It is important to consider social security contributions when discussing tax revenues on personal income. Social security contributions (sometimes called “social security tax”) are in most countries a shared financial burden between employer and employee, and they may cover compulsory insurances such as social pension, health insurance, sickness benefits, etc., for employees and their families. Social security contributions may provide individuals with benefits at any stage of life.26
Perhaps it is because of the “quid pro quo” principle in most social security systems that the share of social security contributions is higher in most of the European Economic Area (EEA)—which includes the 27 EU countries plus Iceland, Liechtenstein, and Norway—than the share of tax revenues that comes from direct taxes.27 Levels of social security contributions vary from country to country, as do the levels of benefits and social security protection.
What Is the Potential Impact of Teleworking on Social Security?
In the EEA countries and Switzerland, employers and employees cannot choose in which country they are covered by social security. Instead, the competent country for social security is determined through a uniform set of coordination rules.28
Recently, a couple of EU member states have taken an approach that when an employee works, for instance, for four weeks in another jurisdiction in a one-off arrangement, both employer and employee are liable to social security in the host member state. Given this author’s experiences with several authorities on certificates of coverage matters, authorities in certain of these countries have made an interpretation of the coordination rules that categorise working remotely in another jurisdiction as a separate form of working that is not covered by an exception rule on temporary posting. Here, they argue that the EU coordination rules cannot apply to situations in which an employee relocates temporarily without a specific business reason for them working in that specific location.
This line of reasoning is familiar from treaties on social security, e.g., between an EU member state and a non-EU member state. However, within the scope of existing EU legislation, this interpretation does not seem to find support in the legislation or EU case law, but such practices in these few member states continue all the same. It is therefore possible that we will see a case in which the home country refuses to issue a certificate of coverage to an employee who is working remotely in another member state before the European Court of Justice.
This situation with the categorisation of teleworking in another jurisdiction as a separate form of working that is not in the scope of the posting provision in EU legislation becomes increasingly perplexing when we learn, based on experiences and observations, that the same authorities issue certificates of coverage to employees working remotely in another jurisdiction when this work is categorised under the provision for work in two or more member states (multi-state working). However, the application of the provision for multi-state work does not come without challenges.
A working situation that has become much more widespread during the pandemic is that in which the employer is in one country and the employee is resident in another country. The EEA coordination rules for social security state that an employee who works less than 25 percent in the country of residence is covered by social security in the country where the employer is situated. However, if an employee is working at least 25 percent of the time in the country of residence, the employee is covered by social security in the country of residence.
This may be administratively burdensome, as the employer must register and comply with the social security rules in the country of the employee’s residence, a process which is often complicated and costly, and may result in non-compliance.
Temporary Relief Measures Due to COVID-19 and the Future
Due to COVID-19 restrictions in the EU and the inability to conduct one’s work as usual, many frontier workers29 and employees who occasionally worked from home (less than 25 percent) pre-pandemic are now working most of their time remotely and from home, in a different jurisdiction than their employer. This means that social security should shift from the country of their employer to their country of residence. However, employers and employees for the time being can rely on the temporary measures EU countries have implemented that allow remote work in the country of residence to exceed 25 percent of the employee’s time without triggering changes in their social security position, unless these changes to the working arrangement are meant to be permanent.30
The leniency by the social security authorities in the EU to not change the country that is competent for social security when working patterns change is based on the fact that the global pandemic has prevented workers from moving freely. Because remote work is not a choice but is instead necessitated by health emergency and pandemic control measures, the change in one’s usual work location to a different (remote) location would not generally result in changes to the applicable legislation for social security. However, if employees choose to work from their home countries in increasing numbers, countries may question whether the 25-percent threshold continues to be appropriate.
Many perceive the 25-percent threshold not to be practical. Twenty-five percent of work can be organised in various ways, but it would be an unusual pattern for employees to work a full week from home and three weeks from the office. It may therefore be more relevant to look at the 25-percent threshold on a daily basis. If an average full-time employee works eight hours per day, five days per week, 25 percent amounts to one day and a couple of hours of the second working day. If we assume that in general one full working day amounts to 20 percent of work, then a more appropriate threshold could be 40 percent. If an employee worked up to 40 percent in the country of residence, social security in the country where the employer is located would continue to apply.
A threshold of 40 percent would allow for a higher degree of flexibility than a threshold of 25 percent, and it is easier to calculate and comply with. As the pandemic continues and work patterns continue to change, we may see EU member states elevate the issue to the EU level, to consider reviewing the coordination rules from a long-term perspective.
If we consider countries outside the EU, there are similar challenges in bilateral social security agreements (or “totalisation agreements”), which may need to be reviewed and adjusted to address the ways people work in a cross-border context at present and (presumably) in future. For example, in the USA, an employee cannot maintain coverage under U.S. social security if he or she initiated the relocation, and it is not substantiated with business reasons―if an employee in the USA requests to work remotely for a couple of months from Portugal for personal reasons, for example.
We have already mentioned that in some of these bilateral treaties teleworking in the other jurisdiction as a one-off arrangement does not allow coverage under social security in the home country. It would be helpful if the authorities engaged in a dialogue to review this position and consider changing it to modernise the treaties and accommodate developments in the labour market. The objective of these treaties is to remove obstacles to mobility between the countries and provide continued protection when work in other jurisdiction is of a temporary nature.
However, another challenge in these treaties is that very few of them describe a situation in which an employee works in both countries in alternance, what we know as multi-state work from the EU legislation. At the time many of these treaties had been concluded it was not relevant to consider a situation in which an employee could work simultaneously in both countries as usual, but developments in technology and infrastructure are making it possible -- and commonplace -- for employees to work in both, e.g., in Germany and the USA in alternation. Therefore, it may be worthwhile for countries to reconsider their social security agreements to assess whether they are adequate for the current and future labour markets, as well as whether they still support mobility, as was their initial intention.
It will be interesting to follow this topic, because if teleworking in another jurisdiction becomes categorised as a form of working that is not subject to the coordination rules on social security, it could potentially restrict the free movement of employees and prevent businesses and employees from reaping all the potential benefits of remote working, from optimising and growing a business to improving work-life balance and employee satisfaction.