Secondment of employees, as a concept, has evolved in the era of global commercial mobility. Secondment is where an employee of one organization is working for one or more other organization(s), basis a mutual understanding between the organizations.
There are various concerns associated with secondment of employees like the payroll , employer- employee relationship status , control over the employee and several related issues.
Considering the growing popularity of this concept in India, owing to the advent of the multi-national organization in the country, this article has been drawn up to conceptualize and try and find answer to queries pertaining to the concept, taxation aspects, legal aspects etc.
What is secondment?
Secondment is a temporary phase of arrangement where an employee is transferred from one job to another, usually in the same group of company for a definite period of time for the mutual benefit of all parties involved in the arrangement. Although the term has not been legally defined but the meaning can be construed from the different related cases of secondment that come across as reference.
There are generally three parties to secondment agreements :
(a) the original employer referred to as the “employer” or “seconder”;
(b) the seconded employee referred to as the “employee” or the “secondee” and
(c) the organization to which the secondee is to render service referred to as the “host”.
A secondment agreement is executed by the parties containing the detailed terms and conditions of the said arrangement between the employer and the host.
Types of secondment
The nature and type of secondment varies based on the terms or understanding between the parties. Based on the practice followed widely, secondment can be classified in the following manner:
After the expiry of the secondment period the secondee usually returns back to his/her substantive post under the seconded employer. This type of arrangement proves to be valuable for both employee and organizational development. As business organisations adopt even flatter management structures, traditional prospects for promotion through a succession of line management positions are limited – especially through recession when there is relatively little movement in the labour market. Secondment provides for career development opportunities to the employees and is increasingly used as part of talent management programmes. They also offer organisations with the chance to improve their skills base.
Who will be the employer of the seconded employee?
When it comes to identifying the employer of the secondee, the answer is not so obvious as one may contemplate. In this regards, we have relied upon the rulings of the Hon’ble Supreme Court of India in the case of Morgan Stanley 1and that of Delhi High Court in the case of Centrica India Offshore (P) Ltd 2, where the judgements were circumstantial and in both the cases the seconder was considered to be the employer of the secondee because the right of lien of employment and continuation of employment for social security purposes remained with the original employer.
Hence, it can be safely construed that in order to understand who the original employer is, it is very important to analyse the secondment agreement to see whether the seconder has any control over the secondee.
Further, the matter was also put to the table for discussion at the OECD Model Tax Convention 2014 and the outcome of the same has been discussed below.
OECD’s definition of employer-employee relationship
The Article 15 of the OECD Model Tax Convention 2014 has laid down certain basic factors for determining the employer-employee relationship such as authority to instruct the individual, control and responsibility for the place of work, provision of tools and materials to the employee, right to select the individual to perform work and to terminate contractual agreements, right to impose corrective sanctions related to the work, determination of holidays and work schedules etc. Further, Klaus Vogel in his exposition on Double Taxation Conventions has described the term ’employer’ as someone to whom an employee is committed to supply his/her capacity to work and under whose directions the latter engages in his/her activities and whose instructions he/she is bound to obey. The determination of employer is dependent on the degree of personal and economic dependence of the employee towards the enterprises involved.
On the other hand the host entity can be considered as the de facto and de jure employer of the seconded employee provided it satisfies the aforesaid enumerated conditions of qualification as the employer. As in the case of E- Funds IT Solution 3, where a deviating view has been taken by the Delhi High Court. In the above case the High Court did not discussed on the right of lien or continuation of employment for social security purposes but grounded its view on substantive facts such as supervision and control exercised by the host entity over the seconded employee during their period of secondment.
Hence, it may be concluded that although some conflicting views remain ; looking at the secondment agreement will solve the ambiguity to a great extent.
Under whose payroll will the secondee appear?
Payroll refers to the list of candidates who are supposed to receive the consideration for their work performance or contribution to the company’s performance during a given period of time.
The employer and the host should conjointly agree who will pay the secondee during the secondment and where the remuneration is borne by the secondee, the manner of reimbursement by the host entity. If so, consideration should be given to whether the employer can increase this fee during the secondment to reflect, for example, any increase in the secondee’s salary.
The employer and the host will also need to decide who will fund additional payments made to the employee, for example overtime, bonuses and expenses. This is likely to depend on whether such payments reflect productivity, and whether or not they have already been factored into the overall payment structure.
Funding for disbursements owed to the secondee if he is absent for a substantial period (for instance, maternity leave or long-term sickness absence should also be agreed upon by the parties).
In the usual course, although the secondee will be working for the host entity , but he/she will continue to remain in the payroll of the original entity for the sake of right of lien on employment and for availing the social security benefits in their home country.
Conclusion – Economic Employer vs. Legal Employer
The above discussion can be zeroed down to two terms “economic employer” and “legal employer.”
The term ‘economic employer’ refers to the employer who bears the cost to retain the employee, i.e. who pays salary (or who reimburses the cost of salary to the other employer where the employee is originally employed), other costs related to the maintenance of the employee, etc.
On the other hand the term ‘legal employer’ refers to the employer who has substantially recruited the said employee and provides pension and other social security benefits to the employee in the home country of the employee.
In a secondment arrangement the seconder, being the original employer pays salary to the secondee which in turn is reimbursed by the host entity. Although the secondee remains in the payroll of the seconder but the cost of such salary and other expenses is borne by the host entity. Therefore, the host entity comes out to be the economic employer of the secondee. Similarly, even though the secondee works for the host entity , he/she continues to be in legal employment of the seconder and enjoys the social security benefits from such entity (original employer).
(Article is Authored by Ms Pammy Jaiswal who is executive with Vinod Kothari & Co.)