Doing Business Globally – Employing in Multiple Locations

Of all the decisions a developing business takes, expanding overseas can be one of the most important. Get it right and the rewards can be great. Get it wrong and it can prove to be a costly lesson in what to do differently next time. Employment issues often carry the highest risk both in terms of potential compensation costs and operational problems caused by the loss of a key individual in a foreign land.

Fortunately, through good planning and seeking early advice from advisors with experience in this area, most of the problems can be avoided. Here we set out some of the key issues to appreciate and our tips for a smooth experience.

1. How does employment law differ elsewhere?

The first point to understand is that outside of the US there are very few countries with the principle of “employment at will”. This generally means that employment relationships cannot be terminated at no cost or without reason. It also means that there will typically be a contract of employment which governs the relationship and sets out the notice period required to bring it to an end (which will need to comply with that country’s minimum “statutory notice” protection for employees).

Another key feature of employment law in many countries is the Collective Bargaining Agreement – normally referred to simply as CBA. These are agreements entered into with a union or other employee representative group and may apply to just one company, an entire industry such as retail, or even to the whole country. In many countries they will apply to a company whether or not that country has signed up to it. A CBA will typically impose employment protection in areas such as pay and overtime rates, working time limits, paid leave entitlements and termination payments.

Employment protection will vary from country to country and employers should always ensure they understand the protection applicable to countries in which they employ people. There are however common themes and in most of the main business nations:

a. Discrimination is prohibited on the grounds of gender, race, religion, age, disability and sexuality.
b. Harassment and retaliation is unlawful.
c. Dismissal will need to be for cause, or because the employer no longer requires an employee to do that work (redundancy).
d. A procedure will need to be followed before the termination is confirmed.

Failure to abide by these principles can lead to compensation over and above notice and severance entitlements – sometimes running to over a years’ salary to the employee.

Statutory law in most countries will provide for entitlements to paid leave for vacation, maternity, paternity and sick leave which is usually significantly more generous to the employee than is normal in the US.

2. Can I apply US law to the arrangement?

The laws of the country “most closely connected to the employment” will apply to govern the relationship. This will almost always be the country where the work is performed (or most of the work in the case of mobile employees who split their week across different countries – not uncommon in Europe). It is not possible to avoid this by specifying another country’s law as applicable law in the employment contract. All that does is add another layer of employment protection and give the employee choice on which country’s laws to rely on with a claim.

3. What needs to go in an employment contract?

Each country will have laws on what must be covered in an employment contract. Common provisions include the following – although always check for additional requirements in the country in question:

a. Name of the parties
b. Job title and a description of duties
c. Place of work
d. Pay and compensation details
e. Hours of work
f. Holiday (paid leave) entitlement
g. Notice period

Employers will usually put business protection clauses covering confidential information, non-competes, non-solicitation and intellectual property in an employment contract, rather than use a separate NDA/business protection agreement.

4. Can I apply my US policies?

Some policies are suitable for global use such as those covering anti-bribery and corruption, ethical standards, and anti harassment/discrimination. However most policies will need to be bespoke to the country in question where laws will differ (eg paid leave, discipline, performance, background checks and monitoring).

5. What hidden costs are there?

There can be many hidden costs which an employer needs to take advice upon and understand before committing to employ in a new country. These include:

a. 13 month payrolls. In many European countries an employer is legally required to pay an additional month’s pay in the summer or at Christmas to reflect additional costs at that time of year. Some countries require such payments twice a year and therefore a 14 month payroll.
b. Holiday pay – employers in the EU must pay at least 4 weeks paid leave (often called “annual leave”) to enable employees to take holiday. Many countries require even more than this (eg UK is 5.6 weeks per year). This is seen as a safety and health measure to avoid “burn out” and the authorities penalise heavily employers who breach this provision.
c. Long Service Leave – this is a requirement in Australia amongst other countries and is essentially additional paid holiday leave for long serving employees. It can result in many weeks’ worth of extra pay – often paid on termination when accrued and not taken.
d. Taxes and social security – these can be much higher than employers are used to in the US – often because the country has a more generous publically funded healthcare / social security system – and in return employers will often not need to provide healthcare benefits.
e. Termination costs – in most countries there is a requirement to make severance payments on a termination by the employer unless it was because of blameworthy conduct by the employee. The amount will vary from country to country and by length of service but might typically be between 1 – 6 months’ pay in many countries.

6. Can I avoid employment rights by using contractors or a PEO?

This is worth looking into and suitability will depend on the particular work to be performed and the laws of the country in question.

Contractors will generally avoid employment rights making it easier to hire and fire and avoid liabilities for paid leave and termination payments. However, as you would expect, countries are alive to the risk of employers avoiding employment protection rights by labelling people who essential work as employees as being “contractors”. As such there is a risk of legal challenge leading to the imposition of employment protection rights and fines / penalties. Similar action may be taken by the tax authorities. The tests applied by courts when dealing with these “misclassification” cases are remarkably similar across all countries and will be familiar to those who have dealt with these issues in the US. The key factors courts take into account are:

a. Control – a contractor will typically have control over how and when they perform the task they have been contracted to do – subject to completing it on time.
b. Integration – a contractor will usually be separate from the regular employees doing different work.
c. Label – a contractor will not normally be portrayed to the outside world as an employee of the organisation. It is prudent to avoid giving them company email addresses for example unless accompanied by an email signature which clearly identifies them as a “contractor”.
d. Exclusivity – a contractor will typically be free to work for other organizations at the same time as long as it does not conflict with their duties.
e. Profit and risk – a contractor will be in business in his or her own right, with their own business registration where applicable and responsible for their own profitability.
f. Pay and taxes – a contractor will submit invoices and be responsible for their own taxes. Often they are paid by completion of a task or a day rate.
The further away from these principles an arrangement is the higher the risk of a misclassification finding.

