closer connection to the UK, despite now working in a foreign jurisdiction for the same company.
- Whether part of UK schemes or not
If making UK tax and social security contributions or taking part in a UK pension scheme then this will increase connection to the UK. If not, then the omission will increase connection to the foreign jurisdiction.
- Factual conversations
Conversations about this issue between employer and worker can be taken into account under this assessment. If the worker sought assurances he would continue to be protected by UK employment laws despite being posted abroad, and the employer assured the worker that would be the case, this will increase his connection to the UK.
Taking these factors together, our advice would be to make it clear from the outset what law is going to apply to the employment relationship.
Although the default position is that the laws of where the worker is posted will apply, you can remove any doubt by expressing as much in the employment contract, having a conversation with the worker about this fact and ensuring you do not include them in any UK specific initiatives.
How UK law decide what employment protections an individual gets (provided UK law applies)
The second point related to this question is that the UK has created different employment categories depending on the work one does. Employment protections (unfair dismissal protection, holiday pay, minimum wage, etc.) only apply to “employees” or “workers” (to differing degrees) as compared to people who are genuinely self-employed and who receive no statutory protection.
There are a variety of factors that the law takes into account when deciding whether someone is a genuine employee of the company, compared to someone who is genuinely self-employed.
The courts have said they look at the substance of the working relationship as opposed to simply what the underlying contract says the relationship is (take Uber for example, they insist their drivers are self-employed and the contract they offer to those drivers says as much, but the courts have repeatedly held they are employed by the tech company).
The gist of these tests is to look at how much autonomy the individual has during the working relationship. Can they choose their own hours? Do they have to wear a uniform? Are they paid through a company payment system? Can the individual use a substitute if they are unable to work that day? Have they been offered any company benefits? Does the individual have to bring their own equipment or have they been given company equipment? The less autonomy the more likely they will be considered an employee and so entitled to the employment law protections the UK offers (or potentially the employment law protection offered by the foreign jurisdiction).
The takeaway from this point is that if you are worried about having to comply with domestic or foreign employment law obligations when making your foreign hire, you can circumvent those obligations by ensuring you contract with the hire on a self-employed basis and they act as a contractor for the company instead of an employee.
On SeedLegals we have Advisor and Consultancy agreements that are drafted so as to ensure the person you are hiring will be working on a self-employed basis and you will not need to worry about having to comply with any obligations under employment law – these are all completely free under our Quick Agreements plan, they’re now market standard and used by thousands of UK companies.
As an employer, you can make sure you do not have to comply with employment law obligations (whether domestic or foreign) by hiring people on a self-employed basis rather than as new employees.
If hiring employees who will be based and work in a foreign country but nevertheless for your company, the general rule is the local employment laws will apply to that employee. But, exceptional factors can disapply the general rule, so you can avoid that by making it clear in his contract and in your dealings with him that local employment laws rather than UK employment laws are going to govern his employment with your company.
For more information, reach out to us at SeedLegals.