In addition to other formalities, all employers in the European Union who post their employees to other member states or employ citizens of other member states or the EEA are already used to dealing with the issue of which member state they must pay social security and health insurance contributions in on their behalf. Also, the self-employed must deal with this problem when they decide to do business in one or more EU member states. Nevertheless, the correct interpretation of the relevant coordination regulation sometimes seems problematic for employers and the self-employed, and the incorrect application of the regulation or lack of information on the applicable legislation may result in many sanctions.  

 

By 1 May 2010 this situation will be covered by the coordination regulation for social security, Council Regulation (EC) No. 1408/71, on the application of social security schemes to employed persons, to self-employed persons and to members of their families moving within the Community,, as amended (“Regulation”) and Council Regulation (EC) No. 574/72, which lays down the procedure for its implementation (“Implementing Regulation”). Coordination regulations are legislation which is directly binding on and superior to the national legislation of EU member states.  They are to determine the social security legislation[1] applicable to employees, their family members and the self-employed who operate in one or more EU member states, and to determine the entitlements of these persons to health care and other social security benefits such as pensions and unemployment benefits. It must be noted that the application of the Regulation and the Implementing Regulation (“Current Regulations”) was contractually extended also to EEA states (Iceland, Norway and Liechtenstein) and Switzerland.   

 

After 1 May 2010 the Current Regulations will be replaced by New Regulations, that is, Regulation (EC) No. 883/2004 on the coordination of social security systems (“New Regulation”) and Regulation (EC) No. 987/2009 laying down the procedure for implementing Regulation (EC) No. 883/2004 (New Implementing Regulation).

 

The purpose of this Article is to draw attention to some new rules to be introduced by the New Regulations which employers and the self-employed in the EU will have to follow in the relevant situation. 

 

First, we remind you of some basic coordination principles and present the changes which will occur under the New Regulations. 

 

BASIC COORDINATION PRINCIPLES

 

Under the New Regulations the following four coordination principles applicable under the Current Regulations will apply:

 

-       Equality of treatment, that is, the principle of equal treatment of persons to whom the New Regulations apply. The persons are subject to the same obligations and enjoy the same benefits under the legislation of any member state as the nationals of that state. 

-       Application of the legislation of a single member state, that is, the rules for determining the applicable social security legislation. Their goal is to avoid situations when a person is simultaneously insured in several member states or not insured in any member state.

-       Aggregation of periods of insurance, that is, the total of the periods when a person was insured under social security systems in different member states is the basis for the entitlement to benefits, such as pensions. 

-       Retention of the acquired rights (payment of benefits abroad, export of benefits), that is, payment of benefits in any EU member state where the person who has the relevant rights stays.   

 

The assimilation of facts is a new principle arising from the judicial decisions of the European Court of Justice (“ECJ”). Under this principle equal effects are attributed to benefits granted by one member state (or events occurring in one member state) in another member state which applies the New Regulations as if the benefits had been granted (or events had occurred) in this other member state.  

 

MATTERS COVERED BY THE NEW REGULATION

 

The New Regulation applies and is superior to national legislation which deals with:

 

Sickness benefits, maternity benefits, invalidity benefits, old-age benefits, survivors’ benefits, benefits in respect of accidents at work and occupational diseases, death grants, unemployment benefits and finally family benefits. The New Regulation introduces equivalent paternity benefits and pre-retirement benefits. 

 

As mentioned above the regulation also applies to health insurance and non-monetary health insurance benefits.

 

PERSONS COVERED BY THE NEW REGULATION

 

The New Regulation applies to nationals of EU member states, stateless persons and refugees residing in an EU member state who are or have been subject to the legislation of one or more member states, as well as to members of their families and their survivors irrespective of their nationality. Compared to the Current Regulations the scope of persons covered also includes inactive persons.

 

However, it must be noted that compared to the Current Regulations the New Regulation does not yet apply to Norway, Liechtenstein, Iceland and Switzerland. The Current Regulations will apply to employees posted to these states until a new agreement is concluded with them.

 

The New Regulations also do not apply to nationals of third states. Correspondingly, nationals of the EEA and Switzerland, and nationals of third states, will temporarily be subject to the Current Regulations until a new regulation is adopted which is to replace Council Regulation (EC) No. 859/03 under which the application of the Current Regulations was extended to nationals of third states.

 

In certain cases the Current Regulations will temporarily apply also after 1 May 2010.

 

WHERE TO PAY INSURANCE

 

Let us focus on the principle of the legislation of a single member state which is expected to be the most interesting issue for employees (and their employers) and the self-employed. Despite the basic principle of paying insurance in the state where the work is executed remaining unchanged, the New Regulations makes the free rendering of services for employers who post their employees to other member states easier. A special category of employees in international transport has been repealed. The most significant amendments introduced by the New Regulation concern work performed simultaneously in two member states. Also, electronic communication between competent institutions and electronic forms represent a significant change. However, in this respect a temporary period of two years is set for member states.

 

 

 

Work executed only in one member state

 

If persons pursue activities as employees or self-employed only in one member state, they are insured in this state, that is, in the state where the activity is pursued. Their place of residence or place of payment of the remuneration is insignificant.

If, for example, a Slovak employee concludes an employment agreement which determines the Czech Republic as the sole place of performance of work, the employee is insured only in the Czech Republic.

