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Terminating the Employment Contract of an Employee Abroad

Whatever the reason, it is never pleasant to say goodbye to one of your employees. When the employee involved is working for your company across country borders, there is a lot that must be considered.

First of all, you may come across different labour law issues, such as:

  • Where is the employee working, under what contract and which laws apply?
  • When the applicable laws are stipulated in the contact, was this determined correctly at the start of the employment or could the employee possibly benefit from other laws when appearing before a court of law?

When on assignment, both the assignment and the employment contract need to be terminated. For employees that have split employment contracts without an umbrella agreement that terminates both simultaneously, the contracts need to be terminated individually. The applicable laws of the country where the contract is concluded will need to be considered.

The next important element to consider is tax. Sometimes, there is a period of garden leave, where the employee has resigned or otherwise had their employment terminated and is instructed to stay away from work during the notice period, while remaining on the payroll. During this time, it is important to know several things:

  • Is the income during this period is taxable in the home or host country? Or both?
  • Does the employee stay in the host country during this time or come back to the home country?
  • Is there an applicable tax treaty between the two countries or do you have to rely on the local tax rules of the two (or more countries)?

When a tax treaty is applicable, then garden leave is usually taxable in the country where the employee “would have worked”. But how to interpret that? The same applies for a termination payment. How does the tax treaty allocate this payment for taxation? There may be ways within local rules to possibly benefit from the termination payment if it is structured in the right way. For the employer, the tax position is very important as it directly links with the wage tax withholding obligations. And in case of an assignment on a tax equalization basis, check your policy to see whether the garden leave and termination payment are covered under the tax equalization agreement or not. If you haven’t yet done so, make sure to include that when drafting the policy.

Last, but certainly not least, there are the questions regarding social security.

  • What country’s social security rules apply to the garden leave and termination payment?
  • What are the entitlements of the employee under his or her applicable social security system (or systems) and does this affect the termination conditions?

As you see, lots of things to consider! Make sure you give the termination of that cross-border employee the additional attention it requires.