ICE October 2016 Newsletter

Again, so much to cover in this newsletter edition: new PAYE rules announced in France, the GCC get ready for VAT, India willing to go ahead with labour reforms and increased responsibility for Russian employesr. These are just some of the updates captured below. Happy reading!


BRAZIL

Voting on outsourcing delayed yet again

For those who thought the STF (Federal High Court) in Brazil was finally going to make a final decision on the legalisation of outsourcing, the 9th November turned out to be a bit of a let-down.

The discussion as to whether the core activities of a company should be allowed to be outsourced continues to be one of the most polemic involving bosses and employees across the country. There is currently no official legislation on the matter and the whole outsourcing sector goes by a ruling issued by the TST (Labour High Court) back in 1994 (known locally as Súmula 331), which states that only non-core activities can be outsourced to a third party.

Opinions are divided and the debate is fierce, with CUT (the main trade union in country) arguing a decision to legalise outsourcing and extend it to the core activities of a company would  destabilise the very structure of the labour market in country and worsen employment conditions.  Statistics suggest outsourced workers are paid salaries 24% lower than those of personnel hired directly by a client company, work longer hours and are victims of a higher number of work accidents. On the other hand, CNI (the National Industry Confederation) defend that the legalisation of outsourcing will lead to an increase of productivity and promote competition, resulting in lower prices of products for the consumer.

Having failed to deal with the matter on the 9th November, there is still no rescheduled date for the issue to be discussed and voted at the STF, with some now suggesting it is unlikely it will happen before 2017.


EUROPEAN UNION

The Apple tax bill

At the end of August we learned about the result of the European Commission investigation of Apple’s tax affairs in Ireland. The investigation lasted three years and the decision relates to unpaid taxes for years 2003 to 2014. According to the final ruling the tax deal between Apple and the Irish tax authorities was deemed illegal state aid,  resulting in Apple being ordered to pay €13 billion in back taxes to Ireland.

According to the commission, Apple had been allowed to pay a maximum tax rate of just 1% and at one point the US giant paid tax at just 0.005%, whilst other companies in Ireland would normally be subject to the standard corporate tax of 12.5%.  Within days of its announcement, the Irish parliament voted in favour of backing Apple and appealing against the ruling, which was formally done on the 9th November. The commission findings also sparked fierce criticism by US political figures who view the ruling as a direct attack on American businesses and consider it a threat to the economic partnership between the US and the EU. According to Apple’s CEO, Tim Cook, the ruling would end up impacting investment and job creation in Europe. The Irish government fears the ruling will affect its status as a low tax base for overseas companies and according to its Finance Minister, Michael Noonan, it “puts at risk the country’s tax system integrity”.

Opinions are divided, with some arguing the special tax deals have created jobs and helped investment, whist others still see the job and wealth creation arguments not enough to justify advantages granted to multinationals. In this specific case, the commission understands Apple avoided tax on almost all the profit across the EU’s single market as it booked profits in Ireland, rather than the country where its products were actually sold. There is potentially still a long legal battle ahead and in the meantime the debate on tax avoidance and the fairness of aggressive tax schemes goes on.


FRANCE

The El Khomri law and the three ‘new’ types of rules

As France gradually starts enforcing its newly passed El Khomri law (or Loi Travail), we take a quick look at the new structure of agreements. As part of the reform, the existing 700 branch agreements, for example, are due to be reduced to 200, with negotiations taking place over the next two years.   The following will be the three new standards in French labour law:

  • Ordre public (public order provisions): this consists of a set of national rules that define a core of non-negotiable, protected employee rights;
  • Champ de la négociation collective (scope of collective bargaining): this set includes negotiable rules that can be determined freely within each branch (industry), group of companies (intercompany) and worksite (company-wide);
  • Disposition supplétives (auxiliary default rules): this default set of rules includes those applicable in case there is no collective agreement.

The new law redefines the structure of collective bargaining allowing group agreement’s less favourable measures to prevail over the branch agreement even when the latter doesn’t authorise it explicitly. Furthermore, it allows a less favourable group agreement’s measures to prevail over a more favourable worksite agreement. Finally it also permits a worksite agreement with less favourable measures to prevail over measures of a branch agreement. This reversal of hierarchy of norms applies to all agreements irrespective of dates they were signed.

