Both Australians working overseas and employees working for Australian companies overseas come within the concept of 'overseas employment'.
The Fair Work Act applies to not only employees within the jurisdiction but also in certain circumstances to overseas-based employees of Australian employers. Specifically, the Fair Work Regulations provide for the extension of certain provisions of the Fair Work Act to apply outside of Australia. This extra-territorial extension of the law applies to an ‘Australian employer’ and/or an ‘Australian-based employee’.
What is an ‘Australian employer’?
The Fair Work Act defines an ‘Australian employer’ to include:
- a trading or financial corporation formed within the limits of the Commonwealth
- a body corporate incorporated in a territory
- the Commonwealth and Commonwealth authorities, and
- any employer that carries on in Australia an activity (whether of a commercial, governmental or other nature), and whose central management and control is in Australia.
This definition could extend to Australian employers that operate through a branch or a representative office in overseas locations. It is also relevant to Australian employers who send employees to perform work for associated entities overseas but who nevertheless maintain an employment relationship with the Australian entity.
Who is an ‘Australian-based employee’?
The Fair Work Act defines an ‘Australian-based employee’ as an employee:
- whose primary place of work is in Australia, or
- who is employed by an Australian employer (whether the employee is located in Australia or elsewhere).
In effect, this definition provides that the Fair Work Act may apply to an employee whose primary place of work is not Australia, provided that they are employed by an ‘Australian employer’.
However, there is a limitation on this potential extra-territorial application, as the provisions provide for an exception. That is, the relevant parts of the legislation will not apply extra-territorially where an employee is ‘engaged outside Australia and the external Territories to perform duties outside Australia and the external Territories’.
Who is an ‘Australian-based employee’?
It is not clear whether being ‘engaged outside Australia’ refers only to the location of the initial engagement of the employee or to engagement of the employee in an ongoing sense.
It is arguable that the meaning of ‘engaged’ in this situation only extends to when the employee was ‘initially’ engaged, as the exclusion applies to employees ‘engaged outside Australia to perform duties outside Australia’.
Key considerations in determining whether an employee has been engaged outside of Australia are likely to be whether the employee:
- was recruited outside of Australia
- is employed under local terms and conditions of employment rather than receiving expatriate benefits, and
- received relocation assistance at the commencement of employment.
What is the practical effect of the ‘extra-territorial’ application of the Fair Work Act?
If the Fair Work Act is held to apply extra-territorially to a particular employee, that employee has access to certain entitlements under the Fair Work Act, including the provisions of the National Employment Standards, coverage by any applicable modern awards, protection by minimum wage provisions, and access to general protections and unfair dismissal claims.
Of course, these overseas-based employees are likely to also be subject to local employment laws in the country where they are performing their duties. As a general rule, employers must comply with both the provisions of the Fair Work Act that apply extra-territorially as well as the provisions of the local legislation – where these vary, the more beneficial entitlement to the employee should be applied. This creates not only complexity but multiple legal risks in relation to the assignment, and the potential for ‘forum shopping’ in the event of a dispute.
What, if anything, can employers do to avoid the potential ‘extra-territorial’ application of the Fair Work Act?
The potential application of the Fair Work Act and possible situations of conflicts of laws presents employers with a lack of certainty when arranging overseas assignments. It could also result in costly and time consuming employment disputes.
It is not possible to ‘contract out’ of the potential extra-territorial effect of the Fair Work Act as such. Employers who are arranging overseas assignments may therefore wish to consider taking certain precautionary measures to reduce the likelihood of the Fair Work Act applying to overseas-based employees.
An obvious way to limit the application of the Fair Work Act is to structure the arrangements so that the employee is not engaged by an ‘Australian employer’. In other words, end any ties with the Australian entity in ‘clean break’ style and have the employee engaged by an overseas-related entity.
If this is not possible, then certain practical steps may be taken to reduce the risk. For example, ensuring that the recruitment process takes place and employment documentation is signed outside of Australia. This may also include minimising ongoing ties to Australia, for example ensuring that the employee is not reporting to or taking direction from management in Australia, and that the employee does not have regular business trips to Australia nor any rights to personal trips to Australia at the company’s expense.
Health and insurance cover for overseas workers
There are many traps when it comes to providing health and insurance cover for employees working overseas, and many employers have been 'burned' by large claims due to gaps and omissions in coverage. At the same time, employers have a duty of care to ensure that expatriate employees are adequately covered.
Terrorism is just one aspect of the issue – a broad range of medical conditions and situations are also relevant.