It will generally reduce risk of misclassification if a contractor is engaged via a service company they set up.

PEO companies are not common in many countries and illegal in some. Where they are an option they can be used in the same way as in the US, with the PEO taking on employer responsibilities for registrations, pay and benefits. However using a PEO will not fully remove the risk of litigation from the employee – for example in relation to a harassment claim.

7. What issues need considering when temporarily assigning someone from the US?

A common approach when setting up in a new country is to send a trusted employee from head office in the US. Assignments of this sort are typically for a fixed period such as 3 years. There are a number of considerations:

a. Will there be a change in employer to the local entity? This is not usually the case for a fixed term assignment, but in some countries it will be legally required.
b. Documentation – typically an assignment agreement will set out the terms applicable to the assignment.
c. Immigration / work permit for employee and his/her family.
d. Tax – in addition to income tax and social security, the risk of the employee’s activities amounting to a “permanent establishment” for corporation tax purposes should be evaluated where someone is going to a country where you do not currently pay company taxes (ie a new country).
e. Pay equalization.
f. Mandatory local benefits.
g. Continuation of US benefits.
h. Family, schooling and practical issues
i. What will happen at the end? Guarantee of old job back?
j. What if it goes wrong? Understand what is involved in ending the relationship at the outset (eg removing any directorships or mandates)

8. Do you need a subsidiary?

This will vary by country and local corporate law. Some countries offer the alternative of registering a “branch” of your US entity rather than setting up a subsidiary as a new legal entity. Considerations as to what is best will include tax, filing requirements and other administration, the need for a minimum number of directors and whether any of those directors need to be local nationals or residing in the country in question.

9. What mistakes do organizations going overseas make most often.

Some of the most common mistakes organisations make are:

a. Misclassification of contractors. It is important to appreciate that the written contract is only partially influential in a court dispute. Courts are more interested in the reality of the working relationship and the factors referred to in question 6 above. Misclassification can prove extremely costly with awards going back many years for back taxes and employment benefits. Penalties are also often applied and in some countries – France being an example – criminal sanctions including fines and imprisonment are possible.
b. Using non-compliant US documentation. In addition to the risk of enforcement action this risks a finding that business protection clauses such as those on intellectual property, non-competes and confidential information are unenforceable as non-compliant. It can also expose the organisation to unnecessary costs. For example, employees terminated in Germany are entitled to additional compensation if they were engaged under an employment contract or other document which contained a non-compete. This is so regardless of whether the employer wishes to enforce it at the time of termination.
c. Using a NDA or other business protection agreement in addition to an employment contract which covers the same areas. This is a problem when there is inconsistency between the two documents (for example a non-compete referred to as lasting 6 months in one document and 12 months in the other). Inconsistencies of this sort will usually result in the employer getting no protection at all.
d. Unexpected termination costs. As referred to above these can be significant and employers who do not find out about them before engaging someone can have unanticipated additional costs.
e. Proposing to dismiss vs firm decision to dismiss. In most countries an employer should not take a firm decision to dismiss someone until that person has had a chance to comment on the situation – even in misconduct situations. Until then the dismissal is only a “proposal”. However managers used to “at will” employment will often send internal emails to each other showing that a firm decision has already been taken. Under court rules these are usually disclosable to the employee in the event of litigation and will be used by the employee to argue unfair dismissal – a concept which exists in many countries and can lead to substantial compensation (1 – 2 years’ pay or more).
f. Bad timing of dismissal. Do not fire someone the day before they are due to process your payroll (and the only person who can do so) with the result that you have an entire workforce unpaid!
g. Not ending directorships on a termination. Separate steps are usually required to terminate a directorship or other mandate compared to ending the employment relationship.
h. Void dismissals. Many countries require approval from a local Labor Inspector to a dismissal. Without it the dismissal is void.
i. Void documentation because not written in local language.
j. Not appreciating service requirements for employment protection. In many countries employment rights only kick in after a period of service – for example 2 years’ service is required to bring an unfair dismissal claim in the UK. It is far easier and less costly to dismiss when a relationship is not working out before this threshold is reached.
k. Unexpected stock option costs. US style stock option agreements will not operate as intended in a number of countries and advice on local laws should be sought for every country in which you offer benefits under your scheme. For example in Denmark normal termination provisions do not work.
l. Permanent Establishment tax problems. The actions of a single individual in a new country they may be scoping for you can trigger corporation tax if deemed by local tax authorities to be a “permanent establishment”. This is particularly so if they will be trading or entering into contracts.

10. What practical steps should employers be taking?

a. Understand the laws of the country. At Ogletree we supply a country guide to clients going to a country for the first time giving them an overview of that country’s laws and issues of which to be aware.
b. Do not be over reliant on one person. This is often an issue as organizations scout a new country – maybe with just one or two people on the ground in the first instance. Employers should consider what would happen if a person became unavailable, through resignation or illness for example. Ideally key responsibilities will be split across a few people – possibly including US based senior managers.
c. Do not bestow directorships, banking authority or other responsibilities without understanding what is involved in removing those if the relationship ends.
d. Keep all information and copies of documents at head office. This will include dates employment rights kick in, immigration and lease deadlines and equity vest dates. It is not a good start to a termination process to have to ask the country manager you are about to fire for a copy of his/her contract!

Compliments of Ogletree Deakins
August 2018