A recent decision by the Dutch Supreme Court - that a certificate of applicable social security legislation (E-101) is not valid should an employee decide to settle in the country where they are working - might have severe consequences for employees who, during the period of secondment, change their country of residence to that of the country where the employment is carried out. Roeland van Esveld and Hanneke van Dorst from Deloitte & Touche report.

On 18 April 1995 a Dutch employer seconds a Dutch resident to a German company where the employment activities are performed in Germany exclusively. The Dutch social security authorities have issued an E-101 certificate for the period 18 April 1995 up to and including 17 April 1996, stating that the employee will remain covered by the Dutch social security system.

On 22 May 1995, due to changed personal circumstances, the employee emigrated to Germany and consequently became a German resident. The employee claimed that, due to having become a permanent resident of Germany, he was not liable to pay Dutch social security contributions.

The Dutch Supreme Court decided in favour of the employee. The Court stated that in the event of an employee emigrating to the country where the employment is carried out, a conflict of two applicable national legislations, such as that of the Netherlands and of Germany, is not at hand. In other words: there is no cross-border element to the employment situation.

In conjunction with this opinion, the Court decided that, since the employee had severed all ties with the Netherlands, in particular by changing his country of residence to Germany, Dutch social security legislation no longer applied as of the date of emigration.

The Court believes that Dutch legislation can only continue to apply in the case of ties still existing with the Netherlands during the period of secondment.

The Court's decision has triggered off a discussion as to the soundness of this judgement as it is quite common for employees to become resident of the host country during a period of secondment.

Until this decision, emigration of an employee has never been explicitly considered an issue in respect of the validity of an E-101 certificate. In our view, the Court has issued a questionable decision. The 'rightness' of the Court judgment is also questioned by social security agency, the SVB, and disputed in professional literature.

Below, the general rules of European social security legislation are summarized. Based on these rules, the objections to the Court decision are set out and, in conclusion, the possible consequences of the judgment.

EC-Regulation 1408/71

In international EC-employment relationships, EC Regulation 1408/71 (hereafter: "EC Regulation”) appoints the applicable social security system in case an employee is performing activities in the territory of a member state of the European Economic Area. Applicability of the EC Regulation is in general restricted to employees who were or are covered by the social security legislation of one or more member states.

Basic rule

The basic rule states that the employee will be covered by the social security system of the country he works in, regardless his place of residence or the place of establishment of the employer (art. 13, paragraph 1, under a EC 1408-71).

Secondment

The EC-Regulation provides an exception to this basic rule. When an employee is seconded to another member state by the company he/she normally works for, the social security system of the first member state remains in principle applicable, provided that it is not expected that the period of secondment will exceed 12 months and on the condition that the employee does not replace another employee whose secondment has ended (art. 14, paragraph 1, under a EC 1408-71).

In confirmation of the fact that during the period of assignment the social security system of the first member state remains applicable, a certificate of applicable social security legislation (E-101) can be obtained from the competent social security agency of the first member state.

The period of twelve months may be extended with another twelve months in case the period of assignment unforeseeably exceeds 12 months (art. 14, paragraph 1, under b EC 1408-71). A request to this extent should be filed with the competent social security agency of the member state in which the employment is carried out.

General escape rule

The EC-regulation also provides a general escape rule. The competent social security authorities of the member states involved may, by mutual consent, deviate from the allocation rules as explained above (art. 17, EC 1408-71).

A request should be filed with the competent social security agency of the member state by which social security system the employee wants to remain covered. If the request is granted and an E-101 certificate is issued, the employee can, in principle, remain covered by the social security system of the first member state for a period of five years.

This general escape rule can be used in the case that it is clear that the period of secondment will exceed 12 months.

Objections to the Court’s judgment

In the present case, an E-101 certificate has been issued on the basis of art. 14, paragraph 1, under an EC 1408-71, since the duration of secondment was not expected to exceed 12 months.

As mentioned above, the Supreme Court has judged that Dutch legislation can no longer apply as from the emigration date, although an E-101 certificate has been issued to this purpose. This judgment is founded on the following line of reasoning.

An exception to the basic rule can only be applicable in the case of the employee continuing to have ties with the country from which he was seconded. To determine whether or not these ties still exist, the country of residence should be taken into account.

Because the employee no longer resides in the Netherlands, the ties with this country have ceased and consequently no conflict of two applicable national legislations, such as of the Netherlands and Germany, is present. Consequently, the employee is covered by the German social security system and the E-101 certificate has been rendered inoperative.

In our opinion this judgment is questionable based on the following reasons:

1. The Court decision is in conflict with general principles of EC legislation, especially with the principle of free movement of employees, since an employee might not agree to be seconded in case he can not remain covered by the social security system of the country seconded from;

2. The nature and meaning of the EC regulation and the wording of the articles incorporated oppose the assumption that the country of residence is a decisive factor with regard to applicability of the allocation rules, in particular of the secondment rule;

3. The secondment rule is also applicable in case a conflict of applicable legislation does not exist. This can be derived from the fact that the EC regulation is applicable to employees who are, or who have been covered by one or more social security legislations. The EC regulation does not state that it can only be applied in the case of two or more social security legislations conflicting;

4. The Court has put the E-101 certificate aside. It can be derived from European case law that the 'rightness' of an E-101 certificate might not be put aside unilaterally by one of the countries involved (i.e., the Netherlands). When it appears that an E-101 certificate has been issued wrongly, the countries involved should consult whether or not the content of the E-101 certificate should be revoked and/or adjusted.

   Although it can be argued whether or not this should also be the case if the facts and circumstances of the secondment have altered (emigration), which have not been reported to the competent social security agency, if the Court should at least have taken the value of the E-101 certificate into consideration.

Possible consequences of the judgment

Although the competent Dutch social security agency has questioned the rightness of the decision of the Court, it is possible that the agency will comply with the decision in the end. In such a case, the consequences of the judgment might be severe.

Employees who are in possession of an E-101 certificate, issued on the basis of the secondment article, should be aware that, if they have changed their residence to the country in which the work is carried out, the E-101 certificate could no longer be valid. As a consequence, they will be socially insured in the country where the work is carried out. As a result, social security contributions are due and entitlement to social security benefits could arise.

The Court has not decided that the same line of reasoning should be followed in case an E-101 certificate has been issued on the basis of article 17 of the EC Regulation (the mutual consent article).

Although the Court has not decided in this direction, we feel it might be possible that, in the case of an employee changing his residence to the country in which he works, which might easily be the case as the E-101 certificate can be issued for a period of five years, the E-101 certificate will also be set aside as non-valid.

September 2003

Roeland van Esveld (rvanesveld@deloitte.nl) and Hanneke van Dorst (hvandorst@deloitte.nl), are managers with Deloitte & Touche, Amsterdam.