Illegal for employers to pay medical expenses
A major problem for employers is that it is illegal in Australia for them to perform the role of a 'health fund' by paying employees' actual health and medical expenses (as distinct from paying health fund premiums).
Employers need to arrange insurance coverage for as many health and other risk situations as possible. This includes covering some of the gaps left by registered health funds.
For example, when an employee returns to Australia and rejoins a health fund, waiting periods will apply before the employee gains access to many of the fund's benefits, even if the employee belonged to the same fund before transferring overseas.
Cover for each of the following should be arranged:
- continuity of private health cover
- continuity of lifetime health cover with no time limits
- guaranteed re-entry into the Australian health insurance system upon return to Australia with no waiting periods for benefits,; and
- comprehensive coverage during any periods of temporary return to Australia.
Standard travel insurance policies do not provide coverage to this extent, nor do many overseas health insurance systems.
Even if the employee has a suspended Australian health insurance fund membership, the fund has the discretion to apply a maximum waiting period upon the employee's return to Australia for any new conditions that arose while fund membership was suspended.
This situation has major implications in the event of health claims relating to pregnancy and childbirth.
Long service leave for overseas workers
The issue of long service leave entitlement often arises where an employee has spent considerable time in the service of an employer outside Australia.
Some employers in this situation presume that, as the employee is performing work outside the Australian jurisdiction, long service leave would not accrue as this is not a common employment condition in overseas countries. However, this thinking may be incorrect.
It is possible for an employee to continue to be regarded as an employee for the purposes of long service leave even though a considerable period of time was spent outside Australia.
However, there is no fixed period or method of calculating how long an employee can remain outside the jurisdiction without losing the benefits of the legislation.
Industrial tribunals have generally applied the following 'tests' when considering this issue:
- Was the employee employed in Australia in the first place?
- Was the employee sent interstate or overseas by the company at their request and at their expense to increase the knowledge of the employee which would ultimately benefit the company?
- Did the employee return to Australia for a substantial period?
- Was it the company's intention that the employee return to Australia for the major part of their employment with the company?
- Was the employment terminated in Australia?
If most of these questions are answered in the affirmative, the employee may have continuity of service for long service leave.
Generally, where the 'event' occurs is important, the event being either a termination of employment or the taking of long service leave.
Where the employee is participating in a relocation program involving overseas service with the same or related employer, an employee would probably be accruing long service leave under their contract of employment.
Conversely, an employee who resigns and coincidently obtains employment with the same company overseas would not have continuity of service for long service leave.
Tax issues and overseas workers
Various tax issues may arise when an employee works overseas for an Australian employer:
1. Non-resident for tax purposes
Depending on the length of time that the employee works overseas and the ties that are maintained with Australia, the employee may become a non-resident for tax purposes. The employee would then be liable to tax in Australia only on income from Australian sources. Income earned from non-Australian sources would generally be taxed in the overseas country.
The source of income derived from employment is generally where the work is carried out, although it may be where the contract for overseas employment is entered into.
A double tax agreement between Australia and the country where the work is performed may also state the source of the income.
2. Australian resident for tax purposes
If, despite working overseas, the employee remains an Australian resident for tax purposes, the employee will be taxed in Australia on income derived in Australia and overseas. If tax on the overseas income has already been paid in the overseas country, an overseas employment tax credit could be claimed to ensure that tax is not paid twice.
3. Earnings exempt from Australian tax
Foreign earnings derived by an employee who is an Australian tax resident are generally exempt from Australian tax if the employee works in the overseas country for at least 91 days continuously. The earnings are not exempt, however, if the overseas country already exempts the particular income from taxation.
Income derived by an Australian resident from at least 91 days' continuous employment on an overseas project approved by the Australian Trade Commission is exempt from tax.
4. Superannuation guarantee
An Australian employer has superannuation guarantee obligations for an employee working overseas unless the employee is a non-resident for tax purposes and is paid for work done outside Australia.
If, as a result of sending an employee to an overseas country, the employer becomes liable to make superannuation contributions for that employee in both Australia and the overseas country, the employer will be liable only in Australia if Australia has entered into a 'scheduled international social security agreement' with the other country. The purpose of such an agreement is to remove the double superannuation coverage that would otherwise apply.
5. Fringe benefits tax
Benefits provided by an Australian employer to an employee working overseas may be subject to fringe benefits tax, although a number of such benefits receive generous FBT treatment.
Exemptions apply, for example, to payment of removal, storage and transport costs resulting from relocation. The taxable value of a benefit may be reduced if, for example, it is overseas employment holiday transport, temporary accommodation relating to relocation or payment of expenses relating to the education of children of overseas employees.
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