Last week, the European Court of Justice (ECJ) issued its much anticipated judgment on the notion of “employer”. The employer is an important element and connecting factor in the European legislation on the coordination of social security systems (Regulation no. 883/2004 and Regulation no. 987/2009). In last week’s judgment, the Court favoured a more factual approach and interpretation of the notion of employer over the mere formal interpretation, which was traditionally widely accepted.
The ECJ’s new interpretation of the notion of “employer” came about in the case AFMB vs. SVB. This case revolved around a number of truck drivers, who lived in the Netherlands and had concluded employment contracts with a company based in Cyprus, named AFMB. Although formally employed by AFMB, the truck drivers performed their multi-state activities in the EEA on behalf of and under supervision of several Dutch transportation companies, which had all concluded fleet management agreements with AFMB.
Based on the provisions of Regulation no. 883/2004, the truck drivers, who didn’t work at least 25% of their total working time in their home country (the Netherlands), became subject to the social security legislation of the country where their sole employer was vested, i.e. Cyprus.
The Dutch social security authorities (the SVB) did not agree with the above set-up and actively challenged the application of the Cypriote social security legislation. The SVB were of the opinion that the drivers were in fact employed by the Dutch companies and should therefore be subject to the Dutch social security legislation. They based their claim on a number of reasons: the total labour cost was charged to the Dutch companies by the Cypriote company, the employees received their instructions from the Dutch companies and they were under control of the Dutch companies. Moreover, some of them had even been (formally) employed by the Dutch companies in the past.
When the dispute finally came before the ECJ, the Advocate-General (AG) was the first one to give his view on the matter. He opined that, for lack of any definition in European legislation or reference to national legislation, the Court would have to find an autonomous and uniform interpretation of the concept of “employer”.
In this respect, the AG argued that the legal employment contract should only serve as an indication and that one must rather look at the factual circumstances to assess who exercises the actual hierarchical control over the employees. Given the (specific) elements in this case, the AG argued that it were in fact the Dutch companies who had to be considered as the employers and not AFMB.
Last week, the Court itself issued its final decision on the matter. In its judgment, the Court agreed with the views of the AG. The Court ruled that, for the application of the European legislation on the coordination of social security systems, the notion of “employer” must be interpreted uniformly as the undertaking that has the actual authority over the employee, that bears the salary cost and that has the actual power to hire or fire.
According to the Court, AFMB did not meet the above factual requirements to be considered as an employer. The fact that AFMB was the legal employing entity with which the truck drivers had concluded employment contracts was in itself not decisive as the existence of a hierarchical relationship was not sufficiently demonstrated and the employment contracts could only serve as an indication thereof.
Consequently, for the application of Regulations 883/2004 and 987/2009, the Dutch companies must be considered as the truck drivers’ employers. This means that, in the case at hand, the truck drivers would in principle be subject to the Dutch social security legislation.
Even though the Court only ruled on the specific case that was brought forward, the impact of this judgment should not be underestimated.
The Court actively set aside the formal, contractual relationship in favour of the actual hierarchical relationship to determine the employer. Although concluding an employment contract may be an indication of a hierarchical relation, only insofar as the hierarchical relationship and the formal employment contract coincide, can the legal employer be considered as the actual employer. If not, the hierarchical relationship will prevail.
We see set-ups and approaches similar to the one in AFMB in different industries, whereby employees are formally hired by a company in e.g. Cyprus or in an Eastern European Member State and as such subject to the (often cheaper) social security scheme of the country where their formal employer is located. These set-ups will - when applying this judgment - no longer be possible and may be actively challenged by national social security institutions if no substance can be proven on the existence of an employer relationship between employee and formal employer.
Moreover - and perhaps even more importantly - questions may also arise with respect to postings. Indeed, as the notion of employer must be interpreted uniformly throughout the European legislation on coordination of social security systems, the ECJ judgment will also reverberate here. A posting with continued subjection to the home country social security legislation is only possible insofar as the employee maintains his organic and hierarchical relationship with his (home) employer. In practice, we regularly see that posted employees become fully integrated members of the host company’s organisation and often come under hierarchical control of the host company, certainly in the event of intra-group assignments. In such an event, the present ECJ will provide additional ammunition for authorities to challenge the nature of the posting and to claim that the posted worker’s actual employer is in fact the host company.
The ECJ has taken an important step in battling constructions that are set up to avoid or abuse the European rules on the coordination of social security systems, however, it’s judgment will have an impact beyond the specific set of facts in the AFMB-case.
In order to avoid future issues it will thus be more important than ever to ensure that the legal reality, as laid out in the employment contract, is fully in line with the factual circumstances in which the employees are required to work.
If you’d like to assess the impact of the ECJ judgment in the AFMB case on your global mobility operations, don’t hesitate to reach out.