Is it possible to choose Lithuanian law for an employment contract with a foreign company?

Thanks to the Covid-19 pandemic, society has discovered the benefits of teleworking. Many employers and employees still choose teleworking, or at least a hybrid model, today. Many people living in Lithuania, taking advantage of teleworking opportunities, also conclude employment contracts with employers based and operating in foreign countries, but actually working remotely from Lithuania.

It is usual for an employer to draw up an employment contract in accordance with its national law. Usually, the employment contract is drafted in the national language of the employer, the employment contract refers to the labour law rules of the employer's country, and the working time, wages, holidays, termination and other conditions of employment are also set out in the contract in accordance with the national law of the country of the employer. However, since such employment contracts go beyond the borders of a single State, the question naturally arises: should the employment relationship arising from such contracts nevertheless be governed by the labour law of the Republic of Lithuania, from which the employee actually performs his/her work functions, since that is where the employee works and lives?

Sandra Mickienė, a lawyer at AVOCAD, comments on the cases in which the law of the Republic of Lithuania may apply and what it depends on.

To discuss the situation, let's take the United Kingdom as an example, i.e. let's imagine that an employment contract is concluded between an employee (a permanent resident of the Republic of Lithuania) who performs his/her work functions remotely from Lithuania and a company established in the United Kingdom and operating in the United Kingdom, which does not have a branch or any other structural unit in Lithuania, and which carries out its activities in the country of its own (the United Kingdom). This could be administrative work, which employees can do by accessing the employer's internal systems and communicating with management and employees by electronic means.

According to the lawyer, when concluding an employment contract, the parties have the option of specifying in the contract which country's law will apply to the employment relationship between them. However, in many cases the employment contract does not specify the applicable law (even the model form of employment contract approved by the Minister of Social Security and Labour does not contain such a provision). Although a contract with an employer established and operating in the United Kingdom is likely to be drafted in English and to refer to the national law of the United Kingdom, this does not mean that any employment relationship between the employee and the employer would automatically be governed by the law of the United Kingdom, as the employment relationship is a bi-national one.

The Labour Code provides that if the parties to an employment contract have not chosen the law applicable to the employment relationship, it is governed by the law of the country in which the employment contract is regularly performed. According to the commentary to the Labour Code, the key criterion here is the permanent place of work, which means the place where (from which) the employee actually performs his/her duties.

AVOCAD's lawyer points out that despite the fact that the employer is established and operates in the United Kingdom, Lithuanian law should apply to the relations between the parties in accordance with this provision of the Labour Code. However, the Labour Code also provides for exceptions to this rule: if the employee is not permanently employed in one State, the law of the State in which the employer or the employer's place of work is situated applies. Both the first and the second rules also do not apply if, by reason of the substance of the contract of employment and the circumstances in which it was concluded and performed, the employment relationship is more closely connected with another State.

The Labour Code does not clarify when an employment relationship is deemed to be more closely connected to one or another country, but, in the light of case law, the following may be considered as circumstances that may indicate a connection to one particular jurisdiction: nationality of the parties to the contract or their belonging to a particular jurisdiction, the language of the contract, the place of conclusion and performance of the contract, the currency of the contract, the place of settlement of the disputes, the terminology used, the reference to the applicable collective agreements, etc. In addition, the country in which the worker is taxed on his income, where he is covered by social security and the relevant pension, sickness and disability insurance schemes are also relevant considerations.

"Thus, if the parties have not defined the applicable law in the employment contract, the totality of the circumstances would lead to a decision as to which country the employment relationship is more closely connected with and the national law of that country should prevail," says S. Mickienė.

If the parties choose the law applicable to the employment relationship, the law chosen would prevail. However, even if the choice of applicable law is made (if the employer is based in the UK, UK law would most likely be chosen), such an employment contract could still be subject to the mandatory provisions of the LR's employment law.

According to Ms Mickienė, the Labour Code itself does not specify which mandatory provisions should be applied when the choice of applicable law is made in a contract. However, according to the general provisions of the Labour Code, mandatory provisions are considered to be laws, regulations or collective agreements and arbitration awards which have been declared generally applicable and which cannot be derogated from by agreement of the parties under the law of the applicable State.

"Such provisions would cover all the provisions of the legislation governing employment relations that govern the conclusion, performance and termination of the employment contract and cannot be derogated from by agreement between the parties, i.e. the legislation does not provide for the possibility of an agreement to the contrary," she says.

These include: maximum working hours and minimum rest periods; the duration of minimum paid annual leave; pay, including increased pay for overtime, night work, rest and public holidays; working conditions for temporary workers; occupational safety and health; safety at work for persons under 18, pregnant workers, workers who have recently given birth or are breastfeeding; prohibition of discrimination at work; conclusion and termination of employment contracts, etc.

It should be noted that the mandatory provisions of Lithuanian labour law would only apply if the provisions of the United Kingdom's labour law in the same areas (e.g. termination of employment rules, etc.) would give the employee less protection than the provisions of Lithuanian labour law.

Advice for employees and employers

"When concluding employment contracts that cross national borders, we would recommend making sure they specify which country's law will apply to the employment relationship between the parties. This reduces the likelihood of potential disputes and also provides a clear agreement that the law chosen by the parties will apply to at least the majority of situations," emphasises an AVOCAD lawyer.

If, at the time of conclusion of the employment contract, the totality of the circumstances and facts shows that the employment contract is more likely to be related to Lithuania, i.e. to the country from which the employee will actually perform his/her work functions (e.g., taxes on the employee's salary will be paid in Lithuania, the employee will be covered by a social security scheme in Lithuania, the employee's work functions will be related to Lithuania, etc. If the employee's functions are related to Lithuania, i.e. the employee will provide services to Lithuanian residents, or the employee will perform physical work in Lithuania and not just connect to the employer's internal systems, etc.), it is advisable to conduct an analysis of the mandatory provisions of the labour law of both countries and to ensure that the employee is subject to the mandatory provisions of the labour law of the country that provides for a greater protection of the employee's rights and interests.

"Although we have discussed the case of an employment contract with an employer in a non-EU country, very similar rules would apply in the case of an employment contract with an employer established and operating in an EU country," she points out.