Which country’s laws apply to an international employment contract where the parties have not chosen it themselves?
In the recent Court of Justice of the European Union (“CJEU”) case of Schlecker v Boedeker C-64/12, the CJEC was asked to determine whether, in the absence of a governing law clause in an employment contract, a national court was able to decide that the contract was governed by the laws of a country other than one in which the employee worked.
Governing law clauses
Governing law clauses allow parties to a contract to state which system of law will apply to the interpretation of that contract if a dispute ever arises. If the parties do not state a specific governing law, the court will decide the applicable law depending on whether the court (where proceedings are commenced) is a member state of the EU.
If the court is an EU court and the contract was concluded before 17 December 2009, the Rome Convention (to which all EU member states are signatories) applies in determining which governing law applies. Contracts concluded after 17 December 2009 are governed by Rome I.
If the parties have not stated an express choice of law under the Rome Convention an employment contract will be governed:
(a) by the law of the country in which the employee habitually carries out his work in performance of the contract, even if he is temporarily employed in another country; or
(b) if the employee does not habitually carry out his work in any one country, by the law of the country in which the place of business through which he was engaged is situated,
unless it appears from the circumstances as a whole that the contract is more closely connected with another country, in which case the contract shall be governed by the law of that country.
(Article 6(2) of the Rome Convention)
Under Rome I the applicable law is usually the law of the country “in which, or failing that from which” the employee habitually carries out his work.
This case: Schlecker v Boedeker – the facts
Ms Boedeker (a German national and resident) worked for a German retailer (Schlecker) which has a number of branches in other Member States. Between 1979 and 1994 she worked in Germany. In 1994 she agreed to a new employment contract, under which she was appointed Schlecker’s manager in the Netherlands, and she took up this role there. She worked in the Netherlands for more than 11 years, uninterrupted, until that position ceased in June 2006. Schlecker then offered her a new role in Germany under her existing contractual conditions. Ms Boedeker took up that post in Germany but lodged a complaint concerning the unilateral change in her place of work. Two days after taking up this new post she declared herself unfit for work on medical grounds.
Ms Boedeker than brought various claims to the courts in the Netherlands, including that Netherlands law should be declared applicable to her employment contract, that her second employment contract should be annulled and that she should be awarded damages. Ms Boedeker’s employment contract did not specify a choice of governing law, although it stated that the mandatory laws (i.e. those that cannot be contracted out of by the parties) of Germany would apply.
The Netherlands court found that Dutch law applied as she had habitually worked in the Netherlands. Schlecker appealed – firstly to the Court of Appeal in the Netherlands (who agreed that the contract was governed by the law of the Netherlands) and then to the Supreme Court of the Netherlands – on the grounds that the employment contract was more closely connected with Germany and therefore the contract was governed by German law.
The Supreme Court noted that Dutch law offered the employee greater protection than German law against the change in place of work made by Schlecker. However, it was uncertain as to how to interpret the concluding part of Article 6(2), under which it is possible to disregard the law which would otherwise by applied because of the connections referred to in Article 6(2)(a) or (b). The Supreme Court decided to stay proceedings and to refer the following questions to the CJEU for a preliminary ruling:
- Is Article 6(2) of the Rome Convention on the law applicable to contractual obligations to be interpreted in such a way that, if an employee carries out the work in performance of the employment contract not only habitually but also for a lengthy period and without interruption in the same country, the law of that country should be applied in all cases, even if all other circumstances point to a close connection between the employment contract and another country?
- Does an affirmative answer to the first question require that, when concluding the contract of employment, or at least at the commencement of the work, the employer and the employee intended – or were at least aware of the fact – that the work would be carried out over a long period and without interruption in the same country?’
The CJEU’s decision
The CJEU did not rule out the applicability of German law because a closer connection with Germany was suggested by the circumstances as a whole. For example Schlecker is a German entity governed by German law; Ms Boedeker’s remuneration was paid in German marks (prior to the introduction of the Euro); Ms Boedeker’s pension arrangements were made with a German pension provider and she has continued to reside in Germany (where she paid her social security contributions).
The CJEU noted that Article 6 of the Rome Convention is to guarantee adequate protection for the employee and that provision of the Rome Convention must ensure that the law applied to the employment contract is the law of the country with which that contract is most closely connected. However, this did not automatically result in the application in all cases of the law most favourable to the worker (in this case the law of the Netherlands).
It is for the national courts to determine the applicable law by reference to the specific connecting factors under Articles 6(2)(a) and (b) respectively. However, where it is apparent from the circumstances that the employment contract is more closely connected with another country, it is for the national court to apply the law of that other country. The court identified significant factors which are suggestive of a connection with a particular country, these include: the country in which he is covered by a social security scheme and pension, sickness insurance and invalidity schemes.
The CJEU concluded that Article 6(2) of the Rome Convention must be interpreted as meaning that even where an employee carried out the work habitually, for a long time and without interruption in the same country, the national court may (by virtue of the concluding words of Article 6(2) (i.e. unless it appears from the circumstances as a whole that the contract is more closely connected with another country, in which case the contract shall be governed by the law of that country) disregard the law applicable in that country, if it appears from the circumstances that the contract is more closely associated with another country.
On this basis, the CJEU did not feel it necessary to answer the second question put to them by the Dutch court.
What this means for you as an employer?
The case is a useful reminder for employers and their advisers that, in the absence of a governing law clause, you cannot always assume that the applicable governing law will be that of the country in which the employee works (even if the employee has worked there for a long time).
To avoid such uncertainties, always consider which country’s laws you would prefer to apply to the contract as far as possible (subject to any other overriding mandatory laws of another country with which, in summary, the employee may be closely connected) and ensure the relevant country’s laws are identified in a governing law provision in the contract.
There will be a number of considerations which often influence how international businesses decide which country’s laws they wish to apply to their employment contracts as far as possible. These may include (without limitation):
- choosing the laws of the country where the employee presently works or historically worked long-term;
- choosing the laws of the country where the company is headquartered and with which it is therefore most comfortable and familiar (and which may at first glance appear to offer less protection to the employees);
- choosing another business-friendly or offshore country’s laws to apply to the business’s international employment contracts to attempt (usually in vain) to achieve global harmonisation of contracts (subject to variation locally as necessary to take account of local mandatory requirements);
- tax issues and structuring which may influence the choice of applicable law of the contract; and
- the legal requirement of the country where the employee is working that anyone working there must be employed on a local contract will however often be a deciding factor.
Whichever country’s laws you choose, obtain specialist legal advice from that relevant country to ensure that as an employer you are adequately protected and aware of your obligations to the employee. If there is a chance that two or more countries’ laws may apply to the employment relationship by virtue of the chosen law of the contract and the local mandatory laws of another country also potentially applying (which is outside the scope of this alert), seek advice in both or all applicable jurisdictions to ensure the contract complies with the laws of each of those respective countries as far as possible.
Be aware that the choice of law clause does not normally determine where any related dispute should be heard; there will usually be a separate jurisdiction clause which seeks to identify the country whose courts should hear any such dispute. The enforceability or otherwise of such clause and the range of factors taken into account in determining where the dispute should otherwise be heard (especially if the employee is an EU citizen), needs to be carefully considered at the same time as deciding the applicable law that will govern the law itself. It may often be an additional factor which the parties take into account when deciding which country’s laws should apply to the contract, to ensure consistency and simplicity in approach to interpretation and enforcement of any such employment contract. The complex rules relating to jurisdiction are though for a future news alert!