Mobility of workers in the EU: the Croatian perspective

Like the EU, Croatia recognises several forms of mobility of workers, all based on the freedom of movement of people and the provision of services, including posted workers, migrant workers, cross-border workers, international workers, jobseekers and retirees.

While worker mobility in the EU mainly involves posted workers, it is important to understand that each form of mobility results in specific tax and social effects.

A migrant worker who has lived and worked in more than one member state and lives and works in another country is subject to the regulations of that country.

A cross-border worker is someone who lives in one member state (i.e. his resident state) and works in another member state (i.e. country of employment). He can also move to a neighbouring state, but work in his country of origin (as a resident migrant). This worker is subject to the regulations on social security and taxation of wages of the state where he is employed. If a cross-border worker moves to his state of employment, he becomes a migrant worker.

An international worker carries out activities in more than one member state at any time, which does not need to be the employer's or the employee’s resident state. An employment contract can be concluded with one employer, or several contracts can be concluded with different employers. The social security and tax regulations that apply to this worker will vary, depending on the specific circumstances.

A Posted worker regularly works in the territory of one member state (i.e. country of origin), but is sent to work in another member state (i.e. host country) for a limited period.

In recent years, posted employment has been the fastest growing form of cross-border worker mobility in the EU. Many Croatian companies also send workers abroad due to differences in labour costs and the competitive advantages of operating in lower-income countries. Many of the postings involve lower value services in construction, transportation, and agriculture where there are not enough locals to fill positions. Also a certain percentage of postings need a specialised workforce for services such as engineers, specialised construction professionals or financial service providers.

Posting assumes that there is a working relationship between the posted worker and the employer in the country of origin, and a contract between them on a temporary provision of services in the host country.

Posted workers are subject to the minimum requirements of the host country's regulations on salaries. They must pay personal income tax, however, in their country of origin for the first 183 days of their employment abroad, and social contributions for up to two years.

In the context of freedom to provide services, posting represents a unique deviation from the EU principle of "host country regulation” (i.e. the requirement that every worker is subject to the laws of the member state where work is performed to ensure equal treatment and non-discrimination). In posting, the principle of equal treatment applies only to conditions of work and employment, and not to salary.

If social contributions and income tax are lower in the country of origin than in the host country, the companies providing cross-border services have a competitive advantage over domestic competitors. This is why "letter-box" companies, which do not carry out economic activity in the country of origin but send workers abroad to exploit lower labour costs, along with fake subcontracting or illegal agency work, have attracted the attention of the European Commission, trade unions and employers organisations.

To prevent unfair competition based on cost and working conditions, the Commission issued the Posting Directive 96/71/EC and the Implementation Directive 2014/67/EU, which attempt to reconcile these two opposing rights: the freedom of companies to provide services in the single market and protection for posted workers.

The Implementing Directive is meant to create a framework for determining the "true posting situation" for a worker in order to avoid abuse (i.e. the concealment of continuous work),and to protect the worker by providing easier access to information on his rights.

After its adoption, the principles of the Implementation Directive were adopted as laws in EU member states. Croatia was no exception: the last amendments to the Act on Foreigners (in force since mid-2017) introduced new obligations relating to posted employment, including:

• submitting a statement in electronic form and naming a person who will keep all documentation for the posted worker in the host country (i.e. work contract, permit for a third-country national, salary calculation, time-sheet record);
• cooperation of the competent authorities with bodies in other countries;
• the authority responsible for inspections; and
• responsibility for subcontractors and other employees.

The competent authorities of the member states will carry out checks if they have reason to believe that a worker does not meet the conditions for a posted-worker classification. All assessments are performed on a case-by-case basis.

A further step towards the full implementation of the principle of equal pay for equal work was made by the European Commission’s March 2017 revision of the Posted Workers Directive, which was finally approved by the Council of the European Union on 21 June 2018. The revised rules relate to three main areas: the remuneration of posted workers, long-term postings and temporary agency workers. After its entry into force on 30 July 2018, Members States have two years to adapt their legislation to comply with the Directive.

There are still gaps between the Posting and the Implementation Directive and regulations on social security and taxation, which prevent the complete elimination of any misuse of posted employees. For example, the Posting Directive(before revision) defined a posted worker as a worker who "works for a limited period" in the territory of a host country. It did not limit the posting period nor did it provide any other criteria for posting (e.g. the period of previous employment in the home country). It was also silent on repeated postings relating to the same work. The revised Posting Directive introduces 12 months posting period.

The Posting Directive says thatthe employer must be established in the country of origin, but does not give any criteria for determining the true link between the employer and that country. In practice, it is very difficult to confirm that the employer is established in the country of origin.

On the other hand, the Regulation on Coordination of Social Security Systems(Regulation 883/2004 and its Amendments and Additional Rules of the Administrative Commission) sets out a two-year limit and excludes the possibility of repeated postings for the same job. It further requires that a worker be registered in the social security system of the country of origin from the start of employment. This regulation gives more clarity about the relationship between the employer and the country of origin. In it, a company must regularly carry out significant activities in the country of origin to allow it to post its workers to another member state. Internal management and internal administrative activities alone are not considered acceptable economic activities for posting workers abroad.

According to the regulation, workers can also be engaged with the aim of posting them to another member state.In this case, workers should be in the social security system of the country of origin "immediately prior to the beginning of their activities as employed persons." (A period of one month is acceptable,while shorter periods of employment are evaluated individually).

Workers posted to Croatia

The Regulation on Coordination of Social Security Systems is directly applicable in Croatia, just as it is in other EU member states. This means that workers posted to Croatia will remain in the social security system of their country of origin for a maximum of two years, provided that other conditions set by the regulation are met.

Workers posted to Croatia (and under certain circumstances, their family members)may have access to healthcare in Croatia based on the European Health Insurance Card (EHIC), which can be obtained in their country of origin. In the event of a prolonged stay in Croatia, Form S1 (i.e. the certificate of the right to healthcare) will be required.

Taxation of salaries during posting is governed by local legislation and bilateral agreements on avoidance of double taxation (DTT). Most of Croatia’s DTTs follow the OECD Model, which gives the taxation right to the host country. The country of origin is entitled to tax a worker’s salary only if:

• the posted worker resides in the host country for no more than 183 days over any twelve-month period;
• salaries are paid by, or on behalf of, an employer who is not a resident of the host country; and
• the company responsible for the salary is not permanently established in the host country.

If these conditions are not met, taxation by the host country (in this case, Croatia) would apply retroactively, from the first day of work there.

When it comes to temporary employment agencies, the host country has the right to tax a worker’s salary based on the “economic employer” status of the company receiving the posted worker.

For more information on this eAlert and the regulations surrounding posted employment in Croatia, please contact: Tamara Jelić Kazić.