 

Posting to another member state

 

Most frequently the Regulation must be applied by European employers when they post their employees to another member state. If certain conditions are observed, the posted employee will further remain insured in the social security and health insurance system of the state from which the employee was posted. However, some amendments are introduced to simplify the matter, which mainly include the fact that the execution of employees’ activities in another EU member state in the name of posting employers does not exceed 24 months.  Consequently, the term of posting is extended from the original 12 months (which might be extended by an additional 12 months under the Current Regulations) to 24 months.

 

The confirmation on the applicability of the legislation of the first member state will further be issued for the entire term of posting by the relevant authority of the first member state. When all conditions of the New Regulations are observed, employees posted by employer from one member state to do work in another EU member state will be for the entire period of 24 months subject to the social security and health insurance legislation of the first member state.   

 

As in the past the basic prerequisites for the posting must be observed, which are mainly the maintained direct relation between employees and employers who carry out the substantial part of their activities in the first member state, and the application of the social security and health insurance legislation of this state to the posted employees for a minimum of one month before their posting. The direct relation is assessed mainly with respect to the employers’ responsibility for hiring employees, their remuneration and performance of work, and the potential termination of their employment and the power to determine the nature of the work. As in the past, a posted person may not replace another posted person.

 

If, for example, a German employer who carries out substantial business activities in Germany posts its employees to Austria for a period which is not expected to exceed 24 months and if the conditions mentioned above are observed, the employer will pay insurance contributions for the employees only in Germany.  

 

Also, persons who normally pursue activities as self-employed in a member state and go to temporarily pursue similar activities in another member state may be posted for a maximum of 24 months. In such a case they remain insured in the first state if the expected term of their activities does not exceed 24 months. 

 

 

Activities pursued in two or more member states

 

As mentioned above, this area is subject to major amendments. Persons who normally pursue activities in two member states for one employer will further be subject to legislation of the member state of their residence only if they pursue a substantial part of their activities in this state. A substantial part means a minimum of 25 percent with regard to the working period or wages.  Also the development expected in the following 12 months is to be considered.   

If employees do not pursue a substantial part of their activities in the member state of their residence and they have only one employer, the legislation of the member state where their employer’s registered seat or place of business is located applies to them.  

 

Employees are also insured in the member state of their residence if they are employed by different enterprises or different employees whose registered seats or places of business are in different member states.  

 

It is important that the New Regulations also stipulate the criteria for determining the residence which is understood as a place where a person habitually resides. Information significant for the assessment of the place of residence is as follows: the duration and continuity of presence in the member state concerned, the person’s situation including the nature and the specific characteristics of all activities pursued, the place where the activities are pursued, the stability of the activity and the term of any work contract, family status and family ties, the exercise of any non-remunerated activity, the permanent nature of their housing situation, and tax residence. 

 

For example, an employee whose place of residence is in the Czech Republic works for an Austrian employeer simultaneously in the Czech Republic and Austria. While under the Current Regulations the employee would be insured in the Czech Republic, under the New Regulations it will have to be assessed whether the employee pursues the substantial part of their activities in the Czech Republic. If this condition is not fulfilled, the employee will be insured in Austria. 

 

 

The self-employed who pursue their activities in two or more member states are subject to the legislation of the member state where their place of residence is, if they pursue the substantial part of their activities in this state. A substantial part is assessed based on the turnover, working time, volume of services rendered and the income in the relevant state. In other cases, when the self-employed do not live in the state where they pursue the substantial part of their activities, they are subject to the legislation of the member state in which the centre of their activities is located. The centre is assessed with regard to the place of business, nature and duration of activities, volume of the services rendered and the intention arising from all circumstances.   

 

 

It must also be noted that, as opposed to the present situation, the determination of the applicable legislation does not depend only on the local competent institution.  At the request of the relevant person, the applicable legislation will be determined by a competent institution in the member state of the place of residence and the decision will be notified to the competent institution in the other member state. If the decision of the first member state’s competent organisation is not cast in doubt within two months by the second competent institution, the determination of the applicable legislation is final. 

 

If the competent institution of the other member state does not agree with the determined applicable legislation, the determined legislation applies only temporarily and the applicable legislation is finally and retroactively determined by the Administrative Commission. If other than the temporarily prevailing legislation is determined as applicable, insurance contributions and the costs of granted benefits must be settled between the competent institutions and any potential differences must be refunded to insured persons or paid by them.

 

Exception to the rules

 

Also, under the New Regulations exceptions to the rules mentioned above may be applied for. As in the past, both member states must agree on the exception to which no legal entitlement exists.  

 

 

 

TRANSIT FROM THE CURRENT TO THE NEW REGULATIONS 

 

Under the transitory provisions of the New Regulations and decision No. H1 of the Administrative Commission for the Coordiantion of Social Security Systems, E forms issued during the effect of the Current Regulations will also apply after 1 May 2010 until they cease to be valid or are withdrawn or replaced by documents issued under the New Regulations (in maximum for 10 years) .

 

The goal of this text was to draw attention mainly to certain new provisions concerning coordinating social security in Europe and determining the relevant rules upon the application of the New Regulations.  An employer in the EU and the self-employed should not forget that only based on the complex application of coordination regulations in individiual cases may they save costs and avoid sanctions in practice.