Having said that, there are default core areas to which the old hierarchy of rules still apply, namely: minimum wages, grades and levels, medical insurance, training funds, physically demanding work and sex discrimination.

One major change refers to the inclusion of working hours regulations in the scope of collective bargaining, meaning a worksite policy will prevail even if less favourable as it refers to overtime pay, night work, rest breaks, travel and commuting time compensation, maximum daily/weekly working hours, amongst others.

Other new rules introduced by the recent legislation will also affect a number of areas such as protection of parents against dismissal, extra holidays for male employees with children, work council rules and disabled workers, to name a few.

Withholding tax effective from 1 January 2018

Those who thought the reform of the labour code was enough change for the French labour market had better brace themselves – the French government decided to also introduce withholding of employees’ personal income tax.

For now, France remains one of the few countries where employers do not withhold income tax from their employees’ payroll and the responsibility lies solely with the employee to pay their income tax, a year in arrears. However the current system poses problems when there is a drop in income in the following year, especially where the employee did not save enough to cover his/her own tax liability for the previous year. In order to overcome this and the challenges around accuracy and timely tax collections, the French government will implement an electronic filing system that will allow employers to withhold and pay the income tax to the tax administration on behalf of their employees. A tax rate will be communicated to the employer through the monthly wage reports (DSN – Déclaration Social Nominative) after it has been calculated by the French Tax administration based on the individual’s income of the previous year (i.e. 2016 income will be assessed and the rate will be indicated on the tax bill normally issued in September 2017).

A certain level of flexibility will be allowed so an individual can increase or decrease their withholding tax rate by requesting it via their individual tax portal on the French Ministry of Finance website; any revised rates will be communicated directly to the employer through the DSN. Employees will still have to file their annual income tax declaration at the end of the year, at which point a reconciliation will be made between payments made by their employer and the actual tax due. Any due balance will be paid directly by the employee to the tax administration.

Full details of the reform are still to be published so those operating in France should watch out for details as these are released by the government. Finally it is worth noting that for income not subject to the withholding tax such as business income and self-employed income, monthly or quarterly income tax payments will be requested.


GERMANY

Delay in adoption of new AUG law

With the German government approving the proposed changes to the AUG legislation in October, it was also confirmed that the new Germany Employee Leasing Act will come into effect on 1 April 2017 and not 1 January 2017, as originally suggested.

This is the new law that will limit temporary workers’ assignments to a maximum of 18 months with the same end client and equal pay rights will apply after nine months (as long as equal pay is covered under an applicable collective bargaining agreement) amongst other things. For further details please refer to previous editions of the ICE Newsletter or contact me directly.


GULF COOPERATION COUNCIL (GCC)

The introduction of VAT in the Middle East

From 1 January 2018 the GCC members (namely Bahrain, Kuwait,  Oman, Qatar, Saudi Arabia, and the United Arab Emirates) will start implementing VAT. It was decided in June that the six countries would start implementing VAT at a rate of 5% from January 2018.  A common legal framework should have been finalised at the end of October and it will be the basis for a national VAT legislation system to be implemented by each country member; this will still allow each authority to determine its own VAT rules in certain areas. The GCC system is expected to be similar to the European model, with the tax being charged at each step of the supply chain, with the ultimate consumer bearing the cost of VAT.

In October it was announced that the UAE was hiring a team of tax experts as well as setting up a federal tax authority that would be in charge of collecting levies from the newly introduced VAT from the beginning 2018.

The implementation of VAT as well as a number of other fiscal reforms are part of the bloc’s efforts to deal with the sharp decline in oil prices and increase revenue collection.


INDIA

PM Modi decides it is time to proceed with planned labour reforms

Back in April 2015 the Indian government had announced major labour reforms, including plans to condense the 44 labour laws into four codes that mainly dealt with industrial relations, wages, safety and social security and welfare. There would then be a fifth one which would be used as a model law for the states to adopt. The main motivation: help promote growth and job creation by simplifying current legislation that dates as far back as 1926 and 1947. But as some of the proposals included plans to make it easier for employers to carry out mass layoffs (up to 300 employees) without the government’s consent, the 11 central trade unions were not happy, stating workers’ welfare would be severely affected whilst employers would have power to hire and fire at will. The fierce opposition from the unions and workers’ protests, including strike action, caused the reforms to be put on the backburner until September this year, when the government announced it was determined to proceed with the changes to the labour laws.

