Unless international employers particularly want an expensive and time consuming lesson on the choice of law rules applicable to a contract, they should always include an express term in a contract of employment stating which law is to govern it. This is especially so in relation to employees who may perform duties in more than one jurisdiction. If there is no such express term then uncertainty arises, sometimes with unfortunate consequences for the employer.
A recent case has shown that, where there is no express clause in the contract, the place where an employee performs his or her duties will play a key role in determining the applicable law. However, the European Court of Justice (ECJ) has also stated that priority can be given to a different jurisdiction if the contract/employment relationship overall has a closer connection with a country in which the employee was not performing his or her services.
A, a German national, was employed to work for X Limited. A works for X Limited in Germany for five years and is then sent to work for X Limited in the Netherlands (XN). A works for XN for a further seven years before A’s role with XN is abolished. At this time, X Limited offered A a different position with X Limited back in Germany.
As a result of X Limited’s unilateral offer of employment back in Germany, A brings a claim before the courts in the Netherlands, claiming that the laws of the Netherlands should apply to the contract because: (i) A has been performing work for X in the Netherlands for seven years prior to the date on which the role in the Netherlands terminated; (ii) the contract with X Limited did not have a choice of law clause in it and (iii) the Netherlands offered A better employee rights than those available for A under the laws of Germany.
The legal issue
Which law should apply to A’s contract – the laws of Germany or the laws of the Netherlands? This is an all too common question arising out of such a scenario – one contract, but two choices of governing law.
The Rome Convention is the international treaty which deals with the law applicable to contractual relations.
The case went to all the way to the Dutch Supreme Court from where it was referred to the ECJ for clarification of the Rome Convention. This is a slow and expensive process.
Rome to the rescue?
The Rome Convention allows parties to a contract to choose the law that will apply to and govern the terms of the contract.
If the parties fail to make a clear choice of governing law, the Convention states that, in relation to an employment contract, it will be governed by:
(a) 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;
(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.
The ECJ used the case to clarify the correct application of the Rome Convention to employment contracts.
The Convention has to satisfy two requirements, namely: (i) the need for adequate protection for the employee and (ii) the need for legal certainty.
However the ECJ said that it is not mandatory for a court to apply the law that is most favourable to a employee when there is a governing law dispute. Rather, the Convention requires the national court to take account of all the circumstances as a whole in order to determine which country the contract is most closely associated with.
In the case above the ECJ decided that German law could apply to A’s contract by virtue of the fact that A’s contract had a close connection with German law. Factors that were taken into account in reaching this decision included: the fact that A’s pension arrangements were governed by German law; A remained resident in Germany; B continued to pay German social security payments on behalf of A; A’s wages (prior to the introduction of the Euro) had been paid in German Marks; A’s contract included mandatory provisions of German law and B was registered as a German company.
It is unlikely (although not recorded) that either of the parties to the case valued the experience of running it. Far better it would have been to have had an express clause in the employment contract from the outset.