Cross-Border Secondment of Employees

Hiring skilled employees for different roles and responsibilities in a company can be quite a tedious job, considering not everyone is ready and equipped to manage the challenges faced by an organization. As such, a common way to utilize talented employees is to depute them in other companies of the same group. This kind of deputation to another entity of the same group is done under Secondment Agreements, which provides some excellent benefits to these ‘seconded’ employees.

What are the Benefits of Cross-Border Secondment?

A secondment agreement enables an employer to send a worker to another organization for a predetermined period of time to foster commercial contacts, improve the worker's specific skill set, or impart the worker's specific expertise to the host company.

As seconded employees retain their right of employment with the foreign entity (company that they were primarily employed with), determining their relationship with the host entity (where they are being seconded to/going to work) becomes a topic for litigation.

It can be said that the foreign entity is simply using the host entity’s resources and there is no form of employer-employee relationship between the seconded employees and the host entity. This is what makes it imperative to prepare a written secondment agreement.

Secondment Agreement

A secondment agreement must be signed by the host company and the employer in order to govern the secondment's terms and conditions. Secondment agreements should normally be put in writing and signed by all the three parties. When the secondee must apply for a work visa, it is especially crucial to reduce the agreement to writing. Considering the number of disputes that can arise, it is crucial to prepare the agreement terms in writing to record and have evidence of what was decided by the parties involved in the agreement.

Following are some essential terms of secondment agreements that you must be familiar with:

• Employment relationship

The secondee's employment contract will unavoidably change once they consent to taking part in a secondment. The secondee's consent to the modification of their job terms must consequently be stated in the secondment agreement. Therefore, before finalizing the secondment agreement, the employer must make sure the secondee accepts the arrangement. The secondee must be a party to the agreement or must agree to the provisions that apply to them in some other way.

• Duration of the agreement

There are no restrictions on the duration of a secondment agreement when the secondee is an Indian national or resident who is seconded to work there. Despite the terms of the secondment agreement, there is a chance that an excessively extended secondment could give the host the impression that they will be hired. Therefore, it is wise to specify the purpose and term of the secondment. The agreement can have clauses that address the secondment's prospective prolongation. When the secondee is a foreign national, the secondment period shall last for as long as their work visa allows them to do so.

• Remuneration & Benefits

The foreign entity and host must discuss and agree upon a certain amount of remuneration for the seconded employees. When the employer agrees to pay the secondee, the host and employer must work out the specifics of how the host will pay for the secondee's services. If relevant, the parties must decide who will be in charge of paying the secondee's expenditures incurred while providing the services. Unless noted otherwise, the agreement between the employer and the secondee for retirement funds and possible medical assistance shall be in place. To avoid any potential conflicts, it is important to accurately record all agreements related to benefits and remuneration.

• Services, Policies and Performance Management

The work schedule, type of work and the individual that the secondee will report to must be clearly mentioned in the agreement to avoid any service-related complications in the future. The secondee's promise to follow the host's policies and procedures should be documented in the secondment agreement.

When an individual is on secondment, performance management shouldn't be overlooked, especially if the secondment is prolonged. The parties may specify a method for informing the employer of the secondee's performance. The secondee must be informed in advance if key performance areas will change during a secondment due to the services being supplied.

• Leave

The contractual leave rights of an employee cannot be reduced without their consent. In most cases, it will be agreed upon by both parties that the secondee will be entitled to annual leave in accordance with the employment contract. In any case, the business and host should make arrangements for how leave solicitations ought to be managed during the secondment, for instance, to whom should leave demands be submitted for endorsement.

• Confidentiality

During the course of the secondment, both the employer and the secondee are obligated to promise to keep confidential any and all information that the secondee receives from the host. Even if the agreement is terminated, this obligation ought to continue. Involved parties must also agree upon certain instances when confidential information may be disclosed.

• Termination of the agreement

The duration of the secondment ought to be specified in the agreement. Instances in which the agreement may be terminated may be included by the involved parties as well. For example, if there is an impossibility of performance beforehand, involved parties must decide whether they will then terminate the agreement for breach of agreement or the secondee’s lack of performance. Gatherings may likewise wish to accommodate wiping out on notice or by arrangement.

• Non-solicitation

The agreement may include arrangements that restrict the host from offering the secondee extended employment during or for a specified period after completing the secondment.

• Intellectual property

If there is no agreement to the contrary, the employer owns any intellectual property that an employee creates while working for the company. Consequently, in cases where the secondment includes making new protected innovation, the host and manager should determine in the understanding who will claim the protected innovation made by the secondee to keep away from debates emerging sometime in the future.