Another aspect the Modi government will have to consider is the growing demand for contract workers and the fact that the Contract Labour Act 1970, which currently governs the hiring of temporary workforce, also needs updating. Staffing companies as well as clients still contend with a highly bureaucratic and decentralised hiring process. As a consequence, there is a prevalence of non-licensed companies supplying contract workers, whose labour rights are not protected – a system of compulsory licensing for all firms is potentially one of the many things that will have to be considered in order to facilitate the development of the staffing industry.

With more than 200 million Indians reaching working age over the next two decades, Prime Minister Modi and his team certainly have a challenge ahead.


NORWAY

Employee or independent contractor?

While the difference between employees and independent contractors is very clear when it comes to employment protection rights, the actual classification can be a challenging process in many a situation experienced across many countries. Norway is no exception to this, as a recent clarification from the High Court on a case involving a child welfare social worker engaged by the local authority revealed.

The Norwegian Working Environment Act defines an ‘employee’ as ‘anyone who perform work in the service of another’ and even though the courts have traditionally applied concrete evaluation using questions that help identify where an employment relationship exists, there is no ‘one-size fits all’ assessment, and all circumstances of each case need to be taken into consideration.

The High Court used as a reference two cases regarding social workers in 2013. The first involved a social worker engaged to support a family of a child with special needs, where the social worker was required to personally provide the services, the family mostly controlled the work situation and, finally, the work was carried out at the family home. The conclusion here was that the worker was an employee of the municipality. The second case involved a social worker engaged as a foster carer, who despite the personal aspect of her work commitment and a level of control exercised by the municipality, was able to perform the work from her own home, which was supposed to be a separate home where the child was treated as a family member. In this case, the worker was understood to be an independent contractor.

In the most recent case analysed by the High Court, again the social worker was found to be employed by the municipality, mainly on grounds of personal commitment and inability to delegate the work (so no right of substitution), the employer’s ability to exercise control/issue instruction as well as the fact that they retained overall responsibility for the work result. It is interesting to note this decision was reached even though the employer was not responsible for the workplace –  the social worker provided the services from her own home – but that aspect in isolation was not enough to justify an independent contractor status.


PORTUGAL

Amendments to employment law now in force


The Employment Code and rules on operation and licensing of private placement and temporary employment agencies were recently amended by the Law 28/2016 (Combatting modern forms of forced labour), which came into force on 22 September 2016. With the changes, employers (both agencies and end users) see their responsibility increased with regard to temporary workers, workers provided on an occasional basis and outsourced workers providing services at the beneficiary’s premises in relation to aspects of their pay (such as holiday pay and bonuses), social charges, violation of legal provisions relating to health and safety, amongst others – all of which are restricted to the first 12 months of work. Besides these, agencies and users are also joint and severally responsible for all other aspects of pay due to the workers, corresponding social security contributions and payments of any applicable fines with no time restriction.


RUSSIA

Employer’s increased responsibility for payroll law violation

A new law in Russia – Federal Law 272-FZ – came into force on 3 October 2016 with the aim of increasing the responsibility of employers when there is a breach of payroll law, resulting in higher interest rates applicable from the day after the payment was due up to the date of the actual payment.  Other punishments such as issuance of warnings and penalties as well as criminal sanctions for extreme cases (where payroll non-payment exceeds three months) remain as they are under the current provisions, which also entitles the employee to suspend work in case of delays exceeding 15 days.

The existing legislation already required companies to specify deadlines for payroll payment, but the new piece of legislation goes further to determine that the first half of a month must be paid between the 16th and 30th of the same month, whilst the second half should be paid between the 1st and the 15th of the following month. Rules on the payment of bonuses and allowances are more relaxed, allowing for monthly, quarterly or even yearly payments, depending on stipulations of collective agreements, contracts and local regulations.

Should an employee decide to take legal action due to a breach of payroll law, he/she will now have up to a year to do so (it was three months previously) and the application can be submitted to a court at the employee’s place of residence as opposed to the employer’s location as previously required. Finally a State Labour Inspectorate can now carry out inspections following complaints of payroll delays or breach of minimum statutory salary payments by simply notifying the prosecutor’s office and without having to obtain prior consent.


SPAIN

Severance payment rights extended to temporary workers

Those using temporary workers in Spain should be careful to ensure they make provisions for benefits and redundancy pay similarly to what has to be done for permanent workers. A ruling back in September has stipulated temporary workers (both temporary staff and substitute temporary workers) should be granted the same pay rights guaranteed to permanent employees when being dismissed, that is, 20 days per year of service. Prior to this ruling, temporary staff was only granted 12 days and substitutive temporary staff had no entitlement at all, irrespective of the duration of their engagement or services provided.


UNITED KINGDOM

Public sector IR35 reform and the government war against the false self-employed

We all know that most people are not happy with the government plans to proceed with the IR35 reforms in the public sector – the subject has been widely covered over the last few months. Whether public sector clients will want to engage freelancers directly as temporary workers or through a third-party payroll, nobody really knows. Polls (whether we can trust them is a separate matter) suggest freelancers will not want to be payrolled or treated as fixed-term employees of the clients; there is also a possibility of high number of contractors leaving the public sector to find work elsewhere. There has been so much controversy around the issue that many expected (or hoped?) the government would at least postpone the plans, but on the 23rd November, the UK Chancellor Phillip Hammond confirmed during the Autumn Statement that the reform is going ahead, with changes indeed taking place from April 2017. Those who awaited with bated breath for at least some answers to the many existing questions surrounding the reform were left once again disappointed. And the one thing that was clarified turned out to be, again, another piece of bad news: the 5% tax-free allowance for business expenses, currently in place for those providing services through their PSCs (personal service company), will be removed for those working in the public sector. The government understands the allowance not to be justifiable anymore considering the administrative burden of deciding whether IR35 applies no longer sits with the workers, but with the client or recruitment agency (whoever makes payments to the worker).

Meanwhile, the government has also announced the launch of a new specialist unit within HMRC (‘employment status and intermediaries team’) that will investigate companies using large number of self-employed or agency workers as a means to reduce their costs, misclassifying these workers and denying them employment rights they are entitled to. Companies declaring high numbers of self-employed workers as well as those tipped off as carrying out abuse of the rules will be targeted, and, if found in breach of the rules, they will be forced to pay appropriate tax, national insurance contributions, interest and penalties. And obviously, the ruling on the Uber case at the end of October only fuels the argument, despite the fact that many self-employed workers state they are not vulnerable and do not want any employment rights or benefits. In the Uber case, the employment tribunal found that the UK drivers should have been classified as workers and not self-employed, therefore being entitled to minimum wage, holiday pay and all the other regular worker rights.

With Uber promising to appeal the ruling, we still haven’t seen the end of this – one can only wonder what the future holds for the gig economy.


VIETNAM

Amendments to the labour law

The Vietnamese government has put a lot of effort over the last two years in order to create a more favourable investment environment for foreign investors, significantly reducing administrative procedures and shortening the time required to set up foreign-owned companies in the country.

At the same time, the country is going through changes to the labour laws, which will increase benefits to employees, so both local and foreign investors should be aware of these. The changes include new minimum salaries for certain working regions in 2017; the potential to expand the definition of ‘managerial positions’ in their charter allowing more foreigners to qualify for these, therefore becoming eligible for work permit applications; the overtime issue will be addressed and affect mainly manufacturing companies where benefits are to be increased; compulsory social insurance contributions are to apply on all employees with a contract for a month or more, from January 2018, including expatriates (who currently only contribute to health insurance if engaged for three months or longer).

Further details on how some of these changes will be implemented are still to be published.

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I hope you find this newsletter useful. However please note that the content of this newsletter is to be used for informational purposes only and is not to be construed as legal or financial advice. While ICE tries to ensure the information is accurate at the time of writing, due to the nature of Global Compliance, all such information is subject to change AT ANY TIME based on country laws and regulations. ICE shall therefore not be held responsible in any way, and you are strongly advised to contact ICE directly should you wish to obtain further details on a specific country.

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