• Liability and indemnity

It is important to think about whether or not the secondee will be considered an agent of the host and who will be held accountable for the secondee's actions, omissions, and mistakes of judgment that may occur while performing their duties. In the indemnification of either the host or the employer, this is of the utmost significance. The parties must ensure that the secondee's activities are covered by the host's insurance policies in the event of an emergency.

Other Regulations

• Visa

In order to work in another country, an expatriate must obtain a work visa. To be eligible for the e-Visa, foreign nationals must comply with the rules and regulations of the host company, as well as meet certain additional requirements.

Tax Implications

In the case of Commissioner of Customs, Central Excise and Service Tax, Bangalore (Adjudication) and Others v. Northern Operating Systems Pvt. Ltd., which led to huge conclusions with respect to employee secondment contracts, the Supreme Court ruled that such agreements fall under service contract and shall be subject to service tax.

Brief Facts of the Case

• Northern Operating Systems Pvt. Ltd. (referred as ‘Indian entity’) signed a contract with its foreign group entities to provide back-end and operational support.
• As per the agreement, while the seconded employees would be on the foreign entity’s payroll, they shall adhere to the guidelines and directions of the Indian entity.
• In addition, the Indian entity shared a letter of understanding to employees, stating the terms of the employment. As per this arrangement, the seconded employees’ salaries, bonuses, social benefits, out-of-pocket expenditure, and other relevant expenses would be paid by the foreign entity.
• While auditing the Indian entity, the Indian tax authorities argued that the Indian entity had failed to calculate adequate taxes on the compensations paid to the foreign entity for the seconded employees.
• As a result, the Indian entity appealed to the Customs Excise and Service Tax Appellate Tribunal (CESTAT), which passed the judgment in favor of the entity and set aside the demand classifying the arrangement to be of employer-employee.
• Aggrieved with the unfavorable order, tax authorities resorted to file an appeal to the Supreme Court.

Issue

Who would be considered as an employer of the seconded employee and applicability of tax in such a scenario?

Court’s Key Observations 

• If the Indian entity is to be treated as the employer, the payment made to the foreign entity would be a reimbursement, but if the foreign entity is deemed to be the employer, the arrangement would be treated as the provision of a service by foreign entity to the Indian entity and would be subject to service tax.
• Courts are not preferential towards any single decisive aspect when reviewing arrangements that are contracts of service (as claimed by the employer) or contracts for service. On the contrary, a number of tests are employed depending upon the totality of the facts and circumstances. Besides, depending on the case, not all factors may be relevant and, even if they are, they might not carry equal weight.
• The Supreme Court has always adhered to the substance-over-form principle, which basically mandates them to closely review the arrangement or contract between the relevant parties, before making any decision.
• The agreement entered into by the Indian entity with the foreign entity represents the fact that the latter has numerous proficient professionals who have a right to a certain salary structure and social security benefits.
• Employees are chosen for secondment based upon their skills and expertise. Besides, once their secondment period is over, they shall either return to the foreign entity (their original employer) or seconded to some other entity.
• The secondment of employees is an aspect of the group’s global policy, where one entity of the group lends skilled professionals to other entities of the group on a temporary basis. Once the secondment period is complete, the employees return to the entity they were originally employed at, for secondment at a different entity, etc., whatever is defined in the arrangement of this policy.
• The letter of understanding signed by the Indian entity and seconded employees does not state that the employee would be considered as an employee of the Indian entity after their secondment’s completion.
• The Indian entity shall have authority over the seconded employees and may rightfully request them to return to the foreign entity if they under-perform.
• The foreign entity is simply sending some skilled employees to the Indian entity on a secondment basis. As such, the salary package, including allowances, reimbursements, etc. are made in foreign currency, while the employment terms are in accordance with the foreign entity, who is realistically their employer.
• Settlements made to the foreign entity are basically compensation for providing skilled professionals as part of secondment services.
• Remittance to the foreign entity is consideration for the supply of the secondment services.

Decision

While relying on the substance-over-form principle, the Supreme Court stated that the foreign entity basically provided ‘manpower recruitment and supply services’ to the Indian entity and, thus, the Indian entity’s payments shall be subject to service tax at the applicable rates.

Conclusion

Although the employees are seconded to entities of the same group, there is always a scope for potential conflicts due to a number of reasons like under-performance of seconded employees, inapt working conditions, offering work apart from secondment, etc. This makes it imperative to have a clear and concise written agreement between the relevant parties to ensure the agreement acts as a guideline in conflicts and